The dizzying heights of the most recent property boom, when house price growth peaked at an average annual rate of 32% in 2004, as well as the protracted recovery period in which the property industry has been languishing since late 2009, are prime examples of fluctuations that obscure the otherwise clear cyclical movements in the property industry.

One of the fundamental basics of economics is that markets move in cycles. Markets experience boom times, followed by a period of market correction and a downturn, before the next boom arrives. This is a natural phenomenon evident in all markets, and whether it is called “boom and bust”, “bulls or bears” or simply “peaks and troughs”, investors can be absolutely certain that neither a growth period nor a downturn in any market will last forever.

What was uncertain, however, was the highs or lows that may be reached during an upturn or a downturn, and the duration of either.

“In the property industry in SA, the average cycle normally spans around seven years,” says Dr Koos du Toit, CEO of the P3 Investment Group.

“But given the heady heights reached in 2004, when many analysts and experts warned of a ‘property bubble’, as well as the subsequent economic turmoil as the world experienced the worst recession in living memory, it is not surprising that many have lost sight of the fact that we are simply moving through another cycle.

“Yes, the market correction and downturn of this property cycle were nothing short of terrifying for speculators and those investors who had overextended themselves financially. And the long, slow recovery has been painful for even the most prudent investors. But the cycle is turning, as it always does, and the market will again experience an upturn.

“What remained uncertain was when the upturn will commence – many predict only towards the end of 2012; what level property price inflation will reach before the next market correction; and how long the upturn will last.”

The question arises: How can a property investor protect a portfolio against the ravages of the property cycle?

“Many property investors do attempt to ‘time’ the market, but this is akin to speculation. The 2004 boom and this long, protracted recovery provide ample proof that ‘timing’ the market can be a dangerous game,” comments Du Toit.

“Professional – and thus successful – property investors take a long-term view of their investment and the market. They don’t speculate; they are building sustainable property investment businesses. This includes keeping an eye on the property cycle, but their focus is not on ‘timing’ the market, but rather finding the right investment properties that will yield an ongoing passive income and capital growth over the long term. Seasoned and professional property investors know that these investment properties can be found regardless of where we are in the property cycle.”

Du Toit explained that professional property investors did not simply acquire properties, they acquired property assets with long-term income-generating potential.

“In layman’s terms, this approach can be compared to buying a cow. You can either keep the cow for milking over the long term, or you can sell it quickly at the highest price for slaughtering. If you acquire a cow for milking, you will have an asset, which is appreciating in value, and you will benefit from the milk it produces on an ongoing basis for years to come. If you sell the cow for slaughtering, you might make a quick ‘killing’ – to use the terminology speculators are fond of. But you may not, particularly if several other cow owners have the same idea. Either way, both the cow, as an asset, and the milk it would have produced over the long term, are gone.”

Du Toit notes that a property should be acquired as a cash cow.

“The intention is to hold the property over the long term, milking its ability to produce a passive monthly income that keeps pace with inflation year after year.

“While the property will also appreciate in value, this is regarded as an added bonus, since the objective is not to sell the cash cow, but rather to milk it. This approach is almost immune to the property cycles, since regardless of whether property prices are rising or falling, there will always be demand for good entry-level rental properties in well-established and growing areas.

“And while capital appreciation is not the main objective, investors are richly rewarded for their patience and long-term perspective by superior capital growth over the years, as the ups and downs average out, producing a steady upward trend in property price inflation.”

This, clearly, was an entirely different approach when compared to speculating, in which property investors try to “time” the market by buying at high prices, and hope to “make a killing” by selling even higher in the short term.

Du Toit says that while fortunes have been made in this way, it is a high risk approach that has certainly seen many investors lose their investments, and has given many South Africans a distorted understanding of property investment.

“Property investment – acquiring property assets that can be ‘milked’ over the long term for their income-generating potential – may not be as thrilling and exciting as wheeling and dealing with properties, timing the market and making a killing.

“But it is a proven, tried-and-tested recipe for virtually failsafe property investment. And it is a system that allows investors to sleep peacefully at night, knowing that wherever we are in the property cycle, whatever highs or lows may be reached during an upturn or a downturn, or the duration thereof, their properties are generating an inflation-linked passive income, and in the long term, even their most optimistic capital appreciation expectations will be realised.”

This article is to inform and educate, not to advise.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

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SOLE MANDATES – IS THIS THE BETTER OPTION?

One of the first steps when selling your home is to consider giving an Estate Agent a Sole Mandate; but it is essential to be informed before doing so. Sellers are completely within their rights to ask their Estate Agent to explain the pro’s and cons of selling their home on a Sole Mandate, Open Mandate or through a multiple-listing service.

Essentially there are three type of mandates; Sole Mandates, Open mandates, and Multi-listings. A Sole Mandate, once signed, is a contract between you and the Estate Agency and you cannot simply change your mind about its provisions later and revoke it.

THE SOLE MANDATE

The Sole Mandate is a legally binding contract entered into by the Seller and the Estate Agent. It gives the Agent the legal right to be the only marketer of the property over a certain period of time and at a price agreed to by the Seller and the Agent. If Agents are sincere in their determination to sell a property, then there are many obvious benefits which accrue to Sellers willing to sign a SOLE SELLING MANDATE.

The Sole Mandate system is the most popular in the South African market. It has long tradition within the industry, which has allowed professional Estate Agents to perfect the accompanying marketing plans, ensuring that the marketing of the property receives their full attention and commitment. Selling by Sole Mandate ensures the most possible privacy and least amount of inconvenience to Sellers, and also protects them from double commission claims. This form of marketing is, however, most effective when embraced by well-established Estate Agencies that have strong market penetration in the area in which the property is situated, and whose budgets allow for extensive media advertising.

The choice of whether to go with the Sole Mandate is entirely the choice of the Seller. No Estate Agency can force you to provide it with a Sole Mandate. Naturally Estate Agencies prefer Sole Mandates because of the exclusive rights they have that justifies the effort and costs they put into marketing the property.

They have to offer you exceptional services. They must advertise your home in the appropriate publications as well as on the Internet, with ‘For Sale’ boards outside the property (if the local municipality allows it), and a Show House must be held at least once a month, throughout the mandate period.

It is sensible to give a Sole Mandate for a period of four months. Beware of mandates that add a clause stating the mandate will continue indefinitely beyond expiry date, unless you cancel in writing.

THE OPEN MANDATE

This is often no more than a verbal instruction to an Agency to find a buyer without any further commitment on the Seller’s part. The open mandate liberates Sellers from the need to sign any mandate documents, but is the least effective form of marketing. Professional Agents are reluctant to actively promote an open mandate property in terms of advertising costs and show days, because they know the door is always open for a competitor to step in with a buyer after all their hard work and promotional costs.

It appears attractive and non-committal, but Agencies obviously don’t like doing business like this. The most professional and successful Sellers will brush aside open mandates. It’s always a question of quid pro quo – value for value. If you are looking for a professional Agent to deliver a professional service, the open mandate will probably not be the best choice.

OTHER BENEFITS OF SIGNING A SOLE MANDATE AGREEMENT

It is important to look at the marketing process that the Estate Agent will follow before you sign a Sole Mandate agreement. Ten different, smaller ads will reach more potential buyers than one big ad. The size of the advertisement is not important. Do your homework and obtain references from other Sellers. Decide what price you want to ask for your house. Do not just go with an Agent, because he said that he/she could get you a higher price. Always remember that you determine the price at which you wish your home to be marketed but that you appoint an Agent to do marketing for you.

There are no negatives to signing a Sole Mandate agreement if both parties involved are honest people. It is also important that both parties must come to an agreement on what their expectations from one another are. Quite often, the Seller simply takes some items for granted. It is therefore important that the marketing process forms part of the agreement with your Estate Agent, and this agreement needs to be signed by all parties.

A Sole Mandate is the only evidence the Agent has that the Seller will pay him for his expertise and services. Sellers tend to forget that Agents need to spend money on advertisements etc. to sell the property. If you order a pool, you sign the contract first – no contractor will install a pool and enter into a contractual agreement after the pool has been installed.

Some important aspects that will influence the sale and that a Seller can rely on:

• the Estate Agent will advertise your property on a weekly basis in news papers.
• your property will host a show house every second week until your property is sold;
• a full colour pamphlet will be designed with professional photographs and text to be handed out during the Sole Mandate period;
• your home will be advertised around the globe on the internet;
• you will receive exclusive exposure if you advertise your home with one Estate Agency
• benefit the end result in price if one Estate Agent controls all incoming offers;

The same rules applies when it comes to the Sole Mandate agreement – by signing one, you give permission to the Agent to bring prospective buyers to your home on a daily basis. You confirm that you agree to the terms of the sales process. A Sole Mandate is simply a business agreement – it is a legal document that spells out an agreement between two people. Our law system has look into the Sole Mandate agreement and has implemented clauses that protect both parties. The only thing you need to do is to appoint the right Agent for the job. Of course, in our current times, security is an important factor and this is aided by a mandate with a Sole Agent.

SELLER BENEFITS

There are many good reasons for the Seller to sign a Sole Mandate. We know that Sellers want the most money for their property with the least amount of problems. By dealing with one Agent this can be achieved. It is a fallacy that many Agents will do a better job than one Agent can. All buyers interested in the Seller’s property are funneled through to one Agent who can negotiate with each one and thus obtain the best price.

Conversely, when the property is given to three Agents with different buyers, each Agent is working in isolation. Their interest becomes getting their buyer’s offer accepted first, at any price. The Estate Agent is then working for the buyer because if his/her buyer doesn’t buy, the Agent does not get paid. Pressure is exerted on the Seller to accept the offer being presented, because if that buyer does not get the property another Agent’s buyer will. Buyers perceive the property being offered through one company and not eight or ten as more exclusive. They will feel more secure in knowing that one person is controlling al interested buyers.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za