Has anyone purchased property from a family member/friend for a lot less than what it is worth?
Reason I ask is my mum lives in a house close to the beach, small block of land, needs renovating but would be worth approx $800,000 if sold as is. Mum wants to sell and down size to a unit and give us the remaining funds to pay off our mortgage (approx $260,000)
I would prefer to keep mums property and start an investment portfolio. Mums property is in a great area but not sure if it's possible to purchase mums place for let's say $400,000.
If this is possible, we would need to take out a second loan: $400,000 to purchase property, $ 20,000 stamp duty, $30,000 for cosmetic renovations. Total approx$450,000 plus current $260,000 loan = $710,000.
My husband and I have just had a baby so we only have one income and we would be relying on the rent from the tenant that rented mums property to service the loan. My husband doesn't want to be in this much debt but I think this is our best opportunity to start building our property portfolio.
Questions:
1. Has anyone purchased property from a family member/friend for a lot less than what it is worth? is this legally possible?
2. What advice can you give me to help me convince my husband that this would be a great opportunity and not just a huge debt?
1. Yes, it's possible and happens quite a lot. I just helped a first home buyer purchase her parents home for $100k less than market value. It's called a "favorable purchase" and the bank will go off the valuation of the property (rather than the purchase price) to determine the Loan to Value Ratio (LVR). So for the person that I just wrote a loan for – even though she had a small deposit, she was able to avoid paying any mortgage insurance because she was purchasing the property for $100k less than it was actually worth.
2. lol – I'll leave that one to you!
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
1. Yes it is legally possible.
But there are many many potential legal minefields to negotiate so seek legal advice.
2. Tell him you are getting $400k worth of property for free!
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
In regards to question 2 maybe it is worth paying a couple hundred dollars to get a professional valuation done and then put this to your husband and show him what you are actually getting for the price you are paying. If it truly is worth 800k and you are getting it for 400k you won't get too many opportunities like that in your lifetime…
Hi,
Last year we purchased a property off my parents for $725k. It was valued at $1450000 so we paid half price. We found a lot of banks would only take the purchase price (725) into account but as Jamie alluded to, a few based the loan around the actual valuation so our LVR was very low (a loan for under $725k on a property valued at $1450000.) A good broker will help you out there.
Our solicitor drew up a deed of family arrangement which my parents, my brother and myself signed to ensure we were all away of the arrangement because it could havev implications down the track with estates etc.
Does this make sense??
Rusty
Hi,
I suggest that you seek legal advice and make contact to the State Revenue Office for an opinion. You may find that you will need to pay stamp duty on the total value! Recently we were contacted by a purchaser (the Son) regarding a favorable purchase from his father. The father had gifted $50k equity and the contract was written up at $50k under value, so Stamp Duty was calculated on the lessor amount. When it came time to stamp the transfer, the State Revenue Office came looking for the balance of the Stamp Duty as it should have been calculated on the Value of the property, not the sale as it is a "Favorable Purchase". Due to lack of understanding, the son was pursued for the stamp duty, the property could not transfer, a disagreement came about and it simply ended up that the State Revenue Office placed a Caveat on the property!
Hi Grant,
I think you're right, the stamp duty would probably be on the full valuation.
You'd probably have to arrange a separate valuation for stamp duty purposes.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
In NSW it is definitely the "dutiable value" or the transfer amount, whichever is greater. s21 Duties Act.
If a transfer between related parties the OSR will insist on a valuation too.
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
Hi Reneebol10,
Congrats on your new baby.
A question for the more knowledgeable forum locals:
Would it be more beneficial for mum to sell the property (at market value) and to gift the money instead?
It looks to me that mums property is currently being used as an investment and that it will remain an investment after it is sold at a "favorable purchase" price to daughter.
Because of this "favorable purchase" price, I am guessing that there is a larger CGT exposure if/when it is sold again (at market value).
Does it always make sense to buy property at a "favorable purchase" price?
Sorry, I know that these questions sounds silly but I’d like to know your views.
Cheers.
Pimobpi,
Either way the CGT would be paid on market value.
But it could be more beneficial to pay market value – if mum goes bankrupt at a later date this transaction could be reversed, or at least scrutinised carefully..
Same with the gift of cash, but this would be easier to cope with.Also transferring at market value can assist with asset protection strategies such as gifting cash to a discretionary trust and then borrowing it back
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
@terryw – Thanks again for clarifying and supplying your valuable insight – great thinker.
@Reenee – Living as a one income family and having a combined risk profile (from what I read) as quite low – I am hoping that you read Terryw's comments about "asset protection".
Everyone's situation and goals are different and you will have to find your own "right" way to manage your fantastic opportunity but it is well worth it to educate yourselves on some asset protection strategies (even if you do not decide to take them up).
Eliminating the options that you do NOT want to take just makes it easier to become successful.
Either way, I think that you are in a commanding position and I really love how you want to keep the legacy going…you are being helped by your mum and now you want to boost your family's wealth by investing it rather than just wasting it.
See ya & good luck.
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