Remember to Factor in the Time Value of Money

Whether you’re buying or selling, it’s important to factor in the time value of money.  What does that mean?

Money has a value that changes over time.  So, if you have a debt of R100, 000 and you are servicing that debt at R1000 a month, if you can settle that debt then you are effectively saving R1000 per month.  Selling a property and earning interest on the proceeds also gives you a measurable benefit relating to time. apco-generic-credit-cards

If we place that in the context of considering offers on your property then the net result to you, as the seller, can be quite considerable.  For example, if you are selling a vacant plot with a bond of R500, 000 on it, then this could be costing you about R5000 on your bond, as well as monthly rates and taxes.  If you receive 2 offers identical in price, but one gives you transfer 3 months earlier than the other offer, then that would save you R15, 000 plus the rates and taxes.

Of course there are other factors to consider as well in addition to your finance holding costs, such a property insurance, maintenance, municipal costs, and the like.  In some instances it may be that you need to offset the monthly cost savings by the loss of rental income on an investment property. Queensland-Real-Estate-Commission-Calculation

Whatever the case, it’s important to know what the impact will be on you as a seller per month.  That way you can quantify the benefit or the cost to you based on the expected transfer date.

If you are a buyer and you want to strengthen you offer if competing against other buyers, it’s good to bear this in mind.  Can you take transfer earlier?  Would the seller find that more favourable than a later transfer?  If you can sweeten your offer by taking earlier transfer then be sure your agent presents your offer by quantifying the Rand benefit to your seller – as sometimes this is missed.

When purchasing, especially in a development where transfer is at a distant point perhaps a year or more into the future, it’s good to consider how much you gain by having a later transfer.

For example, if you are purchasing a homebuyerproperty for R2 million with transfer in 12 months, and the property values are escalating by 10% per annum, then by the time you actually have to pay for the property you have made R200, 000 on paper.  That’s a pretty good return on your investment, especially considering you wouldn’t have paid for it yet!

There is a definite time value to money that translates into hard cash in or out of your pocket.  Understanding the impact on you makes a lot of sense.  Use the principle to negotiate to your advantage when concluding a real estate transaction.


Steve Caradoc-Davies

Principal of Harcourts Platinum
Director of Harcourts South Africa

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