TSC Case Study 4: Informal cash sales in Khayelitsha: the problem and what can be done about it

The Transaction Support Centre (TSC) in Khayelitsha has been operational for just over six months and, as at 13 December 2018, has received over 100 cases from clients looking for assistance with property-related issues. While the vision of the TSC is to support property transactions, most of our cases deal with administrative failure – title deed backlogs and housing administrative issues, and poor engagement with formal processes – informal cash sales and intestate issues.

This case study series aims to document the real-lfe challenges faced by TSC clients as well as the process we have followed to try find a solution to their problem. In doing so we aim to highlight the policy, legislative and administrative issues that require attention in order to make high-potential property markets, like that in Khayelitsha, investment ready.

This fourth case study highlights the attraction and practice of informal cash sales in Khayelitsha and discusses a potential solution to regularising these transactions and the need to prevent future informal transactions from taking place.

Informal cash sales in Khayelitsha: the problem and what can be done about it

Based on our experience at the TSC for the past six months the TSC, it appears that the practice of selling properties informally for cash in Khayelitsha, and surrounding areas, is prolific. This is problematic for many reasons. Informal cash sales introduce significant risk and instability in local property markets – buyers don’t receive formal title to the property they purchase, the situation is rife for fraud, and sellers often don’t realise the true value of their properties. Further, and as described in the case study below, informal cash sales prevent future buyers & sellers from transacting formally thereby compounding the problem.

Willing buyer, willing seller

Saul* (not his real name) approached the TSC asking for assistance with selling his two-bedroom house in Kraaifontein. This house is valued at R250 000 according to the City. The client has purchased another house in the same area with a bigger yard (for his taxis), hence the reason for wanting to sell his property.

On investigation we established that Saul does not have legal title to the property. He purchased the house informally from the original owner who has subsequently passed away. It would be quite a difficult process to formalise the transaction; assuming the seller had no will, the estate of the deceased registered owner would need to be reported to the Master of the High Court and wound up and the property transferred to the heir/s before any subsequent or simultaneous transfer to a purchaser.

After discussing the options, Saul decided not to follow the formal processes and has subsequently sold the property informally to a cash buyer. This property is now two transactions away from the legal owner reflected in the name listed on the title deed, and unwinding these transactions is going to be a complex undertaking.

The cash buyer has given our client R100 000 cash and will pay off the outstanding balance of R150 000 over time. Unfortunately, the TSC has had no contact with the buyer – who may or may not be aware of the risks of transacting informally – and has no further information on the source of funding or payment terms.

Contested ownership

Solomon* (not his real name) approached us because ownership of his property is contested. He purchased an RDP house for R10 000 cash in 2003. The sale was not formally registered and his only proof of ownership is the street committee’s word. Since 2003, Solomon has upgraded the house extensively. However, in 2015 the original owner and holder of the title deed resold the house to another buyer for R110 000. This more recent formal transaction was facilitated by a local lawyer based in Kraaifontein. The lawyer has also been instructed to evict our client and his family who have lived in the property for 15 years. A court hearing for the eviction was originally set for 1 August 2018 but postponed to 19 September 2018 to allow the client to get some legal representation. Solomon has subsequently got legal representation, and the matter has been referred to the High Court. The hearing is set for January 2019.

Aside from recommending to our client that he get legal representation, there was little the TSC could do to assist him. However, it is an important case study; it highlights risks buyers face when they do not follow formal procedures.

Solutions for informal transactions

These cases highlight how informal transactions become entrenched in a market where there are very real benefits for the seller to sell informally – they get the cash quickly and do not have to undertake the administrative burden of formalising the transaction – and all the risk is carried by the buyer. Until buyers insist on formalising the transaction, this pattern will continue. Buyers (and sellers) need to be educated on the risks of selling informally and relevant stakeholders need to find innovative ways to remove the other hurdles to formal transactions, most notably the speed and cost of these transactions, for low value properties.

The following table compares the costs (in terms of Rand value and administrative burden) of selling a property valued at R140 000 through formal and informal mechanisms. This is a summary of the TSC Case Study 1 – the time it takes to buy a house in Khayelitsha.

As property prices rise and title deed holders become aware of the value of the title deed, it is likely that more disputes will arise; holders of title deeds who might have sold their properties informally for a fraction of prevailing prices have a material incentive to re-sell properties. The TSC therefore approached local street committees to proactively identify buyers who they have assisted in the past, and to explore whether it might be possible to formalise sales. In some cases, street committees have documentation and it may be possible to locate the original owner who might be willing to formalise the sale.

Figure 1: Examples of street committee letter confirming property transaction

However, where it is not possible to formalise the sale it is not clear what legal standing would be given to these agreements. Affidavits may not have dates and there is no documentation to prove the identity of the seller. How would a court regard this documentation?

It may be possible to deal with informal cases using the Land Title Adjustment Act of 1993. The purpose of the Act is “to regulate the allocation….of certain land in respect of which one or more persons claim ownership, but do not have registered title deeds in respect thereof”. The Act allows for the allocation of title to a person claiming ownership of a property without having a registered title deed. A claimant would not need to follow a sequence of formal and simultaneous transfers in order to obtain title, avoiding significant legal costs which are likely to be excessive relative to the value of the property in question. In line with the provisions of the Act, the Minister of Rural Development and Land Reform (DRDLR) must (i) designate land to be dealt with under the Act and (ii) appoint a Commissioner to deal with each case. The Commissioner has wide powers to allocate the property to the claimant and transfer the property directly to the claimant, with the Commissioner acing as transferor. The Minister can order that the costs of the transfer be paid by Parliament according to the financial circumstances of claimant.

Given that this Act offers a potential solution for so many problems (deceased estates, informal cash sales, “expropriations”) it appears that it would be a very useful intervention in the area. The TSC have approached the DRDLR for guidance on implementing the Act for a small number of test cases. The DRDLR have agreed in principle to assist and we are in the process of establishing a way forward in this regard.

 

 

 

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