Buying a home is a high-stakes game. But many first-time buyers do not realise the significant financial and legal obligations they are bound to once they sign an Offer to Purchase (OTP).
Buying a home is one of the most important decisions that you will make in your lifetime, and as a first-time buyer, it can be challenging to navigate the process on your own.
“Many buyers look to real estate agents as their first point of contact to provide them with guidance and information as they traverse the road to homeownership,” says Jackie Smith, Head of Buyers Trust, a subsidiary of ooba Group.
Smith highlights that estate agents in South Africa are committed to the interests of both the buyer and seller. However, buyers must be responsible and educate themselves on the financial and legal implications that come with signing an Offer to Purchase (OTP).
“OTPs are legally binding and massively expensive for you as a buyer should you try to back out from the deal after signing. Therefore, you must ensure that you are adequately informed and prepared for the decision you’re about to make. Here is a set of questions with will assist you with the decision-making required,” Smith says.
Question 1: Have you calculated your long-term affordability?
Buying a home is a long-term financial commitment, with the most common bond repayment period being 20 years.
“Buyers must think long-term: Are you able to afford the costs that come with buying a property? Will you be able to comfortably afford your repayments every month? Can you still afford the property when there are interest rate increases? Will you still be able to afford the payments in the case of an unexpected life event?” Smith explains.
The general rule of thumb is to not spend more than 30% of your gross salary on a bond repayment each month – even if you get approved for a larger bond. This percentage considers possible interest rate hikes and leaves room for living expenses.
“Long-term affordability is the most important issue to consider,” stresses Smith. “If a potential buyer cannot afford to finance the purchase of the property at a particular price-point long-term, it would be irresponsible for them to go further.”
Question 2: Do you have a deposit and where would you like it to be kept?
There are many benefits to putting down a deposit – Typically around 10% of the purchase price. Having a deposit will reduce the monthly bond repayment amount and can help you to negotiate a lower interest rate with the bank as you have proven your ability to contribute to the total cost of the property. “It also helps buyers to stand out from the competition when multiple buyers are vying for the same home.”
Once you have decided to put down a deposit, you must decide how you would like it to be managed as you have multiple options to choose from.
These options include:
– Paying the deposit into the transferring attorney’s trust account
– Paying the deposit into the estate agent’s trust account
– Having a guarantee issued by a secure third-party like Buyers Trust.
“Many estate agents prefer not to manage buyer’s deposits because of the extra admin associated with it and the need to up their security to protect the deposit from cybercrimes such as phishing,” says Smith.
“Thus, buyers should be aware of the third-party alternatives available when it comes to managing the deposit, such as the service offered by Buyers Trust.”
Under Buyers Trust, you receive a competitive return on your investment and deposits are kept safe through the highest level of security measures. A buyer has 100% visibility of their deposit at all times and a free guarantee is issued to the transferring attorney.
Question 3: Do you have money set aside for the extra costs involved?
You as the buyer are responsible for the legal fees of the conveyancer, as well as paying the transfer duty to SARS.
In addition to these costs, you must factor in rates payable to the municipality, fees to the relevant banks and administrative costs incurred in the filing of paperwork.
As an example, here are the extra fees on a R1,500,00 freehold home calculated using ooba’s Transfer Cost Calculator:
– Bond registration cost (incl VAT): R 29,394
– Bank initiation fee (incl VAT): R 6,038
– Deeds office fees: R 1,371
– Post, petties, FICA other fees (incl VAT): R 1,400
Total bond registration cost = R 38,203
– Property transfer costs (incl VAT): R 29,394
– Transfer duty: R 18,750
– Deeds office fees: R 1,371
– Post, petties, FICA and other fees (incl VAT): R 1,400
Total transfer cost = R50,915
TOTAL EXTRA COSTS: R89,118
“For more expensive properties. the extra costs involved in buying a home can be more than R100 000,” says Smith. “Given that buyers are legally required to pay these fees once the OTP is signed, it’s crucial that your estate agent sits down with you to make sure that you understand the total costs involved in the homebuying process.”
Question 4: Do you understand the terms of the OTP?
Finally, the somewhat obvious question a buyer should ask themselves before signing a legally binding OTP – do you understand what you’re agreeing to?
As a buyer, your estate agent will be able to explain the OTP carefully to you so you understand what you are going to agree to before you sign. “Pay close attention to the section in every agreement that lists fixtures (attached to the property, such as ceiling fans) that are excluded and chattels (not permanently attached, such as appliances) that are included,” says Smith.
Smith recommends that buyers inspect the property carefully before making an offer. “If you discover significant issues only after the OTP has been signed, you’re potentially stuck with a less-than-desirable property.”
“Finally, your estate agent will be able to help you to stipulate any conditions in the OTP that need to be fulfilled before you can complete the transaction. These could include the sale of your current home, or that the purchase is subject to your bond application being approved. This gives you time to acquire the necessary funding,” she concludes.