March 2007

Home buying: how to be really clever

In the first article in our property series, we laid out a calculation which illustrated quite clearly that renting a house (in current market conditions) can be cheaper in the long run than buying a house. What our calculation didn't and couldn't cover were the elements of pride and permanence that come with owning one's own home. There is a lot to be said for buying and paying off your own home, or building your own home and finishing it off to your personal requirements.

Our message to readers really is that owning your own home is a fine goal to have, but you should never feel hard-pressed to buy and in doing so create unnecessary financial hardships for yourself and your family. It's absolutely fine to rent, at least until you can comfortably afford to buy or build the home that you want.

For the next couple of articles we are going to assume that you've made the decision to go house-hunting. There are so many things you can do to ensure that your final goal of affordably buying a house is achieved with a minimum of fuss.

How do you know if you can comfortably afford to purchase a property?

This question can and should stop you in your tracks. Don't even start reading the property section of the newspaper until you've done some homework. Here's a rule of thumb: Your home-loan repayments should not exceed 35% of your after-tax salary.
And you need to be able to afford household insurance, rates and taxes, maintenance, and levies (in a sectional title property) in addition to your bond repayments.

By doing your calculations you'll also get an excellent idea of what price range you should consider. For example, if 35% of your monthly after-tax salary is R5 000 and the bond interest rate is 11% p.a., you can consider houses costing not more than R500 000, assuming that you are applying for a 100% bond.

Going shopping for a house

Picture the scenario of buying a digital camera. You know how much you are prepared to spend, and you have an idea of your basic requirements. No sooner have you entered the store than the salesperson shows you a far more expensive model than you planned to purchase and suddenly it seems quite attractive to pay a bit more and get a bit more. It's an easy trap to fall into, and it happens with buying houses too.

The only way you are going to comfortably afford a house is if you are ruthless about sticking to your pre-calculated price range. That means being ruthless with estate agents too – don't let them even bother taking you to a house out of your price range.

Negotiating a price

Here's a valuable tip when it comes to making an offer on a house: Every seller has a "lowest price". This is lower than the advertised asking price. It's the lowest price they will be prepared to settle for, and you won't know what it is unless you start by offering them a price quite a bit lower than their asking price. If the seller tosses your offer out the window, it means your offer was even lower than their "lowest price". But if negotiations begin (perhaps they submit a counter-offer) it means your offer was within a price range still acceptable to them.

And here's another tip: Estate agents may profess shock when you make an offer quite a bit lower than the asking price. They will claim that their job is to get the best price for the seller. Wrong. Their job is to act as an intermediary between seller and potential buyers, and they are legally obliged to take any offer to the seller.

Take note too of this surprising fact: You can make any sort of offer to purchase a house. On the offer form the estate agent supplies, you can write (in ink) something like this: "I cannot afford the price of R500 000 but I can pay you R400 000 and my Mercedes-Benz  (SLK 2000 model)." Yes, believe it or not, money is not the only legal tender in the purchasing of property!

Next issue: Going shopping for a home loan.

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