Hello folks,
I have read many posts about securing property using options contracts and the like, and then artificially creating value growth with the intent to on sell for a higher price.
I was wondering if this would still be the preferred method if you intended to buy property that you knew was going to increase in value organically in the near future ( New school, freeway access, re-zoning ) etc. I am unsure how the process exactly works for putting offers down on houses with an extended settlement, then re selling it for a higher price during that time frame.
Even if you organize a simultaneous settlement, you still have to be able to settle on the property ( if only for an hour etc ) ? Or can the property in effect pass through you with you only being liable for any stamp – duty and capital gains ?
Any clarification on the best strategy to accumulate multiple properties in an area you feel is going to have significant, short term growth would be much appreciated
Options are excellent for anything increasing in value. If you secure an option then you may be able to assign the option to someone else and avoid settlement altogether. If you sign a normal contract to purchase land then you will have required to settle, momentarily even if you onsell it – but you would have no need for finance etc – this should still be considered as if the new purchaser doesn't settle you may have to.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
The following is a thought exercise only, not a suggestion as it would contain plenty of risk of loss as well as gain.
Assuming you had some super information about a rezoning to higher density or something similar.
One strategy to go aggressive quickly for an individual would be to do as much off the plan buying as you could (land/units or whatever is available), using as little deposit as possible for each purchase.
Options require that someone will say 'yes', which can involve asking the question a lot of times before you get to your first hit.
Need to be sure you can onsell – otherwise you will be required to settle on the property.
This stragety was marketed big time to many investors who bought into Docklands etc in Melbourne 7/8 years ago. The early birds did OK – the latecomers got caught holding the baby.
Thank you Terryw, Andrew_A and Derek for your responses.
As Andrew has said the thought I was having with options was that they would be difficult to get accepted for various reasons. The fact that I am not fully educated on them, the fact that most likely the vendor ( and possibly the agent ) would need to be educated on them.. I’m not sure I have the wit and charm to do that successfully
Terryw, I was interested that you said if a property was bought with an extended settlement, and on sold prior to this date, with that sale to be settled simultaneously, then I would have no need to secure finance? IE I wouldn’t have to organise $300k to then receive back my $350k ( just an example ) ? This would make life a lot easier as it is not how I thought it worked.
And yes, I understand that if the end buyer were to pull out I would be left needing to settle on the property, but could the insertion of an ‘escape clause’ remove this danger. Something like ( and I’m paraphrasing here ) Subject to getting a suitable development approval, in that should I need to, I could deem ANY development approval unsuitable and walk away. It needs to be noted that wouldn’t be my intent, just a security blanket.
Thanks again for taking the time to help a newbie answer some questions
an 'escape clause' is generally only valid until the contracts are exchanged. Without an unconditional contract is is unlikely that a vendor would go to the trouble of preparing for settlement.
If you have a new buyer then you wouldn't need finance as you would not actually settle – but this is extremely dangerous. It is also extremely hard to arrange a simultaneous settlement.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
"Subject to getting a suitable development approval, in that should I need to, I could deem ANY development approval unsuitable and walk away. It needs to be noted that wouldn't be my intent, just a security blanket"
Thats exactly what an option is designed for, so you have an out. I certianly wouldn't sign a contract with that clause in it. Would you if you were the seller? It basically voids the whole contract at the buyers whim and makes the whole thing not binding…so is legally pointless. Stick with an option any decent property solicitor would be able to draft you one for a few hundred dollars.
If you are dead serious about the potential of a property and your intentions are to buy it you can afford to offer a good price for the vendor to accepy your option say 2% of the properties current value rather than a few thousand $$. If they are thinking of selling but are apathetic either way they may accept as is a no risk stratergy for them.
Marty McDonald | Mortgage Experts
http://mortgageexpertsonline.com.au/
Phone MeHi Rippah
I'll just talk about the nature of the option you can use, not the challenges involved in getting a vendor to agree.
I've got to agree with Terry, i.e. simultaneous settlements are nail biting affairs. We've done them but, apart from the excitement
we had to find a way around the double stamp duty issue.As Terry says, assigning the option is one way. However the challenge with that is your buyer sees the price you optioned the property for, i.e. the strike price.
To overcome these common pitfalls of the "standard" call option, the "Blind Option" was developed. It makes the strike price completely invisible to the buyer throughout the whole transaction and, because it is a creative form of assignment, it solved the double stamp duty issue for us.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
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