The offer to purchase
So, you’ve done all your checks and you’re ready to sign the offer to purchase?
Awesome!
But before you do, it’s worth understanding the details around what you’re signing.
What it is and why it’s important that you add necessary exit and protection clauses?
Many agents will claim that there is a standard offer to purchase (OTP).
This is not true.
There is not one OTP to rule them all.
You CAN negotiate a property deal.
What is the OTP?
The OTP is a legally binding contract between you and the seller where you state the terms under which you will buy the property. It also includes the purchase price, your personal (or company details), deposit information, the infamous voetstoots clause and compliance (such as the COC certificate).
This will be discussed more in-depth below.
What can I negotiate?
As the purchaser, you might feel like you don’t have special rights to negotiate a deal. I want to encourage you: don’t settle for second best! Property is much more negotiable than you might think. Here are some areas that you can negotiate:
- The purchase price of the property.
- Choosing attorneys (and negotiating their fees).
- Exit clauses that will protect you if you don’t want the deal.
- When and how you will take occupancy.
Price negotiation
Top Tip
Never pay the deposit into the account of the agent – always pay it into the trust account of the transfer attorney directly
Though I have a dedicated article about purchase price negotiation here, I would like to mention some things here, as it touches on the OTP as a legal contract.
Once you reach the OTP stage, you have probably negotiated the purchase price down already. You have also probably elaborated on what needs to be done with regards to maintenance as a condition. It is also not unheard of that the seller is tight on money, which makes negotiation a little bit more challenging. It might thus be better if maintenance is done once the property is registered – and the OTP is the perfect place to add these conditions!
If necessary, add a clause to the OTP to withhold the money needed for maintenance to make the necessary fixes after registration.
Make sure that the amount offered and the deposit amount is correct!
Attorneys
Top Tip
Some banks allow you to choose your own bond attorney. If you have the same bond and transfer attorney, they tend to give you a discount on the bond and transfer costs.
When it comes to the transfer attorney, it is customary that the seller appoints their chosen minion. As this is not a legal requirement, you can negotiate to use your own.
One might say that the only reason for this is financial gain (as your own attorney probably will charge you less), but it’s also for the sake of convenience. Your own attorney has all your information already. It is therefore convenient not needing to gather all paperwork again.
If you have a friend or someone that will give you a discount, this is definitely worth the negotiation.
Exit clauses
One of the queries I get most about OTPs is how to get out of one.
It is with dread that some people realise that if you signed an OTP, you are bound by it. Make sure you have the necessary exit clauses in your contract. If you need to exit the deal, you need to have the option.
Getting a loan
One of the ways that estate agents make extra cash is through mortgage origination. In short, originators go to all the banks and get you the best interest rate. This is awesome for most people. This safeguards the deal (and their commission).
The issue is that in many cases the agent forces you to hand over your documents. They will handle the communication and negotiation on your behalf.
I have seen many OTP’s where they force you to go through with the using their originators – and they know if you will qualify and for how much. It might be in your interest that they should not have knowledge of this information.
It’s therefore advisable to either appoint your own originator or do it yourself. You can also add a clause that you would need to approve the interest rate/loan amount to be reasonable and to your liking.
Concerning deposits, you might be overplaying your hand if you add it in writing in the OTP. Once you have secured a loan, you will be able to negotiate with the banks for a better interest rate (see my article here).
Inspections
I am sure you cannot relate, but landlords and tenants can be strange. In some cases, you might not have had full access to the property! For example, the owners weren’t home and your handyman couldn’t get access.
You can amend the contract that you must be allowed to end/renegotiate the contract upon inspection if the maintenance makes it unfeasible.
If possible, it is also worth doing a full inspection to check for structural, aesthetic and other damage – just to make sure you know what you’re buying and adjust the purchase price accordingly.
Compliance certificates
Not so long ago, I bought a property. I went there to pick up the keys from the caretaker, just to discover that the COC has been issued without any electricity. Needless to say, I lost it completely.
It is, for this reason, I would recommend choosing the contractors yourself for the electrical, gas and beetle certificates.
Add this into the OTP.
Make sure to add that the seller must pay for the fixes that need to happen!
Penalties
It is worth checking that the OTP also has clauses that no penalty will be payable if you do not receive a 100% loan.
If, at your discretion, the interest rate is too high, you must be able to decide not to accept a deal from the bank (The bank calls this an NTU).
Tenants and occupancy
Sometimes a property is sold to tenants. The question is if the tenants should stay on or not.
In the case where the tenant has paid rent regularly without issue or default, the information around rent payable should be specified. If there are issues with the current tenant, add a clause whereas occupational rent is payable until the tenant moves out. This will cover your back!
I want to make it clear that everything here is negotiable: I had a very interesting case not that long ago. The property was without a tenant, and the seller wanted occupational rent from us. We negotiated that we get access to the property to paint and do needed maintenance. Occupational rent will only be payable to the seller in the case when we found a suitable tenant and received the rent.
Sectional title properties
If you had to buy a share in a company, it would be wise to scrutinise their books. In the same way, when purchasing a property in a sectional title block, add a clause that the financial documents are delivered to you within 7 days.
You should have 7 days to check go over the documents and confirm all is well.
Once you’re happy with the documents and what they contain, you must be allowed to approve or retract your offer. This is helpful for you, the purchaser, not to buy a flat in a block with serious debt.
The voetstoots clause
It is often misquoted that the voetstoots clause is no longer valid. This is only the case where the seller is in the trade of property. If the seller is using the home as his primary residence and/or rental, it becomes increasingly challenging to prove it’s their trade.
In the scenario that you only find out something is wrong a year or two later, you would need to prove that the seller willfully withheld the information from you at the time of selling. This is exceedingly difficult, and I have heard multiple stories where people decided to just pay for the damage themselves.
Conclusion
An offer to purchase (OTP) is a legally binding document.
Make sure you read and understand the details.
Add a few exit clauses for yourself to make sure you can worm your way out of the situation if the deal is not as sweet as you might think.
Go now!
Happy investing!
Sources consulted
- Private Property – What is the voetstoots clause?
- BusinessTech – What you need to know about an offer to purchase on a home in South Africa