Rent Vs Buy: Tyger Valley - Great Expectations

Here's an ad for a 2 bed apartment in Tyger Valley on the market for R1 300 000, or alternately you can rent it out for R10 000/month. But why rent it out for R10 000/month when you can rent an apartment in the same building for 68% less at R4 200/month?

So if you bought the place at R1 300 000 only to find your rental income isn't quite what the owner promised what can you expect? Well if you consider that with a 100% bond the difference between the bond payment and the rent is 3.2 times the monthly rental (R13 400/month) then you know it's going to be pretty bad.

Plonking down R1.3 million gets you a ROI of 3.88% which is about 8% below inflation. To be cash flow positive you have to put down just under R990 000 (a 76.14% downpayment).

More Plunging Prices From Repo Auctions

Reader TA has been at another bank repo auction and sends in the following:

Parklands

Parklands - 3 bedroom/2.5 bathroom townhouse(only 12 months old) - sheriff auction price R583000 - Sold in 2007 for R879 000 by developer
Parklands - 3 bedroom / 2.5 bathroom townhouse - sheriff auction price: R379 000 - exact same sized property in same complex selling through Remax for R749 000
Parklands - 3 bedroom/ 2 bathroom townhouse - sheriff auction price : R480 000 - Open market value: about R650 000 (currently being rented out for R4600)
Parklands - 3 bedrooms/2 bathroom townhouse Sheriff auction price: R515 000 - Open market value: about R699 000 (currently being rented out for R4800 hence its high price)
Parklands - 3 bedroom / 2 bathroom freestanding house (no garage): R490 000 - Open market value: about R650-699 000 (currently being rented out for R5000 per month)
Parklands - Plot - sheriff auction price: R350 000 - outstanding bond: R590 000 odd

Table View

Heron Cove complex - 2 bedroom / 1 bathroom - sheriff auction price: R252000 - Open market value: about R399 - 429 000
Heron Cove complex - 3 bedroom / 1 bathroom - sheriff auction price: R355000 - open market value: about R449 - R499 000 - Oustanding bond value -R550 000 (achieving a monthly rental of R3500 per month)

Bloubergstrand

2 bedroom/ 1 bathroom apartment - sheriff auction price: R424 000 - open market value: R650 000
2 bedoom/ 2 .5 bathroom 127 square meter luxury apartment on Blouberg beachfront - Outstanding bond: R1.9 million (registered in 2005)- sold by sheriff for R1.450 million

Parow / Loevenstein

2 bedroom/ 1 bathroom duplex apartment with great view - Highest bid: R381 000 - Nedbank wanted much more as bond was over R550 000 so no sale.
3 bedoom/ 2 bathroom/double garage/pool - recently renovated house in pristine condition with seperate 1 bedroom granny flat on 900 sq/m plot - Sheriif auction price R866 000 - Outstanding bond: R1.5 million - open market value- R1.3 million

Goodwood

2 bedroom / 1 bathroom apartment (1 years old) - sheriif auction price: R330 000 - open market value: R499-550 000

Sybrand Park

4 bedroom/3 bathroom 250 sq meter house on 850 square meter plot with pool, garage for 4 cars, offstreet parking for 6 cars / had a granny flat that was easily 80 square meters in size- sheriff auction price: R790 000 - outstanding bond value: R1.6 million (registered in 2004) - Open market price: R1.5 million odd

Cape town CBD

Batchelor apartment (40 square meters) - sheriff auction price: R371 000 - similar sized apartments in building selling for R599 - R620 000 - Bond with FNB registered in 2005 was R600 000.

Zonnebloem

3 bedroom/2 bathroom corner unit duplex in Cantebury Square with garage and big garden - sheriff auction top bid: R895000 - no sale as Standard Bank wanted more - Bond value: R1.9 million - exactly same sized property selling for R1.499 million.

South Peninsula

Coniston Park / Retreat- 3 bedroom/ 2 .5 bathroom freestanding brick face home with double garage - Sheriff auction price: R315 000 - Open market value: R550-599 000 - achieving a monthly rental of R4500

Costa Da Gama (opposite Marina Da Gama) - 3 bedroom/2 bathroom freestanding home with garage (about 2 years old) - Sheriff auction price: R270 000 Open market value: R499 000 - R529 000

St James - 2 bedroom/2 bathroom 80 odd square meter sea facing apartment in the St James Terraces - Sheriff auction price: R 1 million - unit directly underneath selling for R1.499 million but has a small garden

Maitland - the exception!

3 bedroom/2 bathroom freestanding trashed house with a garage that was occupied by 30 or so Congolese or Nigerians - somehow this property was sold for R450 000 when the oustanding bond was R280 000. There were two shady characters bidding hell for leather so they probably knew something everybody else didnt.

What I mean by open market value is the current value at this point in time and taking the current depressed market conditions into account.

Its quite apparent that the market has tanked judging by the prices being achieved at the sheriff's auction. It must be said that there are numerous bidders at these auctions and the bank's representative does get involved if the bids are too low.

Another interesting observation is that the banks, with the exception of Nedbank, are willing to accept the fact that the final bid is only 50-60% of the oustanding bond value. It seems the banks know that prices are going down and they are selling cheap to cut their losses. That and banks dont want to be landlords of distressed properties.

Bond Defaults Up 21.5% From 6 Months Ago

Unpaid home loans soar

In the third quarter of this year 70 000 homeowners were more than two months behind with their bond instalments - 21.5% more than in the first quarter.

At the same time, 25 000 homeowners were more than four months behind and in danger of losing their houses. This figure shot up from 18 000 in the first quarter.

These shocking figures have become evident from the Alliance Group's latest research for the third quarter.

CE Rael Levitt says that indications are that the numbers will climb. "The residential market is slipping backwards and, if the macroeconomic climate weakens further, more and more homeowners will experience serious mortgage stress."

He says that stressed sales being handled by the group are growing 20% month by month.

Rent Vs Buy: Blouberg - A Loser All The Way

Here's possibly the worst 'investment' I've ever seen advertised in Blouberg. A 2 bed/2 bath apartment on sale for R1 250 000,a 'winner all the way' and 'IDEAL FOR INVESTORS', but which rents for... wait for it... R3 500/month. To put that in perspective the payments on a 100% bond is R16 923/month which means it would be 4.8 times cheaper to rent the place than buy it. The difference between the bond and the rental is R13 423/month alone, and if you were diligent and saved that money you'd be sitting with over R160 000 in your bank account at the end of the year.

The yield graph is as to be expected, horrendous:


So just to break even on cash flow you need a 79% downpayment, over R990 000. Paying for the place in cash get you a 3.36% return on investment. I think there are transactional accounts that earn more interest than that.

Saturday Open Thread

It's really Friday when I'm posting this but I don't plan on switching my laptop on during Saturday. Got a burning issue you want to discuss? Post it here, I'll be up Lion's Head.

Bank Repos Kick Into High Gear

Since the 20th bank repossessed properties have been dumped en masse onto Gumtree. Not sure if it's ABSA, who are also trying to get rid of property via Auction Alliance, or one of the other big 4.

Well I guess the banks could always just hold a raffle...

Tamboerskloof: Apartment Up For Raffle - The Desperation Kicks In

Got a bond on an 'investment' flat but the rent isn't covering half of it? And when you put it on the market not even the next door neighbours came to show days? Then it's time to hold a raffle!

raffle of apartment R 1500

Fully Renovated Stylish Apartment for Sale.- R 1500 - Yes thats right - one thousand five rand only - and I pay for ALL the transfer/duty/lawyer costs in total into your name !

I think desperate housesellers tried this in the US a while back and it ended in tears and disappointment. I predict the same here.

Besides this scheme probably being illegal in SA (I do believe there are all sorts of hoops charities have to jump through to hold a raffle/competition) anyone who does buy into this shouldn't be too surprised to never hear from the person running the competition, only to find the apartment legally sold via standard channels. If you're desperate enough to hold a raffle for a flat you're desperate enough for that.

Thanks to Reader AN for the link.

Saturday Open Thread

It's a beautiful day in Cape Town. What better time to stay inside and argue with strangers on the internet.

This Is Why I Say...

...don't buy anything built in the last five years.

Thanks to reader RF for finding an actual picture of the collapse.

Hermanus: 1/2 The Town For Sale

Reader GH writes:

Just came back from a few days in Hermanus. I'm not lying when I tell you that virtually every 2nd house is for sale.

Anyone out that side got more information?

ABSA: Extra Money In Your Bond? Not Anymore.

About 10 people have emailed me this story from RealEstateWeb today: Absa home loan shocker. ABSA are now preventing people with certain savings accounts linked to their bonds from withdrawing any extra equity from those bonds without going through an application and jumping through some hoops.

So what's going on here? Well with close to 80% of the mortgage market ABSA have a lot to lose if property prices go south any further and defaults increase. They're already auctioning off repossessed houses as fast as possible but this action means it might not be fast enough. It would seem they expect to be the new owners of a chunk of SA realty soon and are trying to reduce losses at the inevitable discount rate bank repo auction by keeping the extra cash paid into the bond.

Worst Investment In Hout Bay Surprisingly Still On The Market

What a surprise! The worst investment in Hout Bay that we last saw in May is still on the market. To remind you all it's a 3 bed townhouse on the market for R6 million which is tenanted for 5 years (that's not a typo... it really is 5 as in f-i-v-e years) at R28 500 a month. Which means that with a 100% bond over the five year period of the lease you will end up losing R3 163 920. Even if interest rates had to magically drop to 10% for the next 5 years you'd still end up losing R1 764 060 and you'd only need a deposit of R3 000 000 to break even on cash flow.

What a deal. I'll take two.

Investors Dumping In Strand

Strand is a suburb with some of the worst rental yields in Cape Town, probably not helped by the 45 minutes it takes to drive there, and that's when there's no traffic. So it's not suprising with the stagnating market to see investors beginning to exit ASAP.

11 Investment Properties in security complex for sale in Cape Town, Strand, South Africa.
1. 2 bedroom units
2. Signed leases with tenants in occupation
3. One years capital growth
4. All are managed by rental agents

Dumping 11 units in the same complex? The other residents must be absolutely thrilled.

Bank Repo Auctions: Prices Plunge

Reader TA writes:

I've been attending quite a few repo residential auctions and thought i'd send you some figures:

San Marina (Marina Da Gama) - 3 Bedroom / 2 bathroom house
Agent selling price: R749 000
Sold at auction: R425 000

San Marina (Marina Da Gama) - 2 Bedroom / 1 bathroom house
Agent selling price: R599 000
Sold at auction: R415 000

Costa Da Gama - 2 bedroom/ 1 Bathroom house
Agent selling price : R529 000
Sold at auction: R340 000

Pinelands - 2 bedroom flat (92 m/sq)
Agent selling price: R799 000
Sold at auction: R514 000

Rondebosch East 2 Bedroom flat (18 months old)
Agent selling price: R585 000
Sold at auction: R300 000

Table View 3 bedroom/ 2 bathroom house
Agent selling price: R795 000
Sold at auction: R 438 000

Durbanville 4 Bedroom / 2 Bathroom
Agent selling price: R2.25 million
Sold at auction: R1.05 million

Pinelands - 8 bedrooms/ 4 bathrooms (400 m/sq house on 900 m/sq plot in pristine condition) sold for R1.4 million - conservative value by Sheriff was R2.7 million ( a little optimistic but never the less)

Agent selling price is the price the property was going for before the house got repo'd. The auction price is the price knocked down by the Sheriff.

Saturday Open Thread

Got a topic to discuss we haven't covered? This the thread for it?

Rent Vs Buy: Royal Ascot

Here's a 2 bed/2 bath apartment for sale in Royal Ascot(Milnerton) on sale for R1 195 000 with a current rental of R5 500/month fixed for the next year. With a 100% bond the monthly payments are R16 178/month leaving you with a shortfall of over R10 000/month. Here's the payment and yield graph.



Buying in cash gets a return on investment of 5.52%, less than half of inflation. A 66.01% (over R780 000) deposit is needed to be cash flow positive with 2.6% capital appreciation required to not lose any money even with a 50% dowpayment.

70 000 South Africans In Mortgage Arrears

Property24 reports:

Mortgage defaults surge

An increasing number of homeowners are defaulting on home loan repayments, with an estimated 70 000 South Africans currently in mortgage arrears, latest figures from the Alliance Group shows.

Alliance Group CEO Rael Levitt says their research shows that the number of homeowners who have defaulted on monthly mortgage repayments by up to two months have increased tenfold in the 12 months to end-September 2008.

How To Read The Rent Vs Buy Graph

I regularly get email from readers asking how to interpret the Rent Vs Buy graphs we post. To avoid further confusion here's an explanation. First here's a sample graph: a property on the market for R1 000 000, with a rental of R5 000/month, a current bond interest rate of 15.5% and a bond period of 240 months (20 years).



The first thing to remember is that this is two graphs superimposed on top of each other. The first graph is the Monthly Payment/Cash Flow graph which uses the left hand side Y-axes.

The blue Monthly Payment graph is the amount needed monthly to pay off the bond. For example with a 25% downpayment of R250 000 we see that the bond payment is R10 154/month. The purple Cash Flow graph is what is left over when the bond payment is deducted from the monthly rental. In this case with a 25% downpayment every month we will still be required to pay in R5 154/month to cover the shortfall. As indicated on the X-axis we will only be cashflow positive (CF+) with a downpayment of 63.07%, which is indicated by the Cash Flow graph crossing the lower X-axis.

The second graph is the Return On Investment/Capital Appreciation Required graph and it uses the right hand side Y-axis. The red Return On Investment graph shows what the annual percentage return is on the money invested in the property. In our scenario with a 25% downpayment we see that the ROI is about -25%, which means that covering all the shortfalls will have lost our buyer R62 500 of his downpayment. To make up that shortfall we look at the green Capital Appreciation Required graph, which shows that to cover the shortfall of R62 500 and not lose any money the property needs to appreciate by just over 6%.

Auction Alliance: New Record Number Of Auctions!

Auction Alliance has 252 auctions set for October, 40 more than the previous record from last month's 210, which was up from 120 the same time last year!. That's close to a 20% increase in a single month!

Saturday Open Thread

It's Saturday! Which means it's time for our weekly open thread.

Rent Vs Buy: Bellville - Calling All Idiots

Here's a house in Bellville which is "CALLING ON INVESTORS ONLY!!". It's on the market for R1 600 000 and has a current gross rental income of R6 000/month. I'm not going to even bother doing analysis here, just take a gander at this awful payment and yield graph.

Buy This House... Or I'll Raise The Price

Here's a house for sale in Muizenberg;

Join the mad rush to view this bargain property! The owner has decided this is too much of a steal.

Instead of increasing the price all at once, however, it will be going up steadily every week until a sale is achieved! Don't miss this opportunity to get in on the ground.

Because if there's one thing that will sell a house in a declining property market it's a threat that the price is going to go up...

Weekend Reading: Rental Housing Report

Class, here's your weekend reading: The Rental Housing Report from the Social Housing Foundation.