I have a hypothecical to anyone out there familiar with this practise.
I negotiate a purchase price of $90k with the vendor of a property. The purchase price happens to be roughly 10% below the assessed MV (according to a valuer on the panel of XYZ bank). You familiarise the vendor with the Forgivable/Gifting process and inform him that you would prefer not to use any of your own money for the deposit (which you may or may not have!), and put it to him that you write out the contract for $100k which now includes a 10% forgivable deposit.
Would XYZ bank go for this if the contract says $100k, one of their own valuers has assessed it at $100k, and you’re only asking for $90k (assuming they finance to 90%) [?]
Obviously this does not take into account closing costs, but you may have other means for these, or alter the scenario to purchase at 13-15% below MV to allow for this. You would also need a co-operative agent, or better still, a private sale.
P.S – Is Vendor Gifting & Forgivable Notes the same thing [?]
Hi Leigh,
I have heard of this mentioned a number of times in books by John Burley, Robert Kiyosaki and Dolf DeRoos and it is done quite regularly.
I am not sure how the bank would see it, I guess it may depend on what relationship you have with them and what their lending criteria is, i.e. how you came up with the deposit.
My personal opinion is that if the seller and both solicitors are happy with the arrangement of no actual deposit and the property values to what the contract price says, then there is a good chance the lender will do it.
Another way you can do it which works well is to pay the deposit of 10% and write a clause in the contract asking for it to be rebated at settlement. Same principle but different approach with the same result of you not putting in a deposit from your own pocket.
Cheers,
Matt. [
]Hi Leigh & Matt
We talked this over with our legal folks some time back, and the idea of the amended contract price where money does not change hands apparently comes under the heading of conspiring to commit a fraud (ie you have not disclosed the your real position to the Lender).
We thought that this sounded like a bad idea (it is amazing how a court case can ruin your chances of ever borrowing money from someone ! [
]) and looked at option 2 that Matt described where we fully revealed in the contract by terms of a redeemable deposit or something like that.It was suggested that the Lender would read the contract and assess it at the”effective” purchase price and not the paper one. I asked a couple of our lending contacts and got much the same story too.
However, as you are fully disclosing, if they did accept you would be on a winner provided the deal still stacks up at 100% finance, as they don’t always do that…..
Please tell us how you get on if you try it out.
TTFN
the B person [
]Hi Bruce,
Thanks for the info on your experiences. Another option I had been thinking of and wondered if people had done it, was to ask for the closing costs to be rebated instead of the deposit.
As the goal is to decrease my money in the deal, this seems logical to me as:
1. I have reduced my capital invested
2. I still have my 10% equity in the property.Anyone have any thoughts on this one?
Cheers,
Matt. [
]Hi,
My immediate reaction to Leigh’s question was that it was a bad idea.
The only way that I would consider doing something like this is in the full daylight of complete disclosure to the bank.
It’s a tricky issue. But I think there is a difference between answering questions and deliberately creating a situation with no other intention other than to gain a financial advantage.
As for would a bank go for it? The valuer having already provided opinion might not count for much as in my experience banks take the lower of valuation and purchase price. Still, it’s worth a try [
]I think the idea of rebating closing costs sounds promising, so long as it was included in the contract.
The bottom line is that sales incentives can be created, but if you are doing it to deceive (as opposed to fully disclosing) then you are in dangerous territory.
Bye
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
I think the idea of rebating closing costs sounds promising, so long as it was included in the contract.
The bottom line is that sales incentives can be created, but if you are doing it to deceive (as opposed to fully disclosing) then you are in dangerous territory.
Steve,
I agree 100% with full disclosure. I believe there are enough ways to be creative with real estate without having to be dodgy or decietful.
I guess the bottom line is you don’t know until you try and if one idea doesn’t work, find one that does.
Cheers,
Matt. [
]Matt
I do have one gem for you on this topic.
Recently a lender suggested to us that we could amortise the LMI costs into the loan without affecting the LVR. i.e. LMI is not counted in the LVR calculation !
For a cheaper house it may only be a few hundred $’s (in fact it may be zero if you don’t borrow more than 80% in most cases) but it alll helps to increase the COC return.
the Bruce [
]Hi Bruce,
That sounds like an easier way of achieving the same result and even better with the lenders approval. Do you mind if I ask what lender? Did this option come because you are already doing business with them?
Cheers,
Matt. [
]Hi there Matt !
ANZ are the lender in question, though I guess that you could probably negotiate that with most of the majors. I think that the secret here is they have their own LMI arm of the bank that they deal with.
de Bruce [
]Hey Guys,
Sorry I’ve been away a few days, lots of posts in the mean time though, you really need to be on everyday to keep up! Interesting outcome with TAILS… Hmmmm, could see that coming!
Anyway, I think my post came across from the wrong angle. It was supposed to be a round about way of saying ‘do the banks care where the 10% deposit goes/comes from?’ ie: if you can negotiate with the vendor to ‘forgive’ or ‘refund’ your 10% deposit will the banks care if you have none of your own money in the deal if it still meets their lending criteria?
Another way I’ve heard of doing this is by way of clause ‘if the purchaser settles on or before “(settlement date)” the vendor, out of good will, agrees to refund the purchasers entire deposit’.
A further suggestion (from Brad Sugars) is to pay a 20% deposit into a term account at the same bank you’re obtaining finance from. Under agreement the bank will lock this into a suitable term and class this as your deposit security and finance 100%. You can then increase the MV of the property or wait for a bit of growth, organise a revaluation/refinance with the same bank and they should unlock your term account to allow you access to your money (assuming 20% increase in MV, or a part of).
Cheers Leigh
Thanks Bruce,
I will give them a call and organise an appointment to see what can be arranged.
Cheers,
Matt. [
]Quote:Anyway, I think my post came across from the wrong angle. It was supposed to be a round about way of saying ‘do the banks care where the 10% deposit goes/comes from?’ ie: if you can negotiate with the vendor to ‘forgive’ or ‘refund’ your 10% deposit will the banks care if you have none of your own money in the deal if it still meets their lending criteria?
Hi Leigh
At the 10% deposit level, it will depend on whether the mortgage insurer goes for it or not. Under full disclosure conditions and with a full market valuation that comes up to scratch, this has been done. You will have a better chance of success the larger your deposit, and therefore the lesser the risk for the institution. It will also depend on the other strengths of the finance application (your asset position, length and stability of your income etc).
On a slightly different note, I have seen many loans approved where there is full disclosure of the property in question being purchased under market price with the reason being explained (and to the satisfaction of the lender), with a letter from the vendor to the purchaser saying something like “I am selling this property to the purchaser at x amount. Any value above this price is a non-refundable gift to the purchaser”. The contract to purchase the property is then drawn up a x amount plus 20% for example. This is explained to the lender, and when the lender instructs the full valuation the true market value is used, and it should match the contract price.
The purchaser will have to pay stamp duty on the market valuation price (which is also the contract price), not what he/she is actually paying for it.
At settlement the purchaser only pays x amount to the vendor, and has 20% euity in the property. The purchaser will still have to cover purchase costs.
Cheers,
Nathan.[
]Nathan
how does this affect the Vendors tax position wrt CGT etc etc ??
the Bruce[8D]
Quote:Nathanhow does this affect the Vendors tax position wrt CGT etc etc ??
the Bruce[8D]
Hi Bruce,
In the same way that stamp duty is calculated on the contract price, so would CGT i expect, this may or may not be an issue for the vendor. (Their own structuring motivation level etc) It may also provide an oportunity to hone the purchasers creative negotiation skills.
9 times out of 10 I have seen this tactic used where the vendor is selling his principal place of residence, and hence no CGT to think about (in general).
cheers,
Nathan
]
]) and looked at option 2 that Matt described where we fully revealed in the contract by terms of a redeemable deposit or something like that.
]
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