Property stokvels – pros and cons

Stokvels, or ROSCAs – rotating savings and credit associations – started out as group saving schemes that were popular among groups of like-minded people who shared the same goals to meet short-term needs. These could include buying groceries or school supplies at the end of the year.

However, stokvels are fast becoming a way for the new generation to build wealth and invest in property. According to recent research conducted by Nedbank, South Africa has more than 820 000 stokvels holding annual savings of over R44 billion.

More than 11 million South Africans are members of one or more stokvels, and large corporates are starting to realise the importance of stokvels in business. For example, FNB recently launched a collective buying home loan scheme, allowing up to 12 people to buy property together.

“Stokvels are a way of generating funds that can be put to better use and for greater benefit,” says Andrea Tucker, Director of online bond aggregator, MortgageMe.

“Although property stokvels are a good way to enter the property market, you need to be cautious when signing agreements. A home loan application by a stokvel is only as good as the worst investor in the scheme. If even one member has a blemished credit record, it is highly unlikely that lenders will approve the application.”

She says stokvel members require education and guidance on how this non-traditional approach can be used to leverage their collective strength for greater economic benefit. This will empower them to take their investment beyond spending on consumables like food and school stationery.

The good

Belonging to a stokvel encourages saving behaviour through co-operation. By joining and participating, you are obligated to save and make your monthly contribution. If you fail to do that, you have to leave the group. This provides security and protection from circumstances that are beyond your control.

Benefits of property stokvels:

• A large percentage of South Africans are still excluded from the formal economy. Property stokvels provide low to middle-income families with a vehicle to invest and build wealth by harnessing the collective’s power.
• The group can purchase bigger and more expensive properties and can benefit from the compounding principle by pooling financial resources. With a deposit of R500 000, the group can buy a far more expensive property than with R100 000 of personal savings, for instance.
• Property stokvels give low-income earners the assurance that if they lose their income – through retrenchment, for example – they may be able to avoid losing the roof over their heads. They will be able to call on the cooperative power of group savings.
• The stokvel can buy a property to maintain, manage and rent out. Members can each take a share of the rental income or use this to decrease the financial burden for the first few years of the loan.
• During periods of low lending rates, it makes sense to look at investing in assets such as property to ensure that your investment is beating inflation rather than eroding the real value of your money.

The bad

Many stokvels are not formally registered or authorised by a financial services provider, which means they are unregulated. As a result, fraud is a common problem – even though that the stokvel concept is based on the principles of trust and discipline.

• If one stokvel member defaults on their monthly instalment, the account will go into arrears if the other members cannot make up the shortfall. Because all members are jointly liable for the loan, this can harm the credit rating of all participants. Therefore, the group’s approach to defaulting must be discussed and clearly outlined upfront. If possible, the stokvel needs to establish a separate slush fund to cover occasional payment shortfalls.
• Disputes – and even fights – between stokvel members may lead to the breakdown of the group. This would be further complicated if all members are co-owners of a big-ticket long-term asset like property.
• Stokvel scams are tricky to spot. Scammers sometimes run pyramid schemes disguised as stokvels, so it’s essential to check the credentials of all the members before joining thoroughly.
• Members may want to withdraw from the stokvel due to changes in their personal circumstances but may not be able to get their money back. Formalisation of the stokvel’s constitution can help to plan for this eventuality.

Check credit scores

Tucker says that before investing in a property stokvel, it’s important to check the credit scores of all the participants.

“You can request credit reports from each individual personally,” she says.

“A credit report shows whether members are the sort of people you would like to involve within your stokvel. It reveals how they have historically handled debt and whether or not they kept to the terms and conditions of the loan.

“Although you cannot request a credit report about another person from a credit bureau, you can ask to see the report that they have requested themselves.

“If you do your homework and take the necessary precautions, a property stokvel can be an excellent investment.”