Only a small number of people can afford to pay for a property in full. At the same time, about half of all home loan applicants get rejected. In this situation, many South Africans are asking themselves whether they can really buy their own home. One more innovative and potentially better way for the purchase of a property is the instalment sale. Around 5% of all property sales at present are based on this type of deal.
The instalment sale is a specific type of sale. In it, the buyer agrees to pay the full property price to the seller in instalments within a set period of time, which is typically 5 years. This type of deal is legally possible thanks to the Alienation of Land Act (ALA) of 1981. It works to protect the rights of both the buyer and the seller in this type of deal.
Under the Alienation of Land Act, the buyer is able to purchase a property by paying the sales price in more than two instalments. The period within which the price has to be paid in full is longer than 1 year, but cannot exceed 5 years. This kind of sale transaction can be easily compared to the one involving a home loan. When the buyer uses a home loan, he actually pays two instalments. The first instalment is the deposit which is paid when the property is purchased. The second instalment is the loan amount. The loan amount is provided by the lender and is repaid in full at the end of the loan term.
In an instalment sale, the seller and the buyer negotiate the property sales price, the way in which the payment will be made and the general terms and conditions of the deal. Once they have reached an agreement, they can sign a property sale contract. This contract is drafted by an attorney or a team of attorneys specialising in transactions governed by the Alienation of Land Act. The legal professionals ensure that the contract meets all ALA requirements and other legal requirements and that it protects the rights of both the seller and the buyer.
The ALA contract is registered against the title deed of the property by a specialised conveyance lawyer. In this way, the rights of the buyer over the property are formally recognised. If there is a bond on the property at the time of sale, the lender is notified about the transaction in writing. The property continues to be registered in the seller's name. At the same time, the rights of the buyer over it are protected by the Alienation of Land Act. After the signing of the contract, the seller cannot use the property as collateral for any loans.
In most cases, the sale contract leaves the seller responsible for the payment of taxes and for the maintenance of the property. Still, these responsibilities are subject to negotiation. The buyer and the seller have to ensure that no issues associated with the occupation of the property will arise in the future.
The buyer is responsible for paying the property price in instalments as outlined in the sale contract. In most cases, the buyer starts paying the monthly home loan instalments instead of the seller. When the property purchase is financed by a bank, the transfer duty has to be paid in advance, but the case is different with instalment sales. The buyer can pay the transfer costs within 6 months after the signing of the contract or over a longer period of time. In this case, however, the buyer will have to pay interest of 10% on the total cost.
The buyer must accept the transfer of the property within 5 years of the date of the signing of the sale contract. Once the buyer has paid the total property price, the property is transferred to them. This can happen at any time before the end of the 5-year period.
The buyer is typically given a 30-day notice period to fulfil their obligations. If this is not done, then the sale contract becomes null and void. The buyer is not entitled to any compensation for the payments made to date while the seller remains the sole owner of the property. In this way, the rights of the seller are fully protected. The rights of the two parties are also fully protected in case one of them becomes insolvent or passes away.
The instalment sales are a viable alternative to the home loans. They give buyers the opportunity to buy a property at its current market value and pay for it over a period of time. There is no need for meeting the requirements for a home loan. At the same time, you can rely on your employment income to pay for the purchase.
Instalment sales are beneficial for property sellers as well. They can start earning money and have a secure income instead of waiting for buyers to obtain a loan and to purchase their property. Distressed sellers are highly likely to choose this option as it will help them avoid defaulting on their current home loan. These include people who have lost their spouse, those who have divorced and those who have to move to another place to work. At the same time, they can take out another bond to purchase a new property.
Overall, buyers should certainly consider the instalment sale option as an alternative to taking out a home loan. If you want to explore this option in greater detail, you should contact an attorney who has an experience with ALA contracts. The professional can help you with finding a property which can be sold under these terms and with negotiating with the seller.