I have just recently had a bad experience with my first Installment contract due to the buyers having a solicitor that just simply did not get it. I would like to continue with investing in this way but dont know the best way to go about it now. We lost money in this process, but did learn what not to do again. Still, it has made me very reluctant to try an installment contract again which is a shame as we have a builder who is keen to Joint Venture with us but obviously we are not buying well to start with, as he still wants his price that he could sell for today and still be able to cash-flow and make a profit himself. How do you not inflate the price except to say that we are setting the price for 3 years time. The buyers we had were happy with this concept/explanation of how we set the price and agreeable to it until the solicitor talked them out of it.
I have rent buyers for my own investment property. They have already moved in on a temporary lease agreement until we get the legal paperwork done. In requesting the solicitor to draw up the legal paper work, 'lease with the option to buy', he has expressed that we encourage the buyers not to obtain legal representation and to get a JP that we get friendly with to witness the signatures on the docs.
This has caused me to have some serious concerns about what we are doing. I thought it was all above board and we are simply trying to do the right thing by the buyers, … but are we??
Our property is in the process of a boundary realignment. We do not want a caveat on the property whilst we do that as it will get too expensive to have it lifted every time we want to work on it. The solicitor has told me that caveats don't go on a lease option anyway, only an installment contract. I have read on websites that others do encourage it. Feeling very confused at the moment.
I know that a lot of people are very wary of this type of investing, however, I am convinced that it works and does benefit those that are having difficulty obtaining finance to buy outright today.
How do I relay the benefits when I am starting to doubt them myself! I just want it to work. Any suggestions?I recently went through a similar experience, my client went to about 5 laywers and all of them were either not specialised enough to advise them, or were advising against entering into an installment contract. It wasn’t until they found a lawyer who was familiar with them that they felt comfortable entering into the contract.
I think its dangerous ground advising people not to seek legal advice, not recommended.
I’m thinking perhaps we need to have a list of 3 or 4 lawyers which specialise in installment contracts in each state and let our clients pick one from the list.
On a new property it is easier not to inflate the price significantly. The real killers in a deal normally are the stamp duty and if you have to pay LMI. With a new property, at least stamp duty is minimal as you are only paying it on the land. I got the buyer to cover the interest during the construction phase (which they would have had to do if buying it outright themselves anyway). Perhaps if you are really keen on the builder, you could get him to finance the costs until the completion date. This is likely to save you around $10k in interest costs.
You need to have access to the best possible finance terms, prior to making your markup, and ensure that you are buying the property under the average market price. Some builders are significantly cheaper than others.
Thank you Mattnz. The builder is really excited about the concept of Vendor Financing buyers in on a regular basis. We started with a home that was completed already and had a standard contract with a real-estate agent fall over. He secures land with the developers on builders terms.- He has a contract to buy the land usually after the completion date of the construction. That way, when he sells the package, he then pays out the land with a simultaneous settlement. This could be a ongoing opportunity for both of us if we can only work out the best way to do it.
We have spoken to someone recently who does 'No deposit' loans. Apparently this is an IOU set up for the 10% deposit that doesnt really exist. A standard contract for sale is produced and the deposit simply says "paid". Obviously an agreement for the deposit is drawn up between the seller and the buyer. The buyer pays this back to the owner over an agreed amount of time interest free. This sounds so much simpler as the buyer still has to qualify for a loan, so everything checks out with them. They just simply do not have a deposit to get started. I would be extemely interested with what the implications of this process could be. There always seems to be a catch.
Lucky for you, the buyer you had was determind to continue to go to other solicitors. Ours ran a hundred miles and hour in the other direction and unfortunately feel that we had the contract set up to protect the owner and ourselves but not them as the buyer. I lost credibility with the buyers, which I find extremely disappointing. (I like to sleep at night) This is an opportunity that our buyers would not get for another 3 years due to bad credit and still, they could not see the risk is worth taking. I wish I had gone with them to the solicitor so I knew exactly what was said to them.
What margin are you putting on the properties when you sell them, what interest margin are you capturing above your own interest cost and which state are you operating in?
To be honest, we did not look at it as in "a margin". We were thinking of what the property would be worth aprox in 3 years if that was the term set. We know now that this is not the way to do it. How we explained this to the buyers was… "It is determined by the time frame of the term set." If they did not want to get the finance for 10 years then, would it be fair to sell at todays price when we all know values go up in ten years. This was excepted by buyers, just not solicitors. Now I dont even know if I except it anymore. Everyone says that there is no right way or wrong way. I just want to know if there is A WAY.
The sellers asking price was $460,000 (full sale price), we figured that if the term was going to be 3 years then why not sell it for $489,000. This would be considered an over inflated price for today but not for 3 years time. The capital growth is there. The builder only builds in brand new estates with quality built homes. Margin? I guess this would have worked out to be about 7% ??
We do not inherit any interest costs ourselves as we have gone in as a Joint Venturer (having no money ourselves) and taking 20% of the cash flow for setting it up, but , for the builder it was the difference between Principal and Interest on the $489,000… sorry, $479,000 as the buyers were to pay $10,000 up front, and, Interest Only for the seller on his cost price (which I think it was around $400,000) over 25 years.
We are based in Qld.
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