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Hidden costs in property deals

By | July 27th 2009

By Morris Aron

An announcement by City Hall calling on property owners to pay up land rates has rekindled a debate on hidden or additional costs that property buyers are exposed to.

In an advertisement published in dailies last week — and in what is becoming an all too common affair with local authorities across the country —Nairobi Town Clerk Philip Kisia issued a one month ultimatum to land rate defaulters to pay up, risk prosecution or lose their properties.

Land rates, payable annually to local authorities, are some of the additional costs that a potential property buyer stands to incur if they blindly get into purchase transactions without doing proper background checks on a house or land.

Mr Justus Munene a valuer at Dayton Valuers, reckons that as a practice, a buyer of a property must ensure that all the charges due to the Government in relation to a property being bought or sold have been paid before one enters into a purchase agreement.

"If one is not careful then in buying such a property they also incur such costs," said Mr Munene.

"A property may have a very good offer price but made expensive by the build up of additional costs and charges."

It is understood that in some cases in Nairobi, property owners who have sought to sell their property have been unable to do so due to huge land rate arrears—some running into millions of shillings.

City Hall

A list of defaulters recently published indicated that by December last year City Hall was owed over Sh1 billion by property owners in Nairobi.

Those close to City Hall say many property owners are behind their payments.

Land rates are payable yearly to the local authorities and are reviewed annually depending on the council’s resolutions on the amount to charge. Rates are charged to property owners to enable the local government authorities offer essential services such as water and street lightning among other services.

If an individual buys a property whose land rates have not been paid, he or she will be forced to pay up or risk his property being charged — meaning the buyer cannot sell or use the property as security to secure a loan until the payments are done.

One of the charges which over the years has been confused with land rates is land rent.

Land rent is payable to the State because the land upon which a property stands is on lease to the individual from the Government and as such attracts rent in the same way as tenants pay monthly rent.

Land rent figures are set up by the Government and have not been reviewed in most parts of the country for a long time.

Lately there has been debate over the need for an upwards review of the figures some of which are as low as Sh100 to encourage property owners to put such investments into use as opposed to letting them lie idle.

"There have been proposals from a number of stakeholders calling on the Government to review land rent upwards to decrease the incidences of idle land and increase investment in affordable housing," said Mr Tirop Kosgey, Housing PS.

Despite the concern over low rent figures, a recent attempt by Ministry of Lands to increase costs was shot down after Institution of Surveyors of Kenya strongly opposed the move.

Other charges related to property transactions, which were shot down include charges associated with searching for a property title and other fees at the ministry’s land registry department.

Other deeply sensitive charge associated with any property transaction are stamp duty, professional fees and other charges.

Stamp duty as the name suggests is a charge imposed by the Government payable during any transfer of property.

It is normally a one-off payment derived from the value —that is the selling price of a property — and currently stands at one per cent of the transaction value.

Stamp duty

Like land rates, it has been of the view of many experts that it should be abolished as it serves to increase the cost of buying property.

In countries like South Africa, payment of stamp duty has been abolished to spur development in the property sector.

"To encourage development in this section of the market there is need that we do away with some taxes such as stamp duty," said Mr Reginald Okumu of Arc Consultants, a property firm.

The Government has, however ,over time ignored the proposal saying that it is a chief source of income to enable it offer essential services and undertake the much needed reforms at the Ministry of Lands.

There are, however, proposals to Treasury that it lifts stamp duty for specific category of investors particularly those seeking to enter the low cost housing units provision to alleviate the current housing shortage in the city and its environs.

Six months

Property transaction is a complex process, which involves a number of professionals and takes approximately six months or more to conclude.

As is common with any other types of transactions, lawyers and industry professionals also must get paid for guiding one through a transaction.

In Kenya, property professionals are normally paid one per cent of the value of the property as fees while lawyer costs are highly varied.

Other fees and charges associated with the property business include negotiation, facilitation fees and insurance charges among others when one secures property through a mortgage loan.

In most cases, additional charges associated with a buying or selling of property or securing of mortgage accounts are close to ten per cent of the value of the transaction.

"In the end it is important to know all the hidden costs which are not so apparent when negotiating to buy a property," said Mr Munene.

"That is why professionals should be involved in the transaction."

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