[Question] Instalment Sale Agreement

[QUINN]

I have a client interested in selling his property in this manner.
Please provide me with your opinions and any information that might be applicable.
I would realy like Sieg's input on this.

[garthu]

Interesting, had one recently also. Really like Siegs opinion here to...

What does put me off is SA's tendancy to not care on repayments to anyone, especially now, even with banks etc. Suppose its ok as the property only register on final payment but i have reservations must admit with the all the eviction etc


Sieg...HELP!

[Marq]

What sort of terms do these agreements hold?

Are they long term, what about deposits, balloon payments, interest rates, municipality charges, maintenance and all that stuff?

It could be an alternative to paying occupational rent leaving the seller with the holding costs. For some reason, without too much thought on this, it seems to be a dodgy way to sell property. Could be good for a buyer though.

[Dave A]

My parents sold a house on an instalment sale in '84. At the time critical components were:

• a deposit that would be forfeit and sufficient to be reasonably punitive in the event of default,
• an instalment plan that at least covered existing bond and costs as raised by Marq above,
• a clear termination date at which point the buyer would have mustered the wherewithal to complete the purchase or face forfeit etc.

It all worked out well enough for them, although the costs involved and cash requiements of the purchaser were definitely higher than usual.

For example, the entomological clearance (not currently relevant upcountry) had to be obtained by the seller at initiation, but had to be obtained again by the purchaser at the end of the deal. I expect this same situation would apply to the electrical COC requirement.

In that deal, the agent got their comm at the end of the deal. I suppose it doesn't have to be that way, but it's something to consider. Legal costs were for the purchaser and of course got paid as they billed.

I can't recall whether the interest rate used for the deal was higher or lower than market rates and I couldn't comment on any norm in this regard.

Of course there has been some regulatory change since then; I'm thinking particularly of the National Credit Act. I don't know what consequences that might have on an instalment sale in this day and age.

One other comment - I once bought a commercial property where I could only raise 75% of the finance, could cover the costs but was short on the deposit. In this case the seller stood co-guarantor on the deposit shortfall. It seemed a wierd arrangement and was suggested by my lawyer at the time. Practically, I had to pay the shortfall by seperate agreement in installments to the seller after taking transfer, a sort of second bond.

Again, it all worked out well, but I reckon the seller needs to be fairly confident of the financial security of the purchaser for this one, and again the NCA might have consequences nowadays.

Having tossed all that out to air, I too look forward to hearing Sieg's views.

[QUINN]

The ISA is regulated by the Allianation of land Act. Apparentlly this was how all proprties were sold at some point.
I realy see this as a viable alternative.

Example: The seller would like to sell his property for 1.5 MILLION.
The buyer can't or prefers not to finance the purchase through a bond.
The seller pays a deposit of say 10 percent and then 1 percent of the purchse price in installemnts. Transfer duty has to be paid within 6 months to avoid penalties, after 5 years (a whole lot can happen in 5 years in our industry) the buyer can if he is so inclined, arrange a bond for the balance.

Should the buyer default he forfeits all money paid to date similar to bond finance.
Other facts:
No interest may be charged, to avoid the NCA requirments.
The rates are for owners resposability until the property is transfered.
I would even consider selling the property at a premuim to cover the interest that would not be earned.

[Marq]

The seller pays a deposit of say 10 percent

mmmm........This buyer really has it made.......

Personally I would find myself another buyer. Five years to sell a house - and still be liable for the rates and ownership risks. I think without doing the numbers - selling at a cheaper price even and putting that in the bank would give a greater return at less risk. May as well rent it out for that 1% number and wait for the market to turn or a better buyer to come along.

This kind of arrangement also assumes that the seller has no finance requirements of their own for a replacement house, or the house is a second investment home. If its the first, why finance another that could be financially unstable - if its the second then one would want to be free to complete new investment. A 30day fixed deposit is already a bind - now to tie into to a 5 year deal??

This deal could also end up with the seller hoping the buyer goes bust and forfeits without sitting tight in the house unable to be evicted and the seller wondering where and why this all went south.

When does the agent get paid and which one of the parties is going to finance that expense? Normally the seller pays the commission - is that another upfront cost with no return?

[Dave A]

I would even consider selling the property at a premuim to cover the interest that would not be earned.

Indeed, you would have to if you went with a five year term. Two years seemed to be the mark as I recall.

This deal could also end up with the seller hoping the buyer goes bust and forfeits...

That line jogged my memory. There was a chap who built a large property portfolio just like that.

His strategy was to sell to young first time buyers using instalment sales.
As he put it - if they made the terms, good for them and he was fine with that.
But he made far more money when they didn't make it. Ultimately it was a numbers game and as he saw it, whether thse youngsters made it or not was up to them, not him.

He was quite upfront about it too. I nearly bought from him and at least one of my members of staff back then definitely did. (And made it by the way).

[QUINN]

Contracts and the NCA

"Is a 'contract' as defined in Section 1 the Alienation of Land Act (68 of 1981) deemed to be a credit agreement for purposes of the National Credit Act?"

To answer this question the following three alternatives must be considered:

1. Where the consumer (purchaser/lessee) is a juristic person with an asset value or turnover below the threshold of R1 000 000,00 and the "contract" concluded is a large agreement (the purchase price/principle debt is higher than R250 000,00) the said agreement falls outside the ambit of the National Credit Act, Act 34 of 2005 (NCA), and is therefore not a credit agreement (section 4(1)(b) of the NCA). The definition of "contract" in section 1 of the Alienation of Land Act, Act 68 of 1981 (ALA) will, however, still apply and require that the purchase price be paid in more than two installments over a period longer than a year.

2. Where the owner/seller of the immovable property concludes a "contract" with a buyer (natural or juristic person) and the purchase price is agreed upon (any amount), and the repayment of the purchase price only, is made in more than two installments over a period longer than a year as required by the ALA, the agreement is not a credit agreement as defined in the National Credit Act. As long as only the purchase price is payable and no additional finance charges/interest or other charges are levied the agreement is a so-called "cash transaction" which falls outside the ambit of the NCA.

Note
Where the parties collude and agree that the purchase price should be higher than the actual and reasonable market price it could be interpreted as simulation to avoid the consequences of the NCA.

3. Where the owner/seller of the immovable property concludes a contract with a buyer (natural or juristic person) and the agreement is a small agreement (the purchase price/principal debt is less than R15 000,00), intermediate agreement (the purchase price/principal debt is more than R15 000,00 and less than R250 000,00) or large agreement (the purchase price/principal debt is more than R250 000,00), the parties agree that finance charges/interest is payable and the repayment is made in two or more installments over a period longer than a year as required by the ALA, the agreement is a credit agreement as defined in section 8 of the NCA and therefore governed by the said Act.


Section 172(1) also clearly states that where Chapter II of the ALA is in conflict with the NCA, the provisions of the NCA will prevail.

Note
The lease of an immovable property irrespective of the form of the agreement is not a credit agreement as defined by the NCA and falls outside the ambit of the Act (section 8(2)(b) of the NCA).

Note Also
Where the agreement is a credit agreement in terms of the NCA and governed by the said Act, the seller/credit provider need not be registered as credit provider, in terms of section 39(1) of the NCA where the person (owner/seller) operates within one province only.

Section 40(1)(a) and (b), however, stipulates that a seller/credit provider must be registered if that person is a credit provider who has concluded more than 100 credit agreements at any given time or the total principal debt owed to the credit provider under all outstanding credit agreements at any given time exceeds the threshold of R500 000,00.

Confusing, however, is the provisions of section 39 referred to supra which stipulates that section 40 does not apply to a credit provider operating within one province only.

From a Deeds Registration point of view, the answer is irrelevant, as a Registrar will record the contract, irrespective of whether the provisions of the NCA have been adhered to or not.

[Dave A]

Confusing, however, is the provisions of section 39 referred to supra which stipulates that section 40 does not apply to a credit provider operating within one province only.

The danger of partial quotes -

Section 39 has two requirements, both of which must be met.

So it would appear that the seller in an instalment sale agreement would likely have to register as a credit provider if the transaction involved more than R500 000.00.

[dnelson]

Hi Quinn and Dave A

Hi Quinn and Dave A

I just found your discussion interesting as I have used this type of agreement a few times in order to get a bit creative with financing to cure the deposit requirements nowadays with NCA.

We find that the maximum permissible term is 24 months in South Africa.

If we consider that 24 payments over 2 years are seen as capital payments off the initial purchase price, at the end of the 24 month period, the purchaser can then approach the financial institutions and show the 24 months of capital payments being held in the conveyancers trust account and are usually substantial enough to cover the 20 - 30 % deposit required by the financial institutions to approve a standard mortgage bond on the difference between the initial purchase amount and the amount as now held in trust.It just means that instead of occupational interest or rental, the price of the property is increased by the amount lost over these 24 months as occupational interest and shown as capital payments to the conveyancers trust account.

sorry to but in.

Kind regards
Dale

[QUINN]

Hi Dale
You say 24 months is the max.
in terms of what, have you found this as the Act says 5 years.

Glad you can help with some practical experience.

[Dave A]

sorry to but in.

No need to apologise - getting a variety of inputs is the whole idea of having a forum

[garthu]

Been doing quite a bit of investigating into this and one thing that is quite clear - very few people have a grasp or understanding on this. What i have picked up -

Getting the buyer to buy via a CC saves alot of time effort etc and confusion with the NCA and excludes consequences there

The attorney drawing the agreement must be experienced with this - from what i am getting, there are very few which have researched or involved themselves so far, possibly a fear of the NCA???

The agreement must be more than 1 year, not more but up to 5 years

Anything over 500K is considered to fall under the NCA, however an attorney has suggested it can be worded and drawn to skirt this.

The courts could easily find for reckless lending in an installment agreement registered or not with the NCA, whether there is interest or not!! - this opens a nasty can of worms.

The only way i ever see this being cleared up with a clear channel is when there is finally a court case with a case study to rely on - a bit scary.

Its a matter of time before we are involved in an installement sale and only going to enter if it involves one particular attorney (we not supposed to do that) but i feel that in order to protect the parties, including ourselves, we have no choice. Rather walk away otherwise!

The really scary bit is that the talk i am hearing is to sell via installment, then the buyer can get a bond in 2- 5 years to pay off the difference. This is a fairly standard agreement and type - I dont need an attorney or the NCA to tell me that this is reckless lending without even a doubt. How do you know he's going to get the bond, if he cant now, then it shouldnt have been loaned etc etc.

Sellers operating on the basis they are safe should really beware as when/if the court finds for the buyer, the buyer could end up with a free house! ( a whole tangle of mess with the banks as first on the list, rates etc)

The first legal battle over all of this is going to be one to be watched!!

[QUINN]

"Getting the buyer to buy via a CC saves a lot of time effort etc and confusion with the NCA and excludes consequences there "
With regard to buying a property in a legal entity: In my humble opinion, anyone NOT buying a property in a Trust either never received advise or is just bloody reckless. I thought estate agents would cash on to the fact that legal entities fall outside the protection of the NCA any time now and then the next step would be to advise their buyers to register a cc. Regardless of the advise being sound or not. Not to speak of the increased transfer duty payable. I think a cc is chosen because it is the cheapest, estate agents are not known for their financial knowledge (present company excluded)

"The courts could easily find for reckless lending in an installment agreement registered or not with the NCA, whether there is interest or not!! - this opens a nasty can of worms." I disagree, there is no more danger of reckless lending than any other agreement. The act is not very clear as to what is considered reckless and do we have any case law were a credit provider was penalised for reckless lending? I think the whole NCA issue is blown out of proportion, every one is to scared to act.
I have just hear of a case were a person involved in an ASA applied for debt review and the ASA was excluded.

A proper due diligence of every transaction should be done. If your buyer can afford the payments, but can not obtain a bond due to the banks credit policy(read ) then I see no problem.
It leaves things open for abuse but we South Africans are known for pushing the envelope