Investing in repossessed properties, which in South Africa are known as PIPs (properties in possession), has become one way to make money in the current economy.
When no one is willing to purchase the home at the sale in execution (which is frequent, since these sales achieve such weak prices on stringent terms) the bank seeks to sell it through the market.
This is because of a near-historic rate of foreclosures across the nation which has resulted in depressed prices being reflected in the residential property market.
However, Rael Levitt, CEO of Auction Alliance says that while there are bargains out there and buyers are often getting houses at below replacement value they should be sure to do their homework properly before bidding.
A brief look at PIP
The term PIP is used in the industry to denote homes that are possessed by the bank which owns the bond for the property.
When a homeowner goes through a sale in execution through the courts, the bank may protect its outstanding bond and thus bid and buy the property into its possession at the no reserve judicial auction. Once it owns the property it will attempt to unload the property at, or near its assessed value.
When no one is willing to purchase the home at the sale in execution (which is frequent, since these sales achieve such weak prices on stringent terms) the bank seeks to sell it through the market.
Taking advantage of PIPs on the open market is about obtaining a home on the market versus the auction and obtaining possible discounts in price.
Finding PIP
Buying and selling properties in possession entails first finding possible properties for purchase. You can find PIPs through estate agents, auctioneers and online which offers the largest source of information.
Repossessed property listings are made available by these web sites and contain descriptions of properties in suburbs across South Africa, along with suggested prices.
Benefits of PIP
The main advantage of finding PIPs is buying homes at discounted prices. In a perfect world, a bank will prefer to sell the home at its current assessed market value. In a depressed market – or a buyer’s market – PIPs are usually well below the assessed value.
Another major benefit is that there is no transfer fee payable when purchasing a repossessed house, which presents a significant saving for the buyer, although bond registration and the usual attorney fees still do apply.
A bank repossessed home, therefore, represents a potentially valuable asset being sold at an inexpensive price. The goal for an investor is to purchase the depressed property, renovate it if necessary, and then sell it immediately or rent it out and keep it until after the market has recovered (or the offered price has risen) for a profit.
Many speculators are holding onto these homes because demand for rental property in South Africa is strong and if the purchaser puts up a 10% deposit, the property rental will cover the bond instalment from day one.
Funding PIPs
A purchaser can get funding from banks and can bid subject to funding.
Levitt says buyers should arrange finance before the sale. “They should approach their financial institution to find out what funding options they have at their disposal.”
Buying in bulk
You can take the process a step further and buy bank PIPs in bulk. The disadvantage of this is that large amounts of capital are needed, since you are investing in multiple properties at once. The advantage is that you can make an impressive profit margin off of one bulk sale.
In a good real estate deal you make your profit when you buy, says Levitt. “I highly recommend that you get reliable data so that you can properly analyse the current and future value of a deal, as knowing the value of the property before you buy is always the best way to be successful in real estate investing.”
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