What is a Cash-back?

By Coert Coetzee

Our new Treoc Property Exchange (Propex), under the management of Clive Bydawell, is making news in the market. Everyone wants a piece of it!

With regard to the four new developments that Propex introduced to Platinum members on 23 July, Clive once again impressed our members with his negotiating skills and thoroughness. He negotiated considerable discounts for our Platinum members on all four of the developments, ranging from R10,000 to R65,000:

Eastwood Manor Estate, Springs – Price was R579,000 – Treoc price is R569,000 Witbank Manor Estate, Witbank – Price was R549,000 – Treoc price is R519,000 Clearwater Eco Estate, Witbank – Price was R579,000 – Treoc price is R549,000 Golf Terraces, Gordon’s Bay – Price was R609,900 – Treoc price is R544,900

These are excellent prices for three-bedroom units! (Only the Gordon's Bay development had two-bedroom units.) All costs are included, no deposits are payable, and excellent rentals are expected. I think all our Platinum members would agree that this kind of offer makes your Platinum membership fee seem like nothing. Needless to say, our members have snapped them up. I myself bought a unit in each of the developments.

The fact that Propex negotiated a discount with the developers doesn’t mean that the values of the properties decreased. We were still able to take out bonds for the original purchase price, and so at registration we’ll have the difference between the bond amount and the Treoc price in our pockets. This is the so-called cash-back. What you do with the cash-back is your business, but the idea is for it to be used for possible shortfalls.

Some of our members would like to know how the cash-back should be entered in the software. You have two options. Let's take Witbank Manor Estate as an example. You can either enter the cash-back as -R30,000 in the "Cost" block on the Deal Planner, or you can enter the price as R519,000 on the Deal Planner. I prefer the last option, to reduce the price. If you load the transaction using an 11.5% interest rate and a 30-year bond of R549,000, the shortfall in the first year is R32,996.40. Your cash-back of R30,000 is therefore almost enough for the whole of the first year's shortfall. You will pay just R2,996.40 out of your own pocket. Fantastic!

After the first year you can refinance to cover further shortfall payments. By the way, if you don’t refinance, the property will break even in the ninth year; with refinancing for shortfall payments only, you will break even in the 15th year. At that stage, at 15% capital growth per year, the value of the property will be R3,500,000. Not bad for an investment of R2,996!