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In the last few years many developments have sprung and investors bough often more than one property. Though these could have been great investments some problems have been noticed with the fact that developments take time to develop and register at the deeds office.
For many economic reasons including the increases in interest rates, some investors found that their affordability has changed since the time they placed the offer to purchase and were granted the bond. They have overextended themselves, didn’t know at that time, and now don’t know what to do to save the situation.
We discussed this situation with a few property professionals including bond originators, to find out what can be done in such cases. Some solutions have come across.
These solutions may not be the perfect outcome nor intended outcome of the investor, nonetheless should be considered as alternatives to repossession if they have no more affordability to pay the bonds and shortfalls on the properties.
1. The purchaser can go to the bond attorneys (bond and transfer) and under the NCA (if applicable) just say to them after discussing in writing that they can no longer afford the bond due to increases in interest rates and changing of financial circumstances during the period of development. Under the NCA a bond should not be granted to a person that can’t afford it. In this case the purchaser’s circumstances may have changed to bring him or her to this affordability problem during the period of development. This does mean that the purchaser may incur some costs including the loss of deposits, but sometimes it could be better repossession. It is not the best situation; nonetheless it could be a viable option. Lesson leant in an easier and far less painful way than repossession.
2. The next option is to sell before transfer – one could in fact immediately advertise the property at cost, in other words the purchase price plus costs incurred for transfer. In this case if the property is sold, then at least the purchaser may save the deposit and other charges that could be incurred in a cancellation. The purchaser should try to get best deal possible (that does not mean “be greedy” but fair and get rid of it), and try to get an offer ASAP. This offer can be used back on back to the offer that was about to transfer and sent to the transferring attorney to register both at the same time. Doing this will also save any mortgage payments. Problem solved. But if the purchaser can’t find a buyer even while lowering the price to absolutely cost, and the deadline is nearing, maybe option one should be considered and try cancellation.
3. The other option is to take transfer, count every possible available financial resource, including downsizing and shrinking expenses to the bear bone minimum, to make sure one can hold on to the property until a sale is completed successfully. That could mean provision for the mortgage bond for anywhere between 12 to 24 months if the seller insists on selling at profit. The profit may just be non-existent, as it would have been swallowed up in 12 months by the shortfall (this is assumed for new development where usually the rentals are far lower than the bond repayments). If the purchaser can hang on to the property for 24 months the market may just turn around enough to make some profit and be home free with this venture.
4. Last option may be available to purchasers that bought more than one property. In this case maybe the affordability changed but not for all the bonds. If the purchaser can still afford some of the bonds and shortfalls the solution is simple, sell the once that the purchaser can no longer afford via the means above and remain with what is affordable. Either way in cases of multiple properties the situation may be less painful, nonetheless option 1 to 3 have to be considered to alleviate the non-affordable bonds before a serious financial problem occurs that would be much more difficult to solve.
One thing to remember is that property as an asset class is slow. By the time one notices prices moving in either directions (up or down) it take time and even more time to rectify a purchasing mistake. Property is not like the stock markets where numbers are on the screen and stop loses are a nice way to get out.
Purchasers can’t sell property as fast as they buy and if one needs to sell fast, it can become a problem as in property unlike the stock market, one can’t just press a button and the asset is sold.
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