Ever thought about opening your own guest house? Here are a few suggestions to simplify the process. “There are certain requirements which must be met in order for a residential home to be used as a guest house,” explains Leon Breytenbach, National Commercial Manager for the Rawson Property Group.
“To achieve zoning for a guest house, you need to approach the process in a different manner to the zoning of most other categories,” says Breytenbach. There are only a few zoning categories which make allowance for guest houses as a consent use item, these being single residential, general residential, local business, agricultural and rural. Operating without consent is an offence, but consent may be gained with a little effort and foresight. This includes gaining the consent of the neighbouring property owners and residents as well as displaying notifications to the immediate public for the purpose of lodging objections. Once the neighbourhood consent is gained, the municipality still retains the right to grant or deny permission. When municipal consent is forthcoming it may be accompanied by certain conditions which must be fulfilled. Further approval may also be required from a health and safety or fire safety perspective, requiring an inspection by either or both of the authorities.
A comparative market analysis is another unique aspect relating to guest houses, this is because there are insufficient guest houses sold in any one area within a reasonable amount of time to allow a viable comparison of their sale values. “In theory,” explains Breytenbach, “the property could be sold as a large family home, thus making it comparable to other homes in the area, but in actual fact it is an asset with a functioning business unit which entails costs, profit, staff, etc., so you must expect to pay a slightly higher premium for it.”
Selling the property
When a functioning guest house is offered for sale but lacks the appropriate zoning and municipal consent, then it is considered to be operating illegally. If it has the required consent, then this in itself is not transferable when the property is sold, thus the new owner would be required to re-apply in his own right. ”I recommend purchasing the shares in the asset-owning legal entity,” advises Breytenbach, “because the consent given to a legal entity, that owns the property, will not change.” Only the shareholding will change, it may prove that retaining the municipal consent given to that specific entity would be more easily managed. It is also important that you purchase the legal entity which runs the business, as it sometimes occurs that a separate legal entity owns the operational side of the business. Thus it is essential to stipulate that you are not only purchasing the property owning entity, but also the business or operational legal entity as well.
Buying a guest house
Buying a guest house is different to buying a house in which you and your family intend to reside, so a standard residential sale agreement will not suffice. It is advisable to insert a due diligence clause in your sale agreement focussing on certain essential requirements. For example, it is essential for the consent use to be in place and the building plans to be verified, because some owners simply extend an existing house to a guesthouse without having submitted plans for approval. Another essential is that the financials of the business are up to date and fully transparent, especially VAT and SARS returns, given that one is purchasing both property and business together. “If you intend purchasing the existing legal entity, you should make sure there are no unpleasant surprises awaiting you,” suggests Breytenbach. “For instance,” he continues, “be sure you understand the financials; find out to whom the business owes money or whether it has stood surety for anyone; ask who provides it with services and who is employed by it.”
Some helpful tips
If you are purchasing a guest house to make it your family home, ensure that you are not paying an unnecessary premium for the business as well. “On the other hand,” says Breytenbach, “if you are purchasing a guest house as an investment or a functioning business for which you are paying a premium, allow yourself the time to ascertain that it is operating legally and that you know exactly what you are getting yourself into.” It would be helpful to seek advice from your attorney or accountant in order to ensure peace of mind.
Rawson Commercial currently has offices countrywide and qualified agents who will gladly assist you. Please contact (021) 658 7100 and we will refer you to your nearest office.