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Bad credit record and property investment
When I first moved up to Johannesburg and my career was just
starting to flourish many years ago, I heard of and spoke to a
number of people in a relatively short period of time with above
average salaries who had lost everything and had to start over
at a somewhat more mature age. I thought they were just stupid
and never gave much thought to it, because it would never happen
to me. Well, as Forest Gump says "It" happens.
What if the banks won't give me a home loan due to a bad credit
record?
As I have mentioned before on my wealth creation site, I had a
bit of a financial setback a couple of years ago. I am slowly
recovering from that, but there's not much chance of a bank
giving me a loan at this stage. I still have 2 judgements
against me. However, it is possible to buy a property even with
bad credit.
Installment Sale
One option is to buy a property through an Installment sale.
This is not necessarily an easy option, but depending on your
situation it could be the quickest way to get into the property
market. With an Installment sale you need a third party to "give
you a loan" and almost act like a bank for a period of time.
Basically, with an Installment sale you pay a certain amount
extra for a property than it would sell for in the open market
at this stage. Let's say Jack Flash wants to sell his house.
He's looked at the market and believes he can sell it for
R500,000. After performing a number of rituals including a 7 day
fast, dancing naked on the hilltop and cutting off your left ear
as a sacrifice, it has been "revealed" to you that Jack has
recently won the lottery and has no immediate need for the
R500,000, but just wants to get his money at some stage. Having
looked at the property market in the area you believe that the
value of the property will continue to rise and that it would
still be worth your while paying R550,000 for the property. So,
you go speak to Jack and offer him R550,000 for his property on
condition that he sells it to you on an Installment sale.
With an Installment sale, the loan for the property remains in
the name of the 3rd party, Jack in our example. The two of you
then sign a contract that states that you are buying the
property from Jack. You agree to pay R25,000 upfront, another
R25,000 12 months later and a monthly Installment. This contract
is completely legal and can be compared to the contract you sign
when taking a loan from a bank. Generally there will be a clause
that states that Jack may "take back" the property if you miss
an Installment or x number of Installments. This is just to
protect the 3rd party, who is really taking a risk in giving you
a loan. This is true of any loan with a bank as well where they
may re-posses the property if you fail to pay your Installments.
Make sure you get a professional with experience in Installment
sales to draw up the contract for you and explain the details to
both parties.
There are two complications here. Firstly you need to ensure
that it is worth buying the property at the higher value. It may
seem that you are going to loose money if you pay
R50,000 more
for a property than it is worth. However, you need to look at
the average property growth rate in that area and compare it to
the current interest rate. Take a look at my explanation on
passive income
(http://www.showcase2look4.com/Passive-Income.asp). The
following calculation is not 100% correct, but for simplicity's
sake. If the interest rate is 10% and the property growth rate
is 20%, it means that you'll recover the R50,000 within the
first year even without taking the rent that you'll earn from
the property into consideration. It means that you may not make
as much profit as the next person, but it does help you to get
(back) into the property market and work your way up from there.
The second problem is finding a person who is willing to sell
their property on Installment sale. I don't know how you do
this. Speak to a wealthy uncle or maybe a family member who
qualifies for a second bond, but cannot afford the monthly
Installment. You'll be surprised how easily banks give a second
loan. If all else fails, do the naked dancing on the hilltop,
listen to the wind and speak to your animal guide. Where there's
a will, there's a way.
Clear your credit record
I know this is stating the obvious, but let me just say it. If
you do have a bad credit record, you need to work out a plan of
how to get out of that situation. It's so easy to get
overwhelmed by financial mountains. You don't see your way clear
to paying off that debt, so you just shove it to the back of
your mind. Don't do this, the problem just escalates!! Go speak
to a financial advisor and be honest about your situation. Ask
them to help you draw up a plan to settle your debt and clear
your name. Some of these guys are brilliant and know all the
legal tricks to clear your name ASAP.
You also need to decide whether it makes more sense to settle
your debt first or to buy a property while still paying off the
debt. You need to compare the interest rate of your debt with
the property growth rate, the interest rate of a bond and the
rent you'll earn from letting the property. For example, if the
property growth rate is 20% and the bond rate is 10%, but the
interest rate on a credit card is also 20%, then it may be
better to settle the credit card debt first. Do the math
yourself.
An instalment sale is just one method of getting into the
property market if you don't qualify for a home loan through a
bank. My point with this article is that it is possible to get a
home loan even when the banks tell you it isn't. The decision of
whether you should buy a property at a slightly higher price and
while you still have debt to settle is completely up to you and
should depend, amongst other factors, on the property growth
rate in your area relative to the interest rates of your bond
and other credit facilities.
About the author:
Dirk Wessels is the owner and author of My Wealth creation
website. You may freely distribute this article on condition
that you keep this Author bio intact with an active link to
http://www.showcase2look4.com.
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