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Pros and cons of buying without a home loan

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Statistics show about 35% of properties bought in the country over the past year were paid for in full upfront

Affording to buy a home these days is a difficult, if not impossible, task for most South Africans. But many are accomplishing this without the assistance of a home loan.

Calculations using Lightstone data show around 35% of properties purchased in the past 12 months was bought with cash. Citing the data, Just Property chief executive Paul Stevens says 233841 property transfers took place in the past 12 months, but only 153255 bonds were registered. The rest, therefore, were cash purchases.
Of the four biggest provinces, three show similar stats relating to cash purchases. In the Western Cape, 41% of transfers were cash deals, while in KwaZulu-Natal and the Eastern Cape these deals accounted for 42% and 44% respectively, he says. “Gauteng lags at 22%.”
Most cash buyers are investors, agents say. Cash is king in the Cape Winelands, where the majority of recent sales were purchased without a bond, says Chris Cilliers, chief executive and principal Lew Geffen Sotheby’s International Realty there.
The most sought-after properties in the region are Paarl estate homes, premium new builds in Somerset West, and houses in the more exclusive Stellenbosch suburbs. “In a buyer’s market a cheeky cash offer can be tempting to a motivated seller.”
Cilliers says savvy investors appreciate the value to be found in the current economic climate and recognise now is the best time to buy low, rent out and wait for the market to climb again. “A fair amount” of cash buying is also being seen in the City Bowl and Atlantic seaboard, says Leon Lombard, sales manager at Rawson Properties, for both residential and commercial properties.
Cash buyers in these areas are mostly looking for renovation projects and are forking out between R3million and R10m. “We had a commercial cash sale of R4m to Joburg buyers,” he says.
In high-demand western Seaboard suburbs, roughly 25% to 30% of all sales are cash purchases, says Century 21 principal Tamara Nettmann. Those who are buying with cash are purchasing homes in estates or complexes, and paying R3m to R4.5m, she says.
Greeff Christie’s International Real Estate is seeing a “significant” number of cash sales across its operation areas, says chief executive Mike Greeff. From February 2018 to February 2019 Kommetjie saw the highest percentage of cash sales, with 84.6%. This was followed by the Southern Suburbs with 61.56%. Simons Town is “on the fence” with 50% and the area with the lowest percentage of cash buyers is False Bay with 40%.
“The majority of the properties sold is in the lower and middle of the markets, with many sectional title properties and full title homes. There are also a few high-end properties changing hands via cash sales.”
Greeff says cash buyers are paying from R800000 to R5m and they include investors buying for resale or renting out, or residential buyers who have already sold their homes.
In the City Bowl, which is increasingly seeing high-value sales, Ross Levin, director for Seeff Atlantic Seaboard, Waterfront, and City Bowl, says most were cash deals. In Knysna about 50% of sales are cash, says Century21’s Theresa Marais.

Removing worries about rising interest rates
MONEY MATTERS Taking out a home loan is often the best option, even for those who can afford to buy a property with cash. Picture: Matthias Zomer

The biggest benefit in buying with cash is that one will save on the interest payable on a bond, says Mike Greeff of Christie’s International Real Estate. There is also the benefit of not having to prove your credit history or record.
In addition to not having to pay off a bond and the accompanying interest, cash-buying households will generally be under less strain than families with bonds, says Century21’s Tamara Nettmann. Jan Oberholzer of Rawson Properties says cash buyers feel more secure in being bond-free, especially during uncertain times.
“Buying cash means you don’t risk being trapped when the interest rates increase, but your return on investment might be much lower compared to when you leverage debt.”
This purchase type may also give buyers some leveraging power on secondhand purchases, Nettmann says, though not in high demand areas of the Western Cape or new developments where developers are paying VAT and no transfer duty is payable by the purchaser.
Just Property’s Paul Stevens says cash buyers offer “clean” deals, uncomplicated by “subject to bond approval” conditions in contracts. “That means buyers can negotiate from a position of strength as sellers may be more attracted to a straight cash offer that is lower than a higher ‘cash and bond’ or ‘bond only deal’.
“However, there are also downsides to cash purchasing, Greeff says. “The most significant downside of buying cash is that you don’t have liquid capital readily available as a significant portion of cash is tied up in an immovable asset.
“It also means you don’t have the benefit of a bank evaluation which gives a realistic valuation as opposed to the sometimes inflated price listed by the seller.” 
While paying cash for a home is a dream for many, for those who can do it, forgoing a bond may, in fact, not be the smartest choice for financial health, says Yvonne Viljoen, mortgage specialist at bond originator ooba.
“Even if a buyer has the ability to pay cash for a home, it may not make sense to tie up a lot of money in property. Doing so could limit your options should other needs arise down the road,” she says. Selling a home bought with cash could also pose a problem if the owner stretched financially to buy it, Viljoen says.
“If cash buyers decide it’s time to sell, they need to make sure they have sufficient cash reserves to put down as a deposit on their new home.”

Real estate agents say cash buying often turns into a ‘crash’ deal 
LIVING BOND-FREE Cash buying is being seen across South Africa. Picture: Supplied

Throughout the country, cash buying is proving popular with property buyers, but these deals are not always welcomed by agents. In Joburg’s Benoni, Boksburg, and Kempton Park areas there has been a “slight upward trend” of cash buyers, with most purchasing sectional title properties and older buildings in the CBDs, ranging from R500 000 to R3 million.
Most buyers are from African countries, says Savas Nicolaides of Century 21. He does not like cash buys, he says, as they often collapse due to failure to get funds or because they are hoaxes.
“I call them ‘crash’ deals.” In Bloemfontein, Century21’s Pano Joannides says 80% of cash buyers do not honour their agreements. Genuine cash buyers account for about 15% of sales and are more common in the R800 000 to R1.4m range. At Century 21 in Hoedspruit, about 70% of sales are for cash, says director Rob Severin.
Most of these sales are seen in the greater Kruger Park area. These buyers, often retirees, foreigners, and businessmen, are mostly purchasing for holiday and retirement purposes and forking out up to R7m, he says. In Northcliff in Joburg, only about 10% of transactions are cash, says Rawson Properties’ Jan Oberholzer.
Most are residential freehold properties costing up to R3m. Commercial cash buyers pay up to R5m. “Cash buyers are predominantly end users within the residential and commercial space. First-time buyers do not have the resources available, except when assisted by their parents.”
Mandy Testa, area specialist for Lew Geffen Sotheby’s International Realty in Durban North and Umhlanga, says about 45% of deals here are cash. “It is predominantly full-title properties that are cash sales. Our recent cash sales included a R990 000 transaction and one for R8m.”
The cash buyers are predominantly in the emerging market. In addition to cash sales, Testa says there are short-term instalment sale agreements. “These are where the buyer pays off the purchase price in three to six equal instalments. Sales of this type are becoming more popular.” In Durban’s Bluff area, cash buying is also seen, says Mike Jansen, franchisee of Rawson Properties.
Now is the time to buy cash or bonded
GROWING MARKET Buying a home is possible in the current climate. Picture: Mohamed Hassan

Buying a property with cash may carry many benefits, but not everyone has the resources to make a cash deal, says Chris Cilliers of Lew Geffen Sotheby’s International Realty. That’s why banks offer mortgage bonds.
“The banks are hungry for business at present and there are great deals for qualified clients. If you are a strong buyer with a good credit record, and you can secure a property under market value, many banks will be happy to give 100% bonds.”
Some institutions will even help finance costs, so those looking to enter the property market may find banks are “currently very accommodating”. Although many investors are still waiting and seeing due to the upcoming elections, Cilliers says South Africans will still need homes.
The tax implications
GOING UP Investing in stocks or shares could see greater rewards than using cash for property. Picture: Steve Buissinne

Buying property cash carries tax implications for purchasers whereas bond interest payments are tax-deductible, says ooba’s Yvonne Viljoen. “And while you shouldn’t opt for a bond just to get a deduction, a reduced tax obligation never hurts.”
Furthermore, depending on the state of the stock market, saving on home loan interest by paying cash might not be financially prudent. “You could be saving less than that money might have earned had you taken out a bond and invested the cash you didn’t spend on your house in stocks or shares.”
Not having a bond could also make it easier for creditors to seize your home should you find yourself seriously in debt in the future, Viljoen says. “The bank may offer you a ‘payment holiday’ on your bond instalments, allowing you to get back on your feet. They may even renegotiate the terms of your loan by either lowering your interest rate or increasing the length of your loan contract.”
No easy buys in current market
TOUGH TIMES Both cash and bonded purchases pose challenges for buyers. Picture: Supplied

While there are “deals to be done” in the current depressed market, especially for cash buyers, Just Property’s Paul Stevens says buying will not be easy. 
The FIC Amendment Act will introduce changes to the way clients are “onboarded”. This means there will be more risk management hoops to jump through in the government’s efforts to curb money laundering. Buyers seeking home loans will also have their work cut out, says Mike Jansen of Rawson Properties. 
“Banks’ stringent lending criteria, including steep deposit requirements in some instances, and affordability assessments in terms of the National Credit Act, make it difficult for buyers to obtain home loans. We also see the challenge of selling a property quickly due to the banks’ credit criteria.

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