Curious about Titles on Installment Contracts

Yes, you are right – under an instalment contract you have an equitable interest in the property with a right to possession which you can protect by way of a caveat subject to the rights of any prior interests registered in the Land Titles office such as the first mortgagee.

If you are not already doing so you should be talking with a solicitor not associated with the Vendor so you can make an informed decision whether to proceed or not. 

Hi Jean

Hate to say The seller is happy for the caveat to be lodged to protect my interests in the property.

The Seller doesnt get a say in this is as under the Property Act he/she has no right to stop you registering your interest by way of a caveat.

Hi guys

This is a fascinating post from my point of view for a number of reasons.  Firstly, as someone who does this stuff all the time, it's great for me to see exactly what goes through a buyer's head before signing on the dotted line.  Secondly, I'm a little alarmed that some people are giving advice on a forum devoted to creative techniques when it doesn't look like they've ever seen one themselves.

I'll try and make some sense of it all for you though Mal and Jean…

1.  Tell me what state you're in, and I should be able to find you a lawyer who knows this stuff.  Unless you're in SA or NT.

2.  Risk of Bankruptcy.  This is a risk.  If the vendor goes bankrupt, then legally you have very little recourse.  While this has never happened to me, it has happened to a friend of mine.  We often buy houses this way ourselves, and one of my friend's sellers went bust.  My friend called up the bank and discussed the situation with them, and basically asked for time to get his refinancing organised.  Depending on a myriad of factors such as how much equity is in the house, if the bankrupt party owes the bank with the title to your home anything(or if they went bankrupt for a totally different reason) and if you're making all your payments, will effect how the bank behaves.  Banks are not in the business of real estate, they are in the finance game, and repossessing houses when the payments are being made just because they can is not in their best interests.  My friend asked for 6 months to get his refinance organised, and that was 3 years ago and has heard nothing since.

3. Equitable title and possessionary title.  Australia has this thing called "Equitable Law", which basically means that if a contract looks unfair, then a judge can overturn it.  It is in this sense that you have title.  You have a signed contract which shows any court in the country that you have an interest in this property, and this would be taken into account if anything bad happened.  However, if the person selling this house to you is in business doing this stuff, chances are it's all above board.  There is far too much money to be made in this business being legitimate to risk screwing someone over.  Because of your (and everyone's) level of caution and suspicion, people who do this sort of stuff as a business have to be absolutely above reproach when it comes to honesty and ethics.  If anyone gets the slightest sniff that they can't trust me, I'm out of business overnight, because what we do is so unusual to so many people. 

Possessionary title basically just means you're in the house, and getting people out who don't want to move is a pain in the butt even IF the legal owner is in the right.

4.  Someone made the suggestion of another vendor finance deal…. why would another one be better?  I've seen several properties sold with a smaller deposit, but your large deposit will help you refinance sooner anyway.  Someone else mentioned rent to buys as well.  Either way is ok, but if the vendor is more familiar with this way, then stick to it.  Then at least one of you will know what's going on!

5.  Caveats.  While you can lodge a caveat without permission from the legal owner, these caveats expire quickly – I think in three months.  In order to have a caveat that lasts, you need written permission from the legal owner.

In the end, whether you decide to purchase a property via this method is all about the risk.  Is the risk that this guy gets the house repossessed (when you're making the payments) larger than the risk of houses going up in price significantly in the next two years or however long you think it will be for you to get "traditional" finance.  Also remember, unless you pay too much for the house, you can often get traditional finance faster this way than if you wait it out to do things the normal way.  That is to say the fact that you're making regular payments already on the house puts you in good stead and shows you can afford it.  Also, you have the chance to improve the value of the property (depending on the house) and therefore increase your equity and make obtaining traditional finance even simpler.

Sorry if I've written the Magna Carter here!  If there's anything else, let me know.

Hope this helps.

Andrew

Hi Terry and everyone

You're absolutely right about the bankruptcy issue, and I think the purchaser would win out too.  As for being legally messy, I've discovered in the last few years that by and large, there is no such thing as a watertight legal situation, and who wins often comes down to who wants to (or who can) fight the hardest.

As for the purchaser being kicked out for not paying, if you consider that most vendor finance properties are sold a bit above market value, what happens if it can't be sold the "traditional" way for the contract price?  Our vendor finance contracts are all non-recourse loans, so the purchaser can walk away at any time if it's no longer working out for them, as opposed to worrying about me selling it off as a "fire sale" for 50 grand less than the contract price, and coming after them for the difference.  

In the opposite situation, where they are defaulting but the price has increased, the purchaser has the ability at any time to sell the property himself the standard way if he thinks he can get more for it than he owes me.  He then just pays me what I'm owed under the contract, and pockets the rest.  I don't know if this is how they all work, but it's certainly how mine work.

Most people I know who do this stuff are just normal people who would prefer to work out a solution with the purchaser, rather than ending up in court over it.  My mentor who has done hundreds of these tells me he has been to court once in his vendor finance career.  A few years ago when I started getting serious about this stuff, I was way too over analytical.  I finally convinced myself that if I needed to know all the "what ifs?" that I would never actually do anything – it was a very hard change to make.

As for not being keen on VF because of the low returns, I really have to disagree with that one.  While having no buy and holds is just plain stupid, working your VF business correctly actually allows you to have more buy and holds, as you can use the cash flow from the VF properties to feed the negative gearing on your highly geared buy and holds.  Furthermore, if the market is going nowhere for a few years and you know how to do VF properly, it's very easy to get in and out of a few properties in that time and make some cashflow as well as some money on the back end, when the buy and hold guys are just bleeding cash for three years for hopefully some growth next time.

Here is a recent example of the returns I'm getting now.
House valued at 325 K after a recent drop.
Loan against property of 321 K – not tying up a great deal of equity here!
My payments to the bank – currently around $350 per week.
Purchasers payments to me – currently $638 per week.
Their purchase price 370K – to be fair I set that price when I got the refinance val of $350K.
Now, I let this guy in with no deposit because I was a moron, but even if I could just have attracted a 4 grand deposit, I'd have no money in the deal really.

Now, while this may sound like fun, this is not where the real magic lies.  Once you've mastered the basics like this deal, you can then step up to where the real profits lie, and that is in the back-to-back deals.  Here is a hypothetical example:

I rent-to-buy a place from a motivated seller:
$400 per week, price of 350K – real value around 380K.  My option fee to get in is $1.

I rent-to-buy the same place to someone new:
$500 per week, price of 400K. 
Their option fee to get in is 10 grand.

I make 10 grand up front, $100 per week for a couple of years, and around 40 grand when the buyer takes up the option to purchase.

I think 65 grand over three years is a pretty high return for $1. 

I know this stuff is a bit "out there" people, but this IS the "Getting Creative" forum!

If anyone wants to know more about this stuff, or just abuse me and tell me why it doesn't work, then find me on facebook.

http://profile.to/andrewbuyshouses/

Have fun!

Andrew

Hey Richard,

Just a bit confused here…

You've said…"One of the major differences is never purchase the property and then try and find a buyer but always let the buyer locate the property and then approach with a view to financing and onselling to them.."

One of the major differences to what?  To those "bad eggs" as you referred to them?  Assuming you're not, then why do you feel letting the buyer choose the property is the way to go?

I's also love to head your examples of things you've seen in ths business that are not ethical and/or legal by a seller.

Cheers

Andrew

Hi Andrew and Richard, thanks for the replies

I have done 6 wraps myself, many years ago now, and that was my main reason for thinking they are not worth the bother. The properties I purchased and then wrapped made me small weekly incomes and smallish capital gains when cashed out, but then you factor in stamp duty and all the other costs and it all adds up. Then comparing it to what if I had just rented them out and held – I would have been far better off. Add to that the potential legal problems…And, by the time I was cashed out properties had grown so much it was hard to buy more with the small proceeds obtained.

But, it is different when dealing with huge portfolios, and I guess it is no different than selling a product. And the main thing is to do some buy and holds as well.
 

Jean & Mel

As the purchaser you are legally required to pay the Stamp Duty 30 days after the Instalment Contract date and not on the date of settlement which could be 25 years time.