Property Purchasing Guide
South Africa’s favorable exchange rate has a lot of foreigners investing in local land, many of the property developers and resellers, an undertaking that can be very profitable in Cape Town due to the low cost of manual labor. Outlined below is the nature of property ownership in South Africa, and the proper process one has to follow in order to transfer property. Note that these laws can change at any time, and that this document is in no way intended as legal advice, for which you should turn to a qualified property attorney.
Land Ownership in South Africa
There are two main types of land ownership in South Africa:
Freehold title is assumed when a buyer purchases a property that is freestanding, and as such gains ownership of all land and buildings to which that property is attached. The new owner should receive a deed to the property (separate title) and becomes singly responsible for all manner of services and maintenance to said property.
In this case, a buyer purchases a apartment or unit in a block or complex. The buyer will then receive a deed to the title for his section, which also entitles him to a proportionate, undivided share of the property as a whole. He will be required to contribute on a pro-rata basis to shared expenses and will have to comply with house and management rules.
Foreigners and Land Ownership
There is no technical restriction on foreigners owning property in South Africa. A foreigner is allowed to purchase property as an individual, or using the name of a South African legal entity, such as a trust, company, or CC (see ‘Real Estate Terminology’). This does, however, require certain legal formalities not required of locals.
The consequences of buying, owning or selling a property in South Africa will ultimately be decided, not by your nationality but, by your tax status, which in turn will be determined by whether you’re legally viewed as a resident or a non-resident of South Africa. There are two separate tests to determine your residential status. Failing one test, you’re entitled to be evaluated under the criteria of the other, giving you a fair amount of leeway when it comes to proving your status.
The Ordinarily Resident Test
This is the primary way people are evaluated for resident status. Under this definition, you’re a resident of South Africa if your home, the place to which you always return and at which your belongings are stored, is in the country, and if you keep returning to South Africa with some degree of continuity. The definition seems to be quite subjective (even wishy-washy) and is primarily based on human judgment rather than the results of a block-ticking legal check sheet.
The Physical Presence Test
Under the terms of this test, a non-citizen only becomes a South African resident for tax purposes when that person has been present in the country for at least:
- 91 days overall during the present year
- 91 days overall for each year preceding the present one
- 549 days overall for the last three years
Financing for Non-Residents
If you’re a non-resident, and you plan to pay cash for your property, there’s no limit to how much money you can bring into the country for this purpose. In fact, so long as you return any profits you make when you sell the property to the country they were originally brought from, you needn’t involve the SARB (South African Reserve Bank) at all.
If, on the other hand, you wish to borrow funds from a local bank, you’ll be required to introduce an amount equal to what you’re borrowing from offshore. You’ll be asked to provide documentation to your lending bank proving that said money has been sent to South Africa for the same purpose as your intended loan. If, thereafter, you want to sell the property, you can send all the proceeds to your country, just as long as the CGT required of you (See ‘Real estate terminology’) has been paid.
The top mortgage lenders in Cape Town are the four major banks – ABSA, Nedbank, Standard Bank and First National Bank (FNB). They all compete fiercely to provide the best deals, and tend to offer a variety of different home loans, with different benefits. Some have lower interest rates, others have fixed interest rates, still others offer better consolidation benefits. It’s all about providing mortgages that are customizable and meet the individual needs of the prospective homeowners they’re funding. They’ll factor in your income, expenses and loan requirements and suggest numerous options in the hope of acquiring your business.
Here are the home loan pages of these banks, along with the specialty real-estate-related-queries lines that they provide for any questions you might have regarding what you find online.
- FNB – Visit http://www.fnb.co.za/home-loans/traditional-home-loan.html
- Standard Bank – http://www.standardbank.co.za/SBIC/Frontdoor_02_02/0,2454,176061_1779124_0,00.html
- Nedbank – http://www.nedbank.co.za/website/content/Products/product_homeloan_overview.asp?SubSubcatid=2011&Subcatid=516
- Absa – http://www.absa.co.za/absacoza/content.jsp?/Home/Personal/Products-and-Services/Loans/Home-Loans
Registering for Tax
South African residents are taxed on their worldwide income, with concessions being given to avoid double taxation. South Africa’s system for taxing non-residents, on the other hand, is a source-based one. This means that you’ll only be taxed on earnings if they are South African in origin. If they come from another country, you’ll only be taxed if South Africa has concluded a double taxation agreement with that country.
Thus, even if you aren’t a South African resident for tax purposes, you may still be legally obliged to register for tax, and to submit an annual income tax return.
The reason for mentioning this here is that SARS (the South African Revenue Service) uses property purchases to check that all parties involved in the transaction are registered for tax and, if so, that their tax affairs are entirely up-to-date and in order. So if you haven’t registered before you transaction, SARS is going to require that you do so.
To register, you’ll need to complete the IT 77 form, available online at http://bit.ly/zx0Iy. In addition, you’ll need:
- A certified copy of your ID document (you can get the copy certified at any police station. The town branch is located at Caledon Square, Buitenkant Street, CBD).
- Your bank details, along with acceptable proof of their validity. Any one of the following documents will do: a cancelled check; a certified or original copy of your account statement; an original letter from your bank confirming your details.
- Your income details for the past 3 years.
- Proof of residence. An original electricity or water bill is acceptable.
Take all these to your nearest SARS office. The Cape Town office’s address is 17 Lower Long Street, CBD. Call 021 417 1400. Business hours are 08:00-16:00 on weekdays, excepting Wednesday, when the offices only open at 09:00.
Once you’ve been registered, a SARS official will contact you with your tax number. Once you have this number, you can use it to register and do your tax returns online at http://www.sarsefiling.co.za.
Typically speaking, any viewings of homes as well as any negotiations and transactions with sellers will be conducted through an estate agent (You can find various estate agents under ‘Finding a home’). Be aware, however, that the estate agent will be motivated to get the highest possible purchase price out of you, as this will result in a higher commission for them. As such, you may want to call on the services of a property consultant to look after your interests (Visit http://www.capetownhomes.com/table-mountain-properties.htm).
Aside from negotiating with the estate agent (and possibly going over the estate agent’s head to the seller, should the agent be pushing for unfair terms), property consultants oversee every step of the selling process, ensuring you don’t get charged too much by the transfer conveyancers, and even speeding along the approval of your bond. If you’d just like assistance with the transfer side of things, then you should probably consider soliciting the services of a good attorney versed in immovable property law.
The Offer To Purchase
Once you’ve found a home and completed negotiations with the estate agent over price, the first concrete step in the process of buying the property will be to submit an Offer To Purchase to the seller. This will generally be drafted by the estate agent and your consultant, and signed by you, and, if applicable, by your spouse. The Offer To Purchase is considered to be the most important document in any property transaction, as, once both you and the seller have signed it, it becomes a binding contract that sets out the terms of the sale. It then becomes known as the Deed Of Sale.
Should you sign an offer to purchase and then back out of the deal, the seller has the legal right to sue you for any damages your actions may have caused. Said damages might include the estate agent’s commission, which could be a considerable sum. If the seller refuses to let you cancel the deal, you may be forced to go ahead with the purchase and resell the house. As such it’s important that you fully evaluate your finances prior to making any offers, and be certain that you both want and are in a position to purchase the property.
The acceptance of your offer also places the seller under certain obligations, which include providing you with an electrical compliance certificate. The seller must pay for a registered electrical contractor to examine the house and verify that all electrical installations on the property are in order, which the contractor will do by providing a Certificate of Compliance (COC). If the contractor finds that the electrical installations do not meet current safety standards, the seller will have to see that any faults are repaired prior to the property being transferred into your name.
It’s also your right to request an entomologist’s certificate, which will state that the property is free of wood-boring beetles (important with older, wooden dwellings). If such beetles are found, the seller will have to foot the cost of having them exterminated. This will only be obligatory if you include it as a clause in your offer from the beginning.
Most Offers To Purchase will include a so-called ‘Voetstoots’ clause. This clause simply establishes that you agree to purchase the property with all its inherent defects. Following the sale, you will not be able to sue the seller for any defects you may discover. To ensure you’re not being misled, you may want to hire a building inspector to inspect the structural integrity of the building. You will, however, have to pay for this out of your own pocket.
Amendments and Clauses
Estate agents generally present sellers with standard Offer To Purchase agreements drafted by them or their legal counsel. You can cross out or amend any clause you consider to be unfair, as can the seller. Any time any clause is amended, it has to be initialed by the estate agent, the buyer and the seller to show that all parties are aware of the changes and find them agreeable. You have the right, at this point, to take an unsigned copy of the agreement to a conveyancer or property lawyer to ensure that the agreement is fair and proper.
This is also the time to include any ‘subject to’ clauses in the agreement. For example, you’ll probably want to mention that your Offer To Purchase is subject to your being granted a home loan. If you intend to finance the purchase with the sale of another property, then you’ll want to mention that the Offer To Purchase is subject to that property being sold. You’ll usually have to place a time limit on these things getting done. Six to eight weeks is a typical period, after which the seller is entitled to put the property back on the market.
You may also want to make mention of any fixtures or fittings in the home that you consider to be part of the sale – items such as cupboards or utilities. The owner should also mention if there are any items (especially built-in fixtures) that are still to be removed from the premises.
Transfer, Occupation and Possession
The Offer To Purchase should also lay out the dates of transfer, occupation and possession of the home. Starting on the date of possession, you’ll become responsible for municipal rates levied by the local authorities. However, should you occupy the house prior to the transfer being completed, you’ll be liable to pay rates from that date. Thus the dates of occupation and the date of possession should, ideally, be the same.
If the seller should fail to leave the premises by the date of possession, you’ll be entitled to charge occupational rent for his or her stay. The amount of occupational rent to be charged in such a situation should be laid out in the Offer To Purchase, as this will help avoid disputes down the line. Typically, the monthly rate is set at 10% of the purchase price of the property divided by 12.
If the property you’re purchasing is selling at or under R250 000, you’re entitled to a cooling-off period during which you can cancel your Offer to Purchase without incurring any penalties. You can exercise this right to cancel up to two times with any given property. The cooling-off period begins at midnight on the day that you sign the Offer to Purchase, and lasts five business days (i.e. excluding Saturdays, Sundays and public holidays).
Applying For Financing
Once you’ve submitted your offer, the estate agent will notify you when and if the buyer has signed it. Following this, assuming you need financing, you’ll need to gather three months of bank statements (or a proof of employment, with a letter from you employer; essentially, the goal is to prove that you have an income sufficient to pay the bond). You’ll also need your residence permit, and proof of residence if you’ve been in the country for some time – a utility bill sent to your current home will do. Once you’ve gathered these, along with a copy of your Offer To Purchase, you can proceed to the bank and apply for financing. Be aware that most banks will only finance you for the market value of your home, which will be determined by an appraiser sent to evaluate the property. Any difference will have to be made up by you, possibly with a loan from another bank. (Be aware that, while it’s no longer legal for banks to pre-approve home loans, if you contact a bank’s home loan division and provide them with the details of your financial position, they’ll usually get back to you quickly with an estimate of the size of home loan for which you qualify).
Once your bond is approved, the necessary funds should be deposited into your account. You’ll need to provide proof of those funds clearing, along with the property transfer fees (outlined below), to the conveyancing attorneys.
Conveyancing attorneys are appointed by the seller, and handle the actual process of transferring property. The conveyancer is responsible for drafting all the necessary documents for transfer and presenting them to the buyer to be signed (if the buyer is married, his or her spouse will also have to sign them).
The various documents will then be taken by the conveyancing attorneys to the local Deeds Office for examination. If all documents pass, they’ll be registered, at which point you’ll be required to deposit all funds into the sellers account. At that moment, you’ll become the registered owner of the property.
About 90 days later, the original title deed should be delivered by the Deeds Office to the conveyancer, and from there will be sent on to the purchaser (if the property was purchased in cash) or the mortgaging company (if bond finance was used), who will keep it as security on your loan, and deliver it to you on the day the final payment is made.
You will be subject to several property taxes, payable through the conveyancer. They will include:
- Bond registration fees (See ‘Real estate terminology’)
- Capital Gains Tax (CGT) (See ‘Real estate terminology’)
- Transfer duties (See ‘Real estate terminology’)
Value Added Tax (VAT) is levied on the seller if he or she is VAT-registered. It’s charged at a rate of 14% of the transacted amount, and is supposed to be included in the purchase price when the seller is registered. Developers tend to be VAT registered, as paying VAT means that no transfer duties will be levied on their purchasers. This makes purchasing their developments more attractive to potential buyers.
Property taxes can amount to as much as 10% of the cost incurred in buying a home, so should be factored in to any calculations regarding the feasibility of a purchase.