Hello All
Been lurking here for a while, there's some great information and experience here. First time post so treat me gently.
I'm in an interesting position – a bit of history…
I've been running a small business in WA for just over six years from rented premises. The lease is due to expire and the new lease agreement will greatly increase our overheads. The business is stable and is not too sensitive to location. We have found a property that would serve us well on the market to buy for lets say 350k.
Initial investigation suggests we could arrange a 60% loan from a bank or commercial lender. The vendor is motivated and will consider some type of vendor finance arrangement, which helps as we have very little spare equity. (just purchased our second residential IP that has taken us to our comfortable edge).
So a couple of queries..
In terms of cash flow, when does Stamp Duty get paid? Is it paid at the conclusion of the loan with the vendor when the title changes? Is it paid now and held in trust?
And GST- how does that get managed in case like this?
Is there any way to do the commercial loan proportion as Interest Only?
Our current rental costs would be in a similar range to the PandI payments on both loans so we would soon gain ground in affordability in 5-10 years. Long term it seems sound for us to buy premises for the business, just need to find a way..
Any thoughts or comments would be much appreciated.
consider carefully how you propose to purchase, it may be better to buy within your smsf, trust or other vehicle than personally or with the trading coy. The separate entity can then lease back to the business.
If you must pay gst on the purchase, make sure settlement date is close to your BAS report date so you can claim it back asap. Don’t leave settlement to the last week of the month as unforeseen delays will impact on your bas lodgement.
Hi Max
Like NSW, stamp Duty is payable within 3 months of Exchange of Contracts, i.e. you have 2 months to register the documents/transfer and 1 month to pay.
I usually deal with residential property so I'll stay out of the GST question.
I'll assume the property is not zoned residential as that will mean your loan(s) on the property will be unregulated by the new National Credit Code. I'd guess that the 60% you get from a traditional lender could easily be structured as I/O for at least 5 years.
You could then offer the Vendor a second mortgage for the remaining 40%. To make it more attractive to the Vendor, you may offer him/her a 5 year term, I/O, amortised over 25 to 30 years (to keep your monthly repayment reasonable), with a ballon payment, for the remainder of the loan, after 5 years. All secured by a caveat.
If I was the vendor, I wouldn't accept your offer but it's worth as try. You did mention he/she is motivated
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Thanks Scott on the GST timing – useful tip.
Thanks Paul, not quite sure how this works so pardon my naivety…I don’t understand how a 5 year term I/O, amortized over 25 yrs with the balloon payment works?
Do we have to assume that the value of the property has increased sufficiently in this 5 years to be able secure the combination of the two loans with the bank at 60% LVR, and using the increased equity to refinance and pay out the vendor?Thanks
Max
So.. just made a quick spreadsheet to rough out some figures.
Doing this purely on interest only terms to keep it simple, at a 60% bank loan and 40% vendor finance it would take 7 years to reach the equity needed to be able to refinance the loan to pay out the vendor. I'm assuming a 10% growth rate which is appropriate for the area.
I dont see the value in this for the vendor apart from some regular income and selling a property that has been on the market for a couple of years.
We are maxed out in available equity on two residential IPs, but would have more equity in five years to throw at the business property if needed. I just wanted to keep our private investments away from the business.
Soo much to learn…
Hi Max
A 5 year term I/O, amortized over 25 yrs with the balloon payment works as follows:
1. The term of the second mortgage is 5 years, or whatever you can negotiate. The longer the better, for you.
2. Interest Only – self explanatory
3. Sorry, it's Interest Only, so you just make I/O monthly payments. If it was going to be a Principal and Interest loan, you can make payment as if it were a 25 year loan and pay the remainder (the balloon) at the end of the 5 years.
4. In the I/O case you would just pay the original principal owing at the end of 5 years (the balloon).Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
You will need to be careful with 2nd mortgage/caveat vendor finance behind a bank because the bank (1st mortgagee) will most likely have clauses in their mortgage documentation stating something along the lines of:
1/ that they must consent to any subsequent mortgage &
2/ that you cannot create another security without their consent and if you do you may be then deemed to be in default of the original loan/security arrangement.Hi Max
Mike is correct, however you should also recognise that most mortgage documentation also;
1. Requires you to get lender approval to rent the property
2, Requires you to get lender approval to sell the property
3. Requires you to get lender approval to make any changes to the propertyThat is, there is quite a large list of what you can't do. As to whether everybody adhere's to the exact wording of their mortgage documents, I'll leave that up to you. Of course the lenders do use all these different clauses quite expertly when they need to, i.e. when you don't pay
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
PaulDobson wrote:Hi MaxMike is correct, however you should also recognise that most mortgage documentation also;
1. Requires you to get lender approval to rent the property
2, Requires you to get lender approval to sell the property
3. Requires you to get lender approval to make any changes to the propertyThat is, there is quite a large list of what you can't do. As to whether everybody adhere's to the exact wording of their mortgage documents, I'll leave that up to you. Of course the lenders do use all these different clauses quite expertly when they need to, i.e. when you don't pay
Cheers, Paul
Not really Paul
Most say that you need permission from the bank to rent the property, but that if the rental is a standard residential lease then no permission is required. You obviously need the lenders permission to sell as they hold the property as security and title couldn't be transferred without their permission and with minor changes to the property permission wouldn't be required.
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 Terry
I guess that's what makes law so interesting, i.e. the variety of opinion
I recently received this opinion from another solicitor in answer to my question regarding Instalment Contracts and the issue of "assignment"."The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.
An Instalment Contract is a Contract for Sale with a delayed completion.The Bank / Lender’s consent is required for all Contracts for Sale, so there is nothing different here from standard procedure.
In terms of timing, a vendor notifies their Bank / Lender that they require a Discharge of Mortgage (by providing a Discharge Authority) shortly before completion is due. I find that Banks will hold open their discharge arrangements for a limited time, each Bank being different. The point is that the Banks do not like being notified a long time beforehand – some like the NAB require completion to take place within about 4 weeks after notification
Therefore, it does not accord with Bank practice to notify a Bank that a discharge is required under a Contract for Sale with a delayed completion until completion is imminent.
I trust that this answers the enquiry."
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
PaulDobson wrote:"The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.
An Instalment Contract is a Contract for Sale with a delayed completion.So Paul,
Does this mean that we would pay stamp duty at the time of transfer (in this case 6-7 years into the arrangement). It would be handy for our cashflow at this time if this were the case.
Paul
That may be the case concerning an assignment. An instalment contract is really a normal contract with the settlement period extended from the standard 42 days to about 30 years, with some other conditions such as the right to occupy before completion.
But there would probably be other provisions in the mortgage conditions which may prevent an instalment contract as it affects the lender's security for the loan. If there is nothing which prevents one, then it is open season. if there are conditions and you do instalment contracts then you may run the risk of having the loan called in for breaching the conditions.
(I heard a rumour that this happened to a big wrapper years ago)
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
Max value wrote:PaulDobson wrote:"The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.
An Instalment Contract is a Contract for Sale with a delayed completion.So Paul,
Does this mean that we would pay stamp duty at the time of transfer (in this case 6-7 years into the arrangement). It would be handy for our cashflow at this time if this were the case.
In NSW stamp duty is payable within 3 months of exchange of contracts – or at settlement if that is earlier. Other states differ, and VIC used to be at settlement, even if that was many years later (not sure if it still is)
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 Max & Terry
The position on stamp duty is as Terry said, i.e. it's payable within 90 days of exchange in NSW and in Vic it remains payable at settlement. Good on Vic!!
Terry I believe the rumour you refer to regarding a couple of big vendor financiers happened during the GFC, i.e. they each had multi million dollar facilities to buy properties and on-sell them with Instalment Contracts with one of the Big 4. The Lender, didn't actually "call" the facility, they simply revalued the properties and made a margin call.
Yep, left the fully declared vendor finance facility in place and made a margin call. It was $250K for one but I don't know the dollar figure for the other. I do know that the vendor financiers were a "tad miffed"
but the facilities still remain in place today.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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