Property Investing in South Africa

It is sad see that there are many property investors and home owners that can't pay their bonds due to the recent interest rate increases.

To add to the trauma, many have refinanced properties to the extent that getting a quick sale in the open market is close to impossible as there is no equity left to make the deal attractive to another investor.

This makes the situation very unpleasant and dangerous for the credit records of such persons. These incidents seem to leave the property investor or homeowner stuck, panicked and very emotional about the situation.

There are however a few solutions that come from the most unexpected place - the banks.

Even though the banks are harsh and procedural and have deep pockets to easily and swiftly take legal action, they are also interested in solving problems. It is costing the bank money to take legal action and repossess a property, not to mention the time, which in corporate terms equals money.

Though more properties in execution are on the banks lists and some people have not found solutions, we are hoping that this article will give some ideas on how to go about getting help from the lenders themselves.

One may find that the banks are willing to help some bond holders experiencing temporary financial problems. Above all, property investors and homeowners must remember that the banks are smart and fully aware of the fact that rising interest rates have a negative impact on repayments.

But it is not that easy to get help from the bank. May factors needs to be taken into consideration, including factors that are part of the willingness profile of the borrower. The banks job is to keep the bank in business and will not extend help to just anyone asking for help, instead they would rather evaluate each case on its' merits.

Before we dive into some solutions that the banks may provide, lets look at some guidelines that one needs to remember if approaching the bank for help.

1. The borrower should contact the bank as soon as they see a problem on the horizon. The issue here is simple. Most borrowers wait far too long before acting on a problem or even informing the bank that a problem exists. This is true for all credit forms not only mortgage bonds.

There are two main reasons for this that are purely emotional:

1.1 Borrowers are afraid to approach the bank. The bank is big and powerful and seems non-emotional and very threatening. When faced with this fear, one always must remember that humans work in the banks, not monsters or aliens. When talking to a bank, one is actually talking to a person. Though not all people are nice, most can be understanding, as they are also human.

1.2) Living in denial. This reason is the worst possible as no one can help a person that does not believe a problem exists. In this case, it is very likely that the borrower may be repossessed and never know what hit them.

2. The borrower should show willingness to find solutions to their problem. In other words, when calling the bank, screaming and yelling doesn't help. It is not their fault you are in this situation. If you are frustrated, you must be emotionally intelligent enough to be nice and polite and kick your punching bag afterwards to let your frustrations out.

It is very important to remember the points above before even looking at the solutions that the banks may be able to extend. If the borrower manages to upset people at the bank, they won't even get to a person willing to help, which could make things even worse.

Now we will discuss some ways in which you may find that a bank may be willing to help a financially struggling property investor or homeowner, if the case merits such help.

When falling behind on payments, each bank has certain procedures, however most of them are similar in nature and each case will be evaluated on merit.

All the banks have something called a Collection and Recoveries Department and a Customer Debt Managing Department some also call these Voluntary Restructuring or Loan Modification or Moratorium.

Here are the procedures of what will happen if a borrower falls in arrears:

1. Pre Legal Section: 0 - +/- 6 payments in arrears. The borrower will get a call whereby they will try and get a promise to pay and arrangements can be made. If these arrangements are broken 3 times in a row, it will be handed to another dept, some call it ICU. Yes, like in hospital. The borrower will be called again and be given +/- 30 days to rectify his/her promises. If nothing happens, its over to the Legal department.

2. Legal Dept: This is where the borrower will get the option to sign a Power of Attorney to the bank to market/sell his property through listed agents or he or she can arrange to list the property independently.

Depending on each bank these departments may have the following options for arrangements to help a struggling borrowers:

1. Extension of loan term, 20 to 30 years. Not favorable for homeowners at all, because the savings are not really that much compared to the additional interest. The opposite may be true for a property investor that receives rental income. This option can spell "heaven" as the interest is paid by the income received and the cash flow improves. Many investors choose this option regardless of any financial difficulties, just to boost the cash flow.

2. The borrower must ask or apply for a Breather Period (this is often called "Holiday") and it entails no payment for a period of 3 to 6 months. The period would depend on the borrowers profile.

3. The borrower also has the option of asking for a reduction in payment, usually not less than 50% but it is negotiable.

To conclude, the borrower has to call the bank, and explain the situation in detail and they will offer some options based on personal profile. But remember, the borrower has to call the bank; not any other 3rd party.

This whole process can take quite a bit of time, and by the time, all avenues have been tried and exhausted, one can be sure that once a property is being sold on auction the bank has tried everything.

As a last word for closing. Many people listen to hear say. They have either heard or been close to person that has had a run in with a bank and lost their home. As a result of this they have already judged the bank and hold a perception that the bank is the problem and the enemy. For such people, one can only ask that they put such stories and perceptions aside. Each case is judged individually upon its' merits, it is worthwhile to giving the bank the benefit of the doubt and working with them. Your case always stands a good chance of having a completely different and perhaps better outcome than those you have heard of.

If you need contact details for specific departments and people in: ABSA, FNB, Standard and Nedbank just go to the forum and read Loan Modifications

Property investors need to optimize on their income to make up for the shortfalls in their bond repayments with all the latest increases in interest rates.

Here are some expert tips that you can use. Just a few things you can do right now that can help you make and save money:

1. Short Leases - Enter into short lease agreements three to six months. Short leases enable you to keep assessing market rental rates and increasing accordingly. Most investors will now be able to increase their rental price. Longer leases may result in you falling behind as rental prices increase. Having the cheapest rental in the neighborhood is good because many clients will want to rent from you, but won't help your profitability or loss reduction if you are subsidizing.

Take also into consideration market conditions are in your favor as a result of interest rates and the NCA. Many people can't afford monthly bond installments or cannot qualify for financing. This means that there is an increasing demand on the rental market. Rental supply is decreasing and as it does rental prices will increase.

If you already have a long-term tenant with predetermined increases, remember that the tenant has a real right over the property. In other words you won't be able to increase your rental more than that stated in the lease, until such time as the lease is expired.

Rental prices are coming of a low starting base. As a result they should increase steadily while interest rates remain high. You do not want to be in the situation where rental prices in your area increase and you are left behind. You want flexibility to change. With short leases 3 to 6 months, will ensure you can.

2. Manage your property yourself - If your margin does not allow for management by an estate agent, then do it yourself. Self-management can save you even more than the normal amount if you increase your rentals more often.

For example: On a R3,000 rental property your estate agents management fee could be anywhere between R240 to R300 per month. If your rent increases, this expense can increase to R350 to R400 per month.

This amount can go a long way to covering shortfalls or increasing profitability on bond installments. To be more accurate, depending on your bond, self managing can help you cover anywhere from 0.5% to 2% of the recent interest rate increases or improve your cash flow by approximately R4,800 per year.

Naturally, it also means that you must do the work yourself. However, if you have 2 or 3 properties, self management could result in a R10,000 increase in profits per year.

3. Ensure that you are collecting all charges that are legally chargeable to the tenant. Many property owners do not know that they can legally charge items such as bin collection fee, refuse removal and sewer to their tenants.

These items are charged to property owners in their municipal taxes and rates bills and are legally chargeable to the tenant if stated in the lease agreement.

Charging these items obviously requires a correctly structured lease agreement. However, it's the small things that add up and investors with a number of properties can save a few 1,000 or more per year by charging these expenses to the tenant.

There is more that you can do, but these 3 things alone can add up to more than R6,000 per year, depending on the individual circumstances of the property. If you have more properties it can be much more and all these tiny, sometimes overlooked, strategies can increase your profitability or reduce your shortfalls when you need cash flow the most.

If you have a buy to let property investment then these article series is a MUST to READ!

There is a huge amount of information on the Internet about selecting tenants and advice in regards with lease agreements and many other pertinent subjects. You must still read all the legalities related to lease agreements and procedures.

These articles were not written to replace such information but to warn you of situations that other investors encountered in real life situations and what was found best to do to avoid a bad tenant.

While trying to qualify the best tenants, under the stress of having to pay a mortgage bond every month, a lot of small issues of high importance can be overlooked.

Often unscrupulous tenants take advantage of situations. Some are very good at doing this, and you must know what to watch out for.

The next 11 points are taken from real life experience of investors. They had to face these situations, more than once. In each case they had to make clear-headed decisions, on the spot, without risking their investment or turning away good tenants due to excessive worry and stress.

1. Identify the Potential Tenant on the First Call

When talking to a potential tenant on the first telephonic interaction, ensure that you ask all the necessary details that identify the person. Their full name, telephone number and maybe email address.
If you can't call them back or the email is not valid and bouncing, the red light should go on already. Furthermore, it will also help you identify if the full name, initially given, if it is the same name written in the ID book.

Some people walk around with many identities and false IDs, for reasons that you do NOT ever want to find out. Double identities have been found in two ID books, for example a representation of one married name and one unmarried has been also encountered. You don't want to rent your property, which is one of your biggest assets, to anyone that can't be identified and verified to be the legitimate identity of the person.

If a person is hesitant about their marital status, can't decide if they are married or not, it would be very wise to reject their application.
If you can't identify and verify the person, you should immediately reject the application.

2. I Need the Keys by Tomorrow!

This is a very known exercise to get occupation of a property without the proper process and checks.

Be aware of the last hour, immediate occupation requests. Some investors have been faced with a situation where a potential tenant calls to rent a property in the condition that they must take occupation within the next day or two, sometimes even the same day.

Often they say that the deposit is not a problem they have cash with them, and will pay in cash as long as they get the flat the same day or next day. The excuses are usually that they lived with family and had a fight, came over from another city and have nowhere to stay for some reason or another, and so on. The reasons are not important, the situation you are faced with is.

If this is the case, you will be stressed to fit in all the required procedures quickly. You will have only a couple of hours to do ITC and TPN checks, get the copies of IDs of tenants and the pay slips for proof of income and sign on lease agreements and give them the keys, all in a couple of hours. Though stressed, it can be done and it has been done successfully.

But in cases where the tenant is not a good one and is just trying to get the property, they will trip you in these couple of hours. They will tell you that this is urgent and don't have the ID with them, that their pay slips are at work and many other excuses. If you are furthermore stressed to pay the bond at the end of the month and they show you the cash, you can make some big mistakes in these couple of hours. Such as: don't complete your process, don't call a reference, don't have time to verify information on the application forms, and then you can end up with a non-paying tenant and worse a squatter.

In this case, take your time, do everything with a clear mind, even if you do give them the keys to the property in 24 hours or less, ensure that in those 24 hours you have done all the necessary checks, without leaving anything out.

Ensure that, they filled in correctly and fully the Tenant Application Form, you checked references, did ITC and TPN checks, and that you received copies of IDs of ALL occupants and proof of income, and that you signed them on the lease agreement.

The main things you should never leave out of the process, is the references, check place of work, identification and pay slips. If you do encounter a bad tenant, funny enough they won't mind signing the lease agreement immediately, often without even reading it, or the patience for you to explain it to them. All they care about is that you do not find out too much about them. If they intend to be bad tenants, lease agreement or not, they won't mind either way, but to put you at ease, they will be very willing to sign anything.

Investors are often fooled by a willing tenant that only wants to do sign the lease agreement and give you the money. That does not mean that he also wants obey the lease agreement, just because he is so willing to sign it.

If you encounter honest tenants in distress for some real reasons, they will do everything possible to provide you with all the necessary documentation quickly and help you do anything necessary to complete the process correctly.

If you can't complete the full process in the required time, you need to make a harsh decision: either take the risk that you could be entertaining squatters, or just tell them they either give you time to complete the process of you move on to the next potential tenant that has the time.

Even if you won't find another tenant as fast and you will end up paying the shortfall that month, it would be far cheaper than ending up with bad tenants and evictions costs.

Remember, you have no obligation to play the good Samaritan.

In the next part we will be discussing what to do with missing information in application forms, references and your tenants employment or lack thereof.

If you wish to learn more about letting profitably and reducing risk, join us in the upcoming Investor Letting Workshop in Johannesburg.

3. Missing Information

Check that the information on the application form is completed fully. Often applicants do not put their income on the application form, or leave one applicants information totally blank (the spouse information for example) or other vital information. Many don't do this intentionally. Some don't feel comfortable and others just rush when filling out the form.

If they leave the application form blank for one applicant, often it is found that the main applicant (for example the husband) is clear with ITC and everything is fine, but the spouse isn't. Now, you may say that this is fine, as the main applicant pays the rent. But what happens if the couple splits up and you are left with the other person to pay the rent and they can't, but you never checked, so you couldn't possibly know. In this case, you will be left chasing the main applicant for the money (or even both) while the other is living rent free for as long as they can.

It is your responsibility to check on the spot that all the information is there. The reason you should check on the spot is very significant.

If you see a missing piece of information and ask the applicant to fill in please, you will get a response that should tell you immediately if they are trying to hide something, or just unintentionally missed it. This is crucial as you won't be able to get a good reaction over the phone or later if you ask for the information.

You can make decisions about the person on their reactions to your kind request. If they missed filling the telephone of the employer, they might not be working there anymore. If they missed filling in the telephone number of their previous landlord they might not want you to call that landlord. By their reaction you will often notice if they are doing this with reluctance or not.

When in doubt - kick out.

4. No References

Some people won't put any reference in the application form. However, this is not necessarily a bad thing. Maybe they just don't know anyone and have no family in this country. Then you must be able to get reference from the work place and you should inquire with them why they have no references to give. Listen carefully to their answer to determine if this is legitimate, or they just don't want you to call anyone and check on them.

Either way, check if references and last landlords telephone number is filled in. If such information is missing, it should be checked and discussed with the applicant at time of filling in the form and face to face with the applicant.

5. Does Your Potential Tenant Have a Job?

Ask for reference from place of employment or telephone number of employer, and then check that they still work there or ever have.

It was found that people that were fired, made redundant or just left the job, a few days or weeks ago, still put the employers name without contact details. If either of the above happened recently they may need to downsize, but in the mean time they don't necessarily have a job or money to pay the rent.

If this has happened very recently they can still provide you with a pay slip from the same employer from last month, but you don't know that they no longer work there.

It is your responsibility to check all the facts, if you don't want problem tenants and also your decision if you are willing to rent them the property under the circumstances.

If the application is not open and transparent, don't take the tenant.

In the next part we will be discussing issues with self-employed tenants, why good impressions don't count and who must sign on the lease agreements.

If you wish to learn more about letting profitably and reducing risk, join us in the upcoming Investor Letting Workshop in Johannesburg.

6. Your Self-Employed Tenant

Self-employed people and small businesses build economies and can contribute enormously to the growth of any country, but with self-employed people, one needs to check the correct documentation to ensure that they will be paying tenants.

Self-employed people often have no proof of consistent income to start with. One day they have work and the other they don't. A pay slip from a self-employed person is not very useful as they write their own checks and pay slips to whatever suits them.

In this case, you should ask just like the bank does when giving credit, for at least 3 months of bank statements. You will find that some will offer to provide you with their invoice books to see their income. That is a very nice gesture, and you should look at the invoice books if they are willing to present it. However, the invoice book does not tell you if their customers are paying them, only that they have been invoiced. You need to know the persons cash flow. That will prove affordability. The banks do this all the time, why shouldn't you?

After all, the bank asked the same of you when they granted you a bond, now it is your responsibility to do the same if the tenant is to pay the bond or part of it through his rental.

In summary, check if self-employed people have sustainability and cash flow to pay you the rent. If you are not happy with the proofs that the person provides, but you think the applicant could be a very good tenant, ask them to provide surety from someone else for the rent. And don't forget to get the guarantor to fill in the application form if they sign surety, as you will need to do ITC checks.

You need to check if the person signing surety is not already in a lot of trouble and not likely to be a good guarantor. Read more about this on point number 9 Non-Earning Tenants.

7. Good Impressions Can Fool You

Remember that good tenants try to make a good impression, but bad ones will do the same. There are a lot of articles emphasizing the impressions you get from the applicants that want to rent your property.

What these articles don't emphasize is that often con men make a better impression than any honest and sincere tenant. That is why checking and verifying that the information given is correct is far more important than impressions.

8. All Must Sign - No Exceptions!

Beware of couples that only one of the two applicants is willing to sign on the lease agreement. You may end up with the tenant who signed leaving and the remaining tenant left in the property with no signed lease agreement. This is known to have happened.

The other thing is a single parent with minors that are aged 18 or over. Legally a person under the age of 21 needs consent from guardian/parent to sign a lease agreement.

Lets say you rent your property to a single mother with an 18-year-old son. The child did not sign the lease agreement, as he is minor. All of the sudden the mother decides to move to another city and the child is not willing to go because he has a girl friend and a job in this city. The mother leaves, the child does not follow and you have the child and his girl friend as tenants with no lease agreements. That could pose a problem if the child doesn't pay the rent, not to mention that the minor doesn't have a lease agreement in place at all.

In these cases, it is wise to sign the parent on a separate consent form that allows the child to lease your property. Then sign them both on the lease agreement.

Side Note: As of 2007 the legal age in South Africa is 18, not 21. You can now sign tenants from the age of 18 on lease agreements.

In the next part we will be discussing how to safely rent your property to non-earning tenants, tenants from other counties with visas, and the best way to know if your potential tenant is a person you really want renting our property.

If you wish to learn more about letting profitably and reducing risk, join us in the upcoming Investor Letting Workshop in Johannesburg.

9. Guarantees for Non-Earning Tenants

One would think that renting to a person that is not earning income is not a good thing. It may be so, but there are people that are supported by parents and spouses that live in other cities and counties.
Such non-earning tenants can be students that are supported by a spouse or a parent residing in another city or overseas. They should be given the opportunity to have a place to live, as much as you have the right to protect your asset.

If you come across such a situation, it is suggested that you sign the supporting party to guarantee the full amount of rent in the agreement. The tenant still has to sign on the lease agreement as the tenant is living in the property.

In these cases often 2 things go wrong.

1. The guarantor is not signed on guarantees for the rent and the landlord just takes the tenants word that the parent or spouse will be paying the rent (as this is often done).

2. The guarantor is not signed on the applications form and no ITC check are done.

In both cases the consequences are pretty obvious. The guarantor may not have affordability to pay or has a bad ITC record and may not pay the rent, or they are not signed on any guarantee and if they decide not to support the other party anymore, you are left with a tenant with no ability to pay the rent chasing the money in vain.

Extreme caution should be applied when the guarantor is not a South African citizen with a South Africa ID book. If you need to get the money legally from a guarantor that can't be taken to court in South Africa, it can extremely costly and maybe not even possible.

10. The Rental Foreign Affairs Department

People with passports and visas, such as foreign students and foreign manpower living here for a defined period of time, you must ensure that their visas are valid for the duration of the lease agreement otherwise you may end up with an illegal immigrant in your property.

Another occurrence in the foreign department section was found when students want to rent a place but their visa has not been renewed yet. This could take a couple of months, but that is the least of the problem, the main problem is that their visa may not be renewed at all. If that happens they are also not allowed to work in this country and then how will they pay their rent?

Avoid having this become your problem. As a learned teacher of mine, many times he said: HP, which stands for His or Her Problem. Do not make this problem yours.

11. Learn to Listen

Pay attention to detail. Often landlords want to "sell" the wonderful property to the potential client, which is the rental. While this is very good, there should be a high importance on listening to the potential client - the tenant. Listen more and talk less. Pay attention to what they are saying. You will learn much from the conversation you are having with the potential tenant, in particular their character. This will help you determine, if they are easy to deal with, have many problems, keep tidy, have respect for neighbors and many other things which are crucial to selecting a good tenant. After you have presented the property, make a habit of asking questions, listening to details while talking less.

Listening does not mean hearing the words, but actually absorbing what is said, so that you can make educated judgments. This will enable you to determine if this is the type of person you want renting your property.

It's your property - you are under no obligation to rent it to anyone.

Follow the Process

In summary, after all said and done, you must set yourself up with a system to qualify tenants. Whatever system you have, in times of stress FOLLOW IT. No excuses, if the systems worked in the past and proved to be good for you, do not make exceptions, exceptions can be the mother of all mistakes. Stick to your systems, if potential tenants are trying seemingly force you to do things fast and therefore skip some steps in the process or avoid your own rules and your system, rather move on and avoid the tenant instead of making a major mistake. One month of shortfall is far better than the costs of an eviction no matter how you want to look at it.

If you wish to learn more about letting profitably and reducing risk, join us in the upcoming Investor Letting Workshop in Johannesburg.

It has been a whole month and a half since the NCA has taken its' full force and affect and the horror stories are starting to pour in.

I think that the whole picture of the NCA is not fully clear yet, but the effects have started to take shape.

Some comments, stories and situations have brought to the sad and hopefully wrong conclusion that the NCA has the full capability to bring the country down to its' knees. Lets hope we are totally wrong.

Many estate agents are complaining the their bonds just don't get approved. Some say only 10% of they normal rate is being approved and some say around 30%. That is a reduction in income of a minimum of 70% for estate agents, as not many people buy cash deals these days.

Some bond submissions with exemplary buyers, have been rejected bonds and estate agents where in shock to these outcomes. People that have a squeaky-clean credit history and the affordability of the 30% to income ratio have been rejected. Others in the same exemplary clean credit history have been asked for sureties from other people, when in the past this wouldn't occur as they could buy in their own right without a problem.

Juristic entities with over one million rands in assets have been treated exactly the same as natural persons, when the act says that the NCA does not apply to juristic entities and to assets over 1 million.

I am selling now one of my old cars and got a chance to speak to a few car dealers. That is when I got the bigger picture of the NCA, to my own shock. Some are complaining that their sales have gone down by 50% and more. The finance is just not being approved right now.

A while ago on the Property Investor Network forum I wrote that "all hell will brake loose temporarily", but I didn't think of the situation in big picture terms, I was only referring to property investing. After my chats with car sales people and the stories that come to our estate agency affairs, I realized that the problem is far more complicated than it seems at first glance.

If car sales are going down by large percentages, then the furniture sales must go down and many other items in the economy that people by on credit. Where does that put the economy? How many stores, shops, will be affected? How long will it take until they won't be able to hold their businesses open? How many people the economy will bring to redundancy due to lower revenues? How will this credit lending affect the banks revenues if they can't meet their targets? How will this affect the share of listed companies if their projected revenues are going down? And if it affects their shares how will this affect the stock market? Has the NCA shrunk the purchasing power in the economy? And if so, by how much? These questions are mere domino affect questions, how one thing may influence another in the economy.

I don't think it takes rocket science to identify that we may just have a major problem to deal with. I just don't think anyone knows the size of the problem, for how long and what will be the overall after effect?

Though I don't think there are any real conclusive answers now, as there are more questions than answers, the effects are starting to show their ugly head and it may take some time until someone can estimate the damage. Maybe it won't be that bad and business people with far reduced revenues are just over reacting, but if it will be worse than estimated, who is going to do the damage control?