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Time value of money

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Time value of money

Category Financial

The time value of money is an important aspect that is often neglected when it comes to a transaction where assets are bought or sold, or even when major changes are made to the production system of a farm with a corresponding loss of income for a certain period of time. In layman terms the time value of money describes that the money availble to you today is worth more than the same amount of money at a future date. This is due to two reasons, the first being the fact that the money has an earning capacity in terms of interest, dividends or profit, while the second is the influence of inflation that cause the purchasing power of the money to decrease.

The time value of money should thus be calculated everytime when there is a delayed payment on the table, as the amount of money that you are offered today has certainly not the same value that you will receive in future.

The selling of property

If someone offers to buy your property for R1 million with normal transfer in two months, then this would usually have a higher value to you than an identical offer from another buyer, but with transfer in four months. The reason being that once you have received the proceeds, you can utilise it to work for you and minimize the effect of inflation. If, for example, we assume that the inflation rate is 6%/annum and the interest rate is 9%/annum it means that the purchasing power of the R1 million decreases with R5 000/month while, at the same time, the R1 million has an earning capacity of R7 500/month. The extra two months difference between the two transfer periods will thus cause an inflation loss of R10 000 and a loss of interest of R15 000.  In the event where the transfer whould have been done in two months time you will actually receive R5 000 more value as it is the difference between the interest received and the decline in value due to inflation.  In the event of a R10 million farm / house each and every monthly delay boils down to a loss of R125 000 (inflation plus loss of interest), instead of a R25 000 gain (interest received minus inflation).

Of course, not every property seller will be taking the sales proceeds and investing it in a bank account. Whatever you do with the proceeds, calculate the time value of money in your particular instance. It may be that an offer you receive has more value to you than you realise at the time.

Furthermore, it is of absolute importance that you as the seller nominate the right conveyancer to proceed with the transfer of the property. If a conveyancer does his job properly and timelessly transfer should be within 2 months. Excuses such as the deed office is not functioning properly should not be accepted – it is only an excuse and a cliché explanation for incompetence. Therefore, you have to seriously consider the time value of money benefit and take a well informed decision before you reject a fair offer or appoint the conveyancer. In many instances you are able to secure a value when you receive a cash offer and most of the time that is the best deal!

 

Delays caused by lost original title deeds by banks

Unfortunately banks are often the culprits in delaying transfer if there is a mortgage bond which has to be cancelled. The search for a lost Transfer Deed is a major problem and the process to get anew certified copy is a 3 months process. It is common procedure and a condition imposed by banks that they hold the original title deed for property bonded by them, to be released only when the bond is cancelled. Those deeds are generally stored centrally by the banks, however, over the years and due to merges and changes in premises etc., deeds end up getting lost and a duplicate original deed need be applied for. Even though the banks may pay for the replacement it can lead to significant delays. The banks do not, however, compensate you for interest lost (time value of money) and lost opportunity.

In conclusion

The time value of money may have a major influence on the exact value of the money that you receive for you property or assests if the timelessly transfer do not occur. It is therefore imperative to notify your bank timeously of the pending cancellation of your bond in order to identify at the earliest opportunity whether your deeds have been lost or misplaced. Providing your estate agent and conveyancer with a copy of your original title deed as well as any other information relevant to your property transfer, will go a long way in foreseeing and timeously addressing any possible delays.

Author Jannie Fourie, Principal
Published 02 Jun 2016 / Views -
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