You guarantee my business' income.......Really?

by Emile Grobbelaar

Wouldn't it be in a perfect world, that if you do business, somebody guarantees the income you need to do business profitably?

This has happened in the past and will surely happen in the future again. 'How', you might ask.

Wealth Masters

Every now and then, we come across properties being offered 'For Sale' with the monthly rental being guaranteed by the seller. This can be offered by developers, property funds and even private sellers. It is always nice to know that your investment is guaranteed the income you want and budgeted for. So, what is the problem?

The offering of the seller to guarantee the rental income of the property that he is selling is not necessarily a bad thing. It is a sales tool that is being used and the seller is willing to bind himself to something like this to assist him to sell the property quicker. It is completely acceptable. What more do you want?

So where does the money come from to pay the rent every month? Or is the seller really that nice? Sometimes, the seller had a long-term tenant relationship and is willing to take that chance, or he is willing to foot the bill, should the tenant default, as it is not a lot of money to him – but sometimes, it is not that at all.

The other reason, and the one to look out for, is when the selling price is inflated to make provision for the rent over the guaranteed period. The seller is willing to pay the rent for the period because he worked it into his price structure. So you actually give him the money to pay your rent when you buy at his selling price. He also offers to do the renting of the property on your behalf. How will you know this if nobody tells you?

You need to do your own due diligence, like you have to do with every property that you buy. Check the property specs against other properties in the area and compare prices. Do not be fooled by the fact that you will get rent, guaranteed, for 12 or 24 months. If you pay an inflated price and the seller is doing the renting on your behalf you might be in a situation at the end of the guarantee period where you have to rent out your property without anyone ever having occupied it before. This means it was not maintained or cleaned, and your geyser, amongst other things, is probably not in working order anymore. Then you decide to sell the property, but the market has not yet caught up to the price range you paid for this type of property and you are unable to sell at the price you paid.

Therefore, always do your due diligence and market research when buying a property – even if someone guarantees your rent.