Understanding how does a Property Stokvel work

Understanding how does a Property Stokvel work

Thinking of joining a Property Stokvel? Although there are government subsidies like FLISP Grant and RDPs, the reality is that the vast majority of South Africans just don’t have the financial resources to invest in property.

The aim of this stokvel is to make property ownership more accessible by allowing people to pool together money and purchase property, which they otherwise couldn’t afford alone.

What is Property Stokvel?

A traditional stokvel is historically a joint savings scheme whereby members opt-in to join a savings club or society, each contributing a fixed sum of money per month. Then, each participant will collect a lump sum payment at a certain time of year, based on a predetermined rotation. 

A property investment stokvel club provides members with a means to own a share in a larger portfolio of properties and to end a 20-year home loan. Community purchasing power means assets can either be bought and paid for cash or bought in a much shorter time period than the standard 20-year term. 

A property stokvel takes the philosophy of saving and spending and applies it to the real estate world. Property stokvels are sprouting up in South Africa making land ownership and investment a more open choice for many. Like-minded and willing property investors get together to pool their financial capital, invest together in a single property, or buy land for commercial, manufacturing, or residential purposes to build.

How does Property Stokvel work?

The motivation behind setting up a stokvel has always remained the same, regardless of the outcome: stokvels allow and embed the habit of saving and investing in the lives and routines of humans. It becomes obligatory to save and make your monthly contribution by joining and participating in a stokvel setup, or else you are excluded from the club.

The ultimate goal of such a club is to allow greater economic participation, by allowing property ownership through a land stokvel. By pooling its members’ financial resources, a stokvel will attract higher savings interest rates, and allow larger properties to be purchased. And that’s why property stokvels can be enormously beneficial to a first-time real estate investor, or low-to-middle-income earners.

Property stokvel can be used to

  • Purchase a property to maintain, manage and rent, with the participants each taking a share of the profit from the rental;
  • Buy a piece of land on which to build and develop;
  • Buy shares in a portfolio of property assets to generate members’ annuity income;
  • Deposit to a certain property or, 
  • Secure, cascading homes for every member of the stokvel. Some property stokvels are used to buy member homes or investment properties, with each purchase order being connected to when a member joins in.

They provide at least two options or ‘phases’ for potential members to choose from, each varying in cost per month, investment period and benefits. Members are allocated a number of different shares based on their contribution. Such saving clubs typically have one of two goals: to buy and rent a property or assets, in which all members take a share of the monthly profits, or to secure homes in a rotational fashion for each stokvel member depending on the order that each member has joined.

There are wealth creation stokvels – building an investment property portfolio, homeownership stokvels – buy or create each member a family home and building materials stokvel – buy each member building materials for a complete project.

A stokvel is meant for generational wealth creation, a means to leave a legacy, affords financial freedom, the empowerment of black people.  A way to deal with barriers when trying to access financial institutions and do not want to continue to pay bonds for a period of 20 years, addresses past inequalities, deals with feeling a failure after losing a home due to arrears / too many debts or just wanting to keep the money rotating in black communities.

Is my Property Stokvel Legal

No legal protection is offered to a Stokvel and its members. This is regardless of the fact that the number of  Property Stokvels in South Africa is rapidly growing.

Stokvels are based on a system of ‘trust’ and familiarity. Banks require Stokvels to have a constitution before  opening a bank account so that there can be some form of order to the administration

Property Stokvel Constitution

A stokvel constitution and contract signatures made by each participating party will underpin the formalisation of a stokvel, property or otherwise. Notably, financial institutions have created a range of available banking options for stokvels, and the requirements for opening such an account include creating a constitution and similar documentation.

It should be easy to estimate a stokvel for its suitability and legitimacy. If it is made in some way complicated, be warned that you might probably be dealing with a scam. There needs to be a constitution for every stokvel. the constitution should include information on:

  • Stokvel rules and regulations; 
  • Information on Stokvel membership, including how many people can join and what their financial contributions need to be. 
  • Clear information concerning what happens when a member leaves the stokvel, loses his job or is unable to fulfil his financial obligations. 
  • The duties and responsibilities of each member;
  • Stokvels should have a leadership structure detailing who the chairman and treasurer are, and the intent of the stokvel. 
  • The form of financial strategies and options that will be used to protect the finances of the stokvel and to ensure that the club achieves its objectives. 
  • Definitive stokvel targets. 
  • Make sure you have a monthly statement so that the contribution process is clear – that is, you can see exactly where your money is going? 
  • Ask your member what happens if they fail to pay.
  • Find out what recourse the scheme should collapse right up front – how do you get your money back? 
  • Regular meetings should be held, where members can ask questions and receive feedback. 
  • Contributions are to be made to a single bank account. Funds channelled to an individual or distinct accounts should be a red flag. If you see that the funds for registration go to one account and monthly contributions to another.
  • Ask the individual who runs the stokvel where your money is going to be spent, and whether the stokvel can show it is being spent. 
  • Ask how you can keep an eye on your contributions.

How to spot a Stokvel Scam

It’s a must to do your due diligence on a property stokvel, whenever your money is involved. If you are invited to join a stokvel property we recommend that you do the following, long before you make any financial commitments:

  • Making sure it has a clear, robust constitution. 
  • To find out about leadership structure and membership. 
  • Make sure you know everything about where the money you ‘re going to invest, and how it’s going to be used.

Scams that target stokvels come in different sizes and shapes and can be tricky to spot because, unlike pyramid schemes that claim to double your returns, they may seem legitimate and don’t seem too good to be true. A property stokvel should be a circle of confidence and peer pressure that prompts you to save in a group. A stokvel revolves around rotation! So, you may usually have around 10 or 12 members, and each member has a turn to get a monthly profit. Once you get into membership numbers of 100 or more you start to see problems.

The element of a trust circle is lost because these 100 members don’t know each other personally and they don’t know the people running the stokvel personally either in a number of cases. In South Africa there are more than 800 000 stokvel groups representing an estimated annual R49 billion economy, National Stokvel Association of South Africa (Nasasa) is aware that players are joining the stokvel market behind new technology and through platforms such as social media.

Property stokvel schemes are on social media everywhere and all require that you attend some kind of presentation or join a WhatsApp group where registration fees are charged. SAPS will investigate the case if you are scammed or suspect foul play, and will determine whether to charge the liable member or not. Where the individual is convicted, the case is referred for prosecution to the National Prosecuting Authority.

How developers can accommodate the current market?

There will be a significant shift in the property market as our country is undergoing massive changes as a result of the global pandemic and is faced with new challenges. Developers need to focus less on marketing to wealthy individuals, and more on those up-and-coming investment clubs, which are almost guaranteed to popularize.

Developers who choose to change their marketing strategy in this respect are likely to benefit from these stokvels’ high level of attention. It is because few construction firms are yet to cotton on to this investment phenomenon. There is the additional benefit that most stokvel organizations would be able to buy properties in cash, allowing transactions to be done on time and with minimal effort – no need to negotiate with banks or wait for bonds to be accepted.

Ultimately, there is sure to be plenty in store when it comes to collaboration on the horizon between developers and real estate stokvels. As such, it will pay developers to ensure they are thoroughly prepared and equipped to use open arms to embrace that opportunity.

Get the right advice

It’s important to get the right advice when it comes to money – your own or your stokvel’s – to make sure you ‘re on track to achieve your goals. Your co-members’ financial expertise and experience can differ greatly, which may make it difficult to decide on the best savings strategy and choose suitable solutions.

Save with purpose

44% of stokvel contributors save for a rainy day, while 43% save to pay off debt, according to the Old Mutual Savings & Investment Monitor Report. Understanding the underlying saving motivation is a key factor in deciding which tools to use to achieve your goal. Bear in mind the debt costs increase over time. Likewise, if you save for a rainy day, you need to be aware of inflation rates, rising living costs and any VAT reforms to ensure you save enough.

Get more out

Stokvels are common because members are obliged to contribute but it is as necessary to prioritize returns to promote savings. Members ought to get more out of their savings, or they might save their money under a mattress with no growth prospects as well.

Empower members

Every member of stokvel has the opportunity to take an active part in their club. Look for a particular investment strategy that provides value-added benefits that empower members through financial education. Besides being easy, straightforward, cost-effective and scalable, financial solutions must also add value to the members.

Benefit from tax-effective solutions

The Government of South Africa promotes savings by providing tax incentives on such investments. Stokvels often miss out on this great opportunity for development. Remember to consider tax-efficient solutions such as tax-free savings accounts when deciding which savings or investment to use for contributions to your group.

Rustenburg Stokvel Investment Club and Sakhisizwe Property Stokvel are two of the most prominent Property Stokvels in  South Africa

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