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When buying residential property, sweat the numbers! – Featured Blog

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Today’s posts from our featured Port Elizabeth Blogger:

When buying residential property, sweat the numbers! by The Port Elizabeth Property Blog:

Visit our web page for an affordibility calculator to get you going

It is said that we are the products of our thinking. When I was busy with completing the MBA coursework, I was confronted with how different people think. My personal conviction is not to classify people but if you will indulge me. 

 I found there to be three thinking styles on the course with me. There were the social thinkers which included the legal folk, BA grads, HR practitioners et cetera; who found social based studies easier and tended to sweat blood on the finance subjects. You had the numbers guys, like the accountants who loved the financial subjects and really found the social subjects distressing. Then you got the engineers who loved financial subjects as numbers work predictably and did not mind the social stuff as long as there was a formula or process; if not they seemed to experience almost physical pain at what sometimes, to them, would have seemed very airy fairy. These styles of thinking also affect how we see the world and how we deal with our financial decisions.

 But how does this relate to property?

 As homeowners specifically, we tend to view our home as an asset and as such we treat it as such and this colours the lens through which we see our property and all that goes with it (including the mortgage bond). In good times, where unemployment is low, along with interest rates; we can be lulled into a false sense of security. We may extend our bond, thinking that we will easily pay it back, after all we have years to repay, during which our salary will increase (we assume).

 But what when interest rates go up?

 All of a sudden, all our loans cost more and suddenly our cash in the bank seems to be evaporating in the blink of an eye. I am sure your have noticed how costs have a nasty habit of all deciding to go up at once and everything costs more each year. Then we have our incomes do not seem to keep up, nearly as fast as the costs, which happens as money looses its purchaing power. But our home is an investment, we say to ourselves.

 But residential property, as an asset class, is not immune from the vagaries of the economy. When tough times come, as they do. Our trusty asset, instead of holding value, suddenly betrays us and drops in value! 

 This is not personal, rather its a function of the economic drivers which impact the residential property market and an increasingly more sophisticated buyer, who is better informed and less likely to make rash decisions, but more noteworthy: these buyers are seeking value and they want a good deal.

 In a down market, when money is needed; sellers’ hold onto unrealistically high prices, the properties become stale and when the need to sell compels the seller to face reality, the property has fallen further back and the property sells for less than it could have, had it been marketed at the market price from the outset.

 The residential property market is affected mainly by the ability of a buyer to obtain access to funding. This is provided by the banks mainly, who post 2008 and the National Credit Act, have imposed criteria which attempt to prevent buyers becoming over-indebted. This is great for the economy, but not necessarily for the seller, who is clinging onto an unrealistic expectation.

 Let us for a moment remember that every seller was once a buyer. As a buyer, you want to own your own home and in conventional wisdom, a home is a key line item under assets in your personal balance statement. In addition, being a homeowner brings stability and in no small measure, also pride. But putting on our finance hats, we need to see the house financially. Firstly, it requires the payment of a monthly bond payment, only a portion of which is an actual payment on the capital; the rest is financial fees, interest, insurance etc. To buy the property, there were bond initiation fees, transfer fees, bond fees, transfer duty etc. In addition, there are utility bills (water,  sewage, electricity) and property rates. Assuming you have to tenants, you have no income from the property save for the fact that you do not have to pay rent. There are other factors like opportunity cost etc but I do think the point has been made, that your personal home is in most cases an expense.

 As such you need to sit down and budget very carefully to ensure that when calculating your affordability, that you take into consideration the possibility of increases in the repo rates, which affects your financial institution’s lending rate, that all living expense will go up and that you need to have room to breathe. In passing I will make a personal comment, which is not intended as financial advice. Before investing, make sure your mortgage bond and debt is paid off – speak to financial planner about this and the net effect of the interplay between funding a bond with post tax money, while having an investment which is also being taxed; as opposed to the the savings being made on the debt, which is not taxed.

 Home ownership is a responsibility with real financial implications which can be rewarding on many levels, but do your sums and then sweat the numbers, do some what if scenarios. Then go for it, but with your eyes open.

Clinton Begley (PPRE MPRE CEA B.PROC (NMMU)) is the Principal/Director at BOLD REALTY, in Port Elizabeth, South Africa. In addition, to his passion for real estate, he is also an experienced trainer, coach, and mentor. He holds a B.Proc degree through the Nelson Mandela Metropolitan University and is a non-practising Attorney, Notary, and Conveyancer. His legal and real estate experience is augmented by studies towards an MBA degree through the Nelson Mandela Metropolitan University Business School, which he is scheduled to complete soon. This article reflects the personal opinion of the author only, it is NOT intended as legal advice nor may any reliance be placed upon it. The article is purely for information purposes and you are advised to consult an expert before making any decision. The author nor any other person or entity may be held liable for damages of whatsoever nature from whatsoever cause.

Read more here: The Port Elizabeth Property Blog

FOR SALE BY OWNER – but most often not sold by the owner by The Port Elizabeth Property Blog:

As an experienced agent and as a conveyancer, I have seen a fair number of people attempt the “FOR SALE BY OWNER” gauntlet. This decision in most cases meets with failure. In many cases where the owner feels they have succeeded, only to find later that they could had a better outcome in terms of price or the specific terms of the agreement.

I recently read an article which appeared in INMAN, which detailed 10 reasons why these sale by owners (often referred to by estate agents as FSBO’s) so often fail.

In Port Elizabeth, South Africa; it is my view they, most often fail for some or more of the the following key reasons (there are many others, but these are the most prevalent:

  1. The Owner underestimates the practical nuances of exposing the property optimally (or the amount of work) – and its not just buying a slot on an internet portal.
  2. The owner often is motivated by the idea of saving commission, while buyers and buyer’s agents often deduct the amount of commission when they make their offer, after all in their mind there is no agent. Alternatively, the seller comes up against a highly skilled negotiating buyer’s agent who will know how to deal with a FSBO.
  3. In the last few years the level of negotiating skill of professional estate agents has increased and if a owner is not as skilled, the outcome, may not be as optimal as if both sides had been more equally matched;
  4. The home owner is too subjectively involved in their own property, whereas other parties will not be. In my experience it is the very reason, I prefer owners not to be home when a home is showed, because they often get upset at comments made by potential buyers. In addition, hard decisions have to be made to get a home sold and the owner often errs on the side of overvaluing their home or its features;
  5. Most sales in Port Elizabeth, are shared deals and that means working with estate agents, who help facilitate the deal – the very people the owner wanted to exclude in the first instance.
  6. FSBO’s under estimate the response they get when they bring their property to market – not from buyers though; but from estate agents. One FSBO once shared with me that he felt life a zebra being hunted by lions after being separated from the herd. The door bell never stopped and the phone never stopped ringing and it was just agent after agent. As estate agents, we need to be able to handle rejection and be tenacious – the  seller – is unfortunately going to have to accept that this will happen.
  7. Mr & Mrs FSBO also do not have the key relationships to speed the process along, which often means that even if it does happen, its a lot more stressful and prone to failure;
  8. As with the INMAN article, a leading cause of FSBO failures is over pricing and them being too bought in to the asking price to drop, alternatively asking too little (ironically many FSBO sales that happen quickly are often where the owner has undervalued their property).
  9. FSBO’s very quickly learn that they may have bitten off more than they can chew. If a seller has only dealt with agents who have not been professionally trained or are completely unprofessional; the seller may thing anyone can do this and they may be correct. But in my experience, one never sees their failures, but when the unprepared owner tries the same thing, they are faced with all manners of trial that would have made Hercules quake.
  10. Owners often , because of commonly held beliefs about estate agents; underestimate the powerful advantage that a professional agent is in any property transaction. It is not the just the technical knowledge about property, plans and issues like servitudes et cetera, nor is it years of honing their sales skills, the never ending labour of perfecting the art of marketing (properties in that specific area), the fact that you must understand economics and local trends while leveraging professional relationships and allied resource networks of professionals to obtain an optimal outcome.
Very often getting the right estate agent can not only result in a better net financial outcome but can save on stress and make the process much less stressful.

Clinton Begley (PPRE MPRE CEA B.PROC (NMMU)) is the Principal/Director at BOLD REALTY, in Port Elizabeth, South Africa. In addition to his passion for real estate he is also an experienced trainer, coach and mentor. He holds a B.Proc degree through the Nelson Mandela Metropolitan University and is a non-practising Attorney, Notary and Conveyancer. His legal and real estate experience is augmented by studies towards a MBA degree through the Nelson Mandela Metropolitan University Business School, which he is scheduled to complete soon. This article reflects the personal opinion of the author only, it is NOT intended as legal advice nor may any reliance be placed upon it. The article is purely for information purposes and you are advised to consult an expert before making any decision. The author nor any other person or entity may be held liable for damages of whatsoever nature from whatsoever cause.

Read more here: The Port Elizabeth Property Blog

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This author is a 'catch-all' for occasional articles and letters written to MyPE. The Author of each article can be found in the signature at the bottom of each individual article.