Written by: Andrew Church, CEO of Rodel Finance.
Any experienced conveyancer in the residential market will know that bridging finance is both a common and necessary feature in many property deals. As a non-practising member of the side bar and managing director of a large property bridging finance business, I thought it would be useful to share some of our industry knowledge.
Our deals are generally sourced from attorneys, banks, estate agents, bond originators and developers, all of whom understand the necessity of having cash in specific situations. Without going into detail, a typical property bridging finance deal covers:
- Sellers advances (payment of a portion of the equity in a property sale prior to transfer).
- Payment of transfer duty and arrear rates.
- Cash advances prior to bond registrations.
A fallacy exists, that advancing money in a bridging finance transaction is secure lending, when in fact, nothing could be further from the truth. This is a misconception which has, and continues, to lure new players to the bridging finance industry in their droves. Over our years of trading, I am personally aware of property bridging finance losses into the billions of rands, that have been lost by, amongst others, bridging finance companies, banks and attorneys. Without rigorous credit policies, bridging finance companies simply do not survive, and we have seen one company after another, collapse under the burden of bad debt and fraud.
During our years of trading some of the major risk areas to both industry players and attorneys have been:
1. Attorneys binding themselves and / or their firms by way of undertakings, for financial obligations of their clients. Attorneys need to carefully scrutinize the wording of undertakings placed in front of them. There is no need for an attorney to accept the risk for a client who is borrowing money, or discounting proceeds of property transactions.
2. By far the majority of our bad debt relates to attorneys who run money lending operations, within or allied to their law firms. They generally do this for two reasons:
2.1. They advance money to estate agents as an advance on the agents’ commission, in order to secure the conveyancing work (commonly called touting) and /or,
2.2. To conduct business as a money lender, a practise which creates an inevitable conflict of interest and often ends in disaster or legal disputes.
To be a money lender requires a source of funding. Unfortunately, our experience with attorneys who conduct money lending transactions, is that the source of that funding is often their trust account, or from a client who funds the lending business, based upon a promise of huge returns. Based on legal advice, we take the view that it is almost always, both unethical and illegal for attorneys to act as money lender and conveyancer in property transactions, and civil liability and prosecutions are often the result.
Our advice to consumers needing bridging finance is to do your research into the bridging finance company you are dealing with. There is an industry watch dog body called the Bridging Finance Association of South Africa (BFASA) and I would strongly recommend that a consumer not deal with any business which is not a member of that Association. BFASA has a Code of Conduct and will expel any member who does not comply with that code.