 Hello everyone and welcome to the private property web words, try saying that five times in a really quick hurry. My name is Kali Masuwani and I'm from the SA Properties Investors Network. Today we're going to be interviewing Bruno Sumao from BSA Attorney Law and we're going to be discussing creative solutions for agents when financing is a problem. Bruno, how are you? I'm well, thanks. Thanks so much Kali for doing the interview. No problem. We're interviewing people in the property space and I think we're going to have a lot of unpacking because they are very creative solutions for both sellers and now property practitioners. We're still not used to saying that, I'm used to saying as they did. But property practitioners and how to help their sellers find creative solutions. So what I understand is we need to have the identification for property practitioners in terms of other opportunities or alternatives if they buy or can't get finance and how they can capitalize on that. Am I correct? Absolutely. Okay. So let's maybe break it down into smaller pieces, let's literally start to unpack small by small because I think a lot of people always assume the denotation of finance is the bank. Absolutely. And it's like there's so many other ways to be creative about it. Okay. So the first thing that I would like to know is when would you need creative financing and why? So there's state agent profession and now property practitioner profession which encompasses a lot more than just the state agents. But the state agent professional in itself has always been isolated to sales and leasing and that's pretty much all that you see them deal with on a day to day basis. But their involvement in the industry and their level of knowledge is so vast that simply applying different strategies and different solutions would create extra work, would give them an advantage over other agents, would allow them to close deals more frequently. So when we say when would this apply, it's not simply just about when your purchaser for example can't get financing from a bank. But that for me seems to be the dominant situation like 80% of the time an agent would go out to a seller. They would get a property, they would canvass, they would get a mandate. This mandate maybe gives them a couple of months to market the property and they market it and they find a purchaser and everyone's excited, purchaser goes to the bank, submits all the information, bank comes back and says, sorry, we're only willing to give you 80% or we are not willing to give you anything at all. Now in that instance, the state agent has just lost the purchaser and three months is coming up. They find others, maybe they don't find others. Maybe they submitted multiple offers at the same time. But the problem is after that period runs out, where does the seller go? The seller maybe goes to another state agent or goes or looks for another option or decides not to sell. So when this agent can't sell the property in the normal way and is looking for a way of closing the deal, that's extraordinary and that's what we're here to chat about today. We're already starting guys. You didn't even know there's other options outside of the bank on finance. However, now we have to go on to the how can an estate agent or property practitioner gain a competitive edge? Sure. So I suppose this part of the conversation is just listing a couple of different options or different solutions, the ones that we work with. So the ones that come to mind or the ones that we use most often are things like store and sell agreements and private bonds. So they go hand in hand because they're very similar in the way that they would work. But there are a fundamental, they're different like from the outcome perspective. Right. Then you've got things like options and rent by agreements. Those also work really well, a bit more long term and they would have to be structured slightly differently. Loans and joint venture agreements. So this is something that estate agents very rarely deal with. So up until now, some estate agents that I've worked with still have this as part of the arsenal, right? But loans and JVs is something that they should be looking at, but they haven't necessarily started working with that yet. And then even understanding tax incentives in the property space is a nice tool for estate agents. So that's not necessarily a solution per se to close a deal, but it's certainly something that if the purchaser is educated correctly, it could be used to motivate why this purchaser should in fact take a deal when they opt not to or if they're opting not to. Yes. Oh, OK. And now that we've established the when and why, I think what we now need to actually start to understand is the what. What ways in what ways could these solutions be actioned? So if an estate agent, there's a certain indicator and if this estate agent picks up the perfect bio or the perfect seller for these types of solutions, right? So that's what we need to actually identify today. We need to identify the scenarios and layout these scenarios to see how they're actually coming to being and once identified, how the estate agent is going to apply their knowledge or these new skills in order to be able to close the deal, right? So the examples that I just spoke about now are the tools that you're going to be using, how you're going to my suggestion is how we're going to identify each scenario. Maybe as we run through each solution, I'd give one or two examples just to highlight, you know, what an estate agent would typically be looking at and what solution they might want to apply in, you know, in those examples. OK, so we've you've mentioned like the potential solutions. So we have, for example, joint ventures, we have loans. Those are the standard where we're helping the purchase. But then taxing would be an incentive in terms of motivation. It's not like a direct thing such as loans and such. But then the entire premise of this is for a sale to go through. So how then would this be beneficial to the agent or the property practitioner? How would they earn commission through these ways? All right. So fundamentally, each way may look different, right? So if you take an instalment sale agreement, as an example, or a private bond. So I call it a private bond. These different names for it to sell or financing is basically the umbrella term, right? If we're speaking about sales, so as you mentioned, for example, the tax incentives are necessary, the sale in itself and loans and JVs are a contract, you know, on their own. But let's take the first example as an instalment sale agreement, right? Now, under this term instal or rather the term seller finance, you'd find things like instalment sale agreements and customs briefs, which is basically private bonds. So imagine a situation where you've got a seller and the seller is happy to sell to someone, but the person buying the property can't afford to buy the property in the normal sense. Properties are expensive, right? Fundamentally, they're one of the most expensive purchases that you're going to make in a lifetime. So when buying a property, you always rely on money from the bank, right? If you're a foreign national, for example, you're probably not going to be able to raise finance from a bank or you're only going to be able to get 50% finance or whatever the case might be. So it's not that you don't have money. It's that you're not good for it. It's simply that you don't have access to the tools out there in order to be able to get you that first property, right? So what we're looking at now, it's not just your first property. We do this with investors all the time. Sometimes it's your fifth, sixth property where, you know, unfortunately, the banks have given you enough money and don't necessarily want to give you more. Or it's a deal where you'd rather use a solution like this. But in any event, I'm digressing there. If this purchase is struggling and cannot get on finance, but they've got cash or they've got an idea for the property and they're actually able to assist the seller. A lot of sellers, and this is the perfect example. So we once got into a deal where the seller wanted to sell the property for a certain price. Now, when we ran the numbers, and this is where my head is an investor, when we ran the numbers, it turned out that it wasn't as lucrative or profitable at that price. We really need to bring the price lower. But we also identified that the seller was in need of money right away and wouldn't want to wait for a transfer process or wouldn't want an instalment sale agreement. So what we actually decided to do is in terms of the instalment sale agreement, we decided to pay the purchaser quite a hefty deposit because we had the cash available. Yes. This is all the... sorry, they paid the seller and this is all the seller needed. That's all they really need because they had debt that needed to be serviced immediately. But by alleviating that stress, the seller was willing to grant the rest of the purchase price by way of instalment sale. Because we're investors, we actually managed to take control of a part of the property, renovated, rented out and we were able to pay the rest of the instalments through the rental that we were receiving. But that's just an example of a very advanced way of doing it. But under normal circumstances, if the seller wants to fix a price and they can't get that price on the open market and it will throw an immediate sale, an instalment sale agreement may actually fix that price. And in addition to that, they're charging interest, they may charge rent for the person to stay there. And this person every month would cover their bond payments, would cover property rates, would probably pay a little bit extra towards the purchase price in order to reduce it. And that's the point of an instalment sale agreement. Instead of doing everything at once, you do it over a period of time. Anything above 12 months under five years. And it gives that person an opportunity to maybe clear their record to raise enough funds. After three years, for example, they go back to the bank they applied for a bond and it's 100%. But up until that point, they service the seller. And best part of this is the alienation of Land Act totally regulates it, grants both seller and purchaser enough security. So it's a very safe transaction as well. It's interesting that you say that because obviously this is a completely alternative way to financing for properties and more so an alternative way that people used to historically think public transactions happen. However, in the eye of the property practitioner, the way it's historically been done is that, you know, buyer, seller, and then once the lump sum is transferred, then they get their commission from the trust. So if it's not in instalments, how in turn would their commission structure work because we're not working with lump something? Absolutely. And that I think that's maybe the most important question during this conversation. So the options there, if you can get the seller cross-aligned purchaser cross-aligned, fantastic, great news. But how do you make money from it, right? There's no specific answer because in this industry, we've been so accustomed to the normal sale where you get your commission once the purchase price is paid or transfer takes place. Now you receive this lump sum. How would you structure this? Each deal would probably have to be structured in its own way. So one suggestion as an example is you make sure that that initial deposit. So you've got a mandate from a seller. Yes. This seller promises you, let's say it's 80,000 rent commission on a specific deal. Now you need to earn that 80,000 rent, which ever way the sale goes. So if you want to negotiate this instalment sale agreement, then try and ensure that that first payment, that first instalment, the deposit as it were, is 80,000 rent. So that's already a tool to be able to secure 80,000 as a deposit. You've got a mandate that ensures that 80,000 is paid to you. So first it goes into the attorney's trust account and then it gets paid to the agent and the first payment goes straight to the agent. So that's just one example. Another example, which I probably wouldn't recommend, but I'm just throwing it out there, is you could justify a higher commission by deferring your commission somewhat, right? I don't like using the word deferral because now it starts looking like it's a credit agreement, but let's say, for example, you're charging 4.5 instead charge 7.5, which is in fact what the norm is supposed to be. And on 7.5 give them three months to pay it off. But now you're charging a little bit extra. You're still charging what you should be charging, but now you're fixing it saying, I'm not giving you a discount. I will be charging the 7.5, but tell you what, pay it over three months and each of those installments goes into the attorney's trust account and gets paid to you in order to cover your 80,000 rent. Okay, so guys, I'm not sure about you, but I am learning a lot. I am learning a whole lot. And so, you know, we've unpacked installments, agreements and from a property practitioner's perspective as to why they would incentivize it, why they were suggested, why they would be part of the negotiations and also how do they remunerate from it. But then there's other avenues that we had previously mentioned. So in terms of like a rent to buy for those who don't quite understand it, how would you then explain what you understand of this and how does it work? Sure, absolutely. So I often group rent to buy in options together, right? A state agent should actually be familiar with options quite a bit because it's used quite often in practice. In short, an option is a clause in a contract or a contract in itself. That gives you a right to opt to do something at a future date. So options in terms of sales as an example is by the end of next year, I can choose. It is my right to enforce a sale agreement with you to buy this property at a specific price, right? I don't have to do it. So it's not a sale agreement because I'm not actually buying it and if I choose not to exercise my right, then sale doesn't go through. So the fact that it's an option is I can enforce a right to buy and you have to sell to me because I've got the right to enforce that option, right? Now rent to buy agreements typically are lease agreements where the person is staying on the property, but there's an option brought into that contract. So a person would lease a property for a year or for two years or whatever the case is. They'd pay certain amounts of money towards the lease. Right? Now at a certain point in time, they've got the right to exercise the option to purchase this property. When they exercise this option, then people look back at what they've paid for rental and certain amounts are discarded from the purchase price, for example, or they fix this option at a reduced purchase price. So it's in their interest to have this option. So now we put these two together and you've got, for example, a purchaser that is good for it. They want to live on the property first. They want to live on the property. They want to buy the property, but again, they're having issues getting financed. Now, for some reason, you can't get an instalment sale agreement across the line, right? Many, many sellers don't have the issue of leasing up the property. So let's say, for example, the property has a positive cash flow. They lease it to someone which you now as an agent have introduced. So now as a leasing agent, this already entitles you to commission because now you've introduced, you've brought through a leasing. Now, if you negotiate an option into that lease agreement and this option entitles you as a property practitioner, if this option is exercised, you as a property practitioner will now earn commission because you've introduced the tenant and on top of that, when they exercise that option, that contract is you as the agent. So now you earn on the leasing, you earn on the purchase as well. And because it's an option and because it's better than just having a lease agreement where you've got a clause saying if they happen to negotiate and buy from each other, I'll earn commission. This actually grants a right to this purchasing. And if this right is advantageous because it's a low purchase price or the purchase price gets discounted because you've paid X amount of rent, it's more the purchase more inclined to buy, meaning that you have a greater likelihood of earning commission with that deal. So you essentially are morphing from a rental agent into a sale agent with the same transaction. Would it be a bit farfetched to say you actually have the potential to earn double commission because you would earn a commission, obviously smaller because it's rentals, when the initial introduction is done and they move in and then it becomes a bigger commission. So now you actually have the potential to earn twice on one deal. So there is, again, such a higher incentive with regards to rent to buys from property practitioners point of view. And even on that note, take rent to buys out of that equation just for a second. I've seen agents earn off option agreements alone. Somebody sees a property that they're like the seller's not ready to sell just yet or the sellers may be immigrating, but they're waiting for something to happen or whatever the case is. And an option is negotiated. Remember, options actually have a fee attached to them. So to keep an option alive, a person can charge a fee for it. So the sellers are allowed to charge a fee saying, I'll give you the options. I won't sell it to anyone else because now I'm not allowed to sell it to anyone else, but you're going to pay me X amount in order to keep this option alive, but if a 40,000, 50,000 rent, which actually can be taken from the purchase price in the future. So if the options exercise, you pay 50,000 and this on the purchase price, agent can also earn off the option. So even if the sale doesn't go through, agent can negotiate a commission because it was in the process of brokering a deal and can charge a fee for the work that it did, even though the seller didn't go through. That is that is actually quite interesting, guys. That is really, really interesting. I'm learning so much as I'm conversing with you. You did mention joint ventures and loans. Obviously, that would be separate from the agent in terms of they can't negotiate in that part. However, that also, you know, it starts to sound like a business transaction. Exactly. So is that something like a property practitioner would like really want to be dealing with? So can a property practitioner deal with it? The act actually allows it to broker business deals. So as a property practitioner, the sale of shares in a property owning company is permissible and it is considered to be under the ambit of the act. So can they do it? Yes, they can. It falls within the scope of their work. Do they want to be doing it? I suppose it depends on how busy they are. Yes. And the support they have. So as a property practitioner trying to close a deal, say, for example, and this is the best example of this because people approach this approach me with it all the time. A person owns a piece of land. It's a large piece of land. It's primed for development. The way that it stands at the moment, no one's making money. The whatever, the structure on the property is too small. It's outdated. You're not getting the rentals that you want. So the seller wants to sell, but the property looks really bad. So no one's willing to pay a good price for it, even though the seller insists on taking a high price. A lot of developers need to find these sellers because a lot of developers are open to ideas of, oh, you know what? It's a really big piece of land. Let me subdivide the land. You can now keep a smaller piece with your house on it and it's more affordable and I'll develop the land next to you. Or, you know what? Let's take the whole piece of land. I'll keep you in the deal. I'll give you X percent of profit. Well, I'll give you a unit in the development or whatever the case is. Here's a bunch of shareholding. So you've got security. I'm going to take this land. I'm going to develop it and you're going to benefit from the ultimate development. So you're not getting your purchase price today because I'm not willing to pay you the price that you're asking, but because you're willing to wait for the development to be a success, I'm willing to then pay you something for your patience and contribution of the property to the deal. That's still a property transaction and these deals are happening. The question now is, how are the developers, as an example, a property investor finding these sellers? Now, there might be an agent because the seller has gone to an agent, but the problem is the agent's trying to sell the property and everyone that approaches that agent, the agent's going, well, sorry, you need to apply for a bond, you need to pay the purchase price, I need to earn commission, you're going to take transfer. Now, the person making the offer isn't willing to pay what the seller wants. So that deal is not going to happen. So if a property practitioner isn't proactive, they're going to lose that deal. And somewhere along the line, the seller is going to realize the potential and is going to start approaching developers directly. So as a property practitioner, wouldn't it actually be ideal to start pulling up that database of property developers, as an example? Yes. To start noticing where these deals might happen and then to suddenly make this connection. And that's where I help my developers, where I help my property investors, as soon as they see this connection, you bring the agent on board, we start discussing how the structure is going to look like, and the agent will earn fees from it. Sometimes the agents earn immediately and there's an amount payable up front, some agents stay in the deal and get secured, secure a mandate to sell all 18 units at the end of the development. So then it's a long term game of I'm not going to make commission today, but when I sell this in 18 months time or 24 months time, I'm okay, that I have never thought of that. I've absolutely never thought of that. Again, hope you guys are learning as much as I am, because it would be a bit sad if I'm learning a lot. You did mention something earlier when you were talking about private bonds, right? I was wondering if you could just unpack that and also how in turn would a property practitioner be able to utilize that, you know, avenue? Absolutely. So private bonds are very similar to instalment sale agreements. The only difference between the two is in an instalment sale agreement, the ownership of the property vests with the seller and continues to vests with the seller until a certain amount of instalments are paid and the property can be transferred to this purchaser, right? Now think of the private bond as slightly different. So transfer takes place immediately. The seller registers a mortgage bond over the property for payment of the instalments. So you're still dealing with a property, you're still dealing with the deferred payment of the instalments. So that remains the same. That's similar. Where the ownership vests is where the difference lies. Now, why would a seller do this? I suppose the reason why I didn't give it that much attention is because it happens far less than instalment sale agreements, right? So the seller wouldn't often want to give up ownership. Why would a purchaser do it? Because they get ownership. Yes. Exactly. And with going back to developments, we've had developments, for example, where it was the prospect of taking ownership was necessary for you to develop out this property, but you don't want to pay the purchase price all at once. So in those instances, this is where the private bond worked really well, where the seller kept a bond over the property to make sure it got its purchase price, the developer took transfer, owned the property and then went to market with it and started building on it. And no developer would want to build on a property usually unless it's got some kind of right. And this would this would give it that right. Okay. So in terms of a property practitioner, would that then kind of fall under a standard transaction for because transfer had happened. So then they could move the commotion, the commission. It's a lot of commotion this. Yeah, the commission would in turn be the standard one by virtue of transfer having and having. So remember because we're still dealing with installments, it depends what money's what money is available. So the same rule as the installment sale agreement, where maybe you'd want to pay a slightly larger deposit ahead of time, so that the agent can earn immediately or over three months or four months, you know, as the installments get paid. Also depends how important it is close to deal. That's the reality. If the agent's going to lose the deal, I would rather secure a commission payable over 12 months than get nothing. Yes. So there's different ways of skinning this cat. Okay. Yeah. And on a last note, you spoke about tax incentives related to properties and how that can be used as a motivation to purchase it to actually, you know, find alternative ways that like similar to the ones we've mentioned, with regards to actually having the deal go through. So do you want to just touch the brief? Yeah. Absolutely. Briefly touch on the tax incentives. Yeah. So we we can't go into too much detail in it, obviously naturally, because I mean, that conversation alone is a couple of hours. The reality is that our tax legislation makes provision for to incentivize taxpayers for investing in certain areas or certain types of buildings or certain types of housing that our Treasury and our government think needs support or endorsement, right? So tax incentives have been used for many, many years to try and incentivize people to look at certain types of investments, right? So just as a basic example, so the building of residential properties, new residential properties, right? Buying new developments, there's incentives for that where person can basically get a capital allowance back. So every year, they get to deduct a certain percentage from, you know, from the income tax. So that's for I'll just give you an example. So it's a new housing. It's buildings in certain areas. So you find, especially in your CBD areas, it's UDZ, basically. So these zones have been showcased and government or Treasury would want us to invest in it so that we can revitalize certain inner-city buildings. That's incentivizing gives you that capital allowance in the manufacturing space. There's a bunch of things as well, commercial space, there's a bunch of things. So long story short, this isn't a way of not paying tax because at some point over at the SARS, SARS gets it's back. But if a person's into a deal, some of these incentives make the deal work. Now, personally, I've always said that if a deal doesn't work, throwing in a tax incentive, you shouldn't throw in a tax incentive just to try and make it work. But the reality is, as an agent, it's not you as an agent, you're there to provide the information. The purchaser needs to make that decision. So if you show the purchaser an opportunity because of these tax incentives, and the purchaser does the maths and realizes that the deal looks good. Now you've commissioned off the sale. That is true. That is true. Well, Bruno, thank you so much. I learned so much and I hope our viewers would have learned, you know, final words to the property practitioners out there. Well, look, if anyone if anyone does want more information, some of these things are quite creative. I've been doing it for years. So if anyone needs to reach out, I'm more than open to have a conversation. But I do feel that these are tools that property practitioners can really benefit from. And I would yeah, and it's going to give you that advantage at the competitive age to be able to outperform. It's a tough market now. So yeah, let's let's make it work for us. Fantastic. It's like he said to anybody that wants to conversal with Bruno regarding these especially property practitioners, you can find him at Bruno Samau Law. And from me, Kali Masawani from the Essay Properties Investors Network, I want to say hopefully I'll see you again. Thank you so much private property.