3% Return per month

[Aikido]

Hi all,

I was just offered this deal but am not in a position to be involved in it. Thought I would pass it onto someone else who might be interested. It seems like a good deal and if a discussion occurs then I would be happy to learn from it. Details are as follows

Background

Developer in Sydney nearing completion of the project (less than 10 units). Having delays in getting the final drawdown from the bank to complete the project. The project is two months from completion. Development is in the Manly area and is near the beach.

Offering

Developer is looking for short term finance of $250,000 and is offering 3% interest per month for 3 months only possibly 2 months. Interest paid upfront.

Security

Developer is willing to exchange title for a 2 bedroom unit in the development to be used as security.

Exit Strategy

Payment of principle from final drawdown.
"Sale" of 2br unit for $400,000 to the investor (other 2 br units sold in the development for $650,000). Contract is kept by the investor (financer) but not registered to avoid stamp duty. Title is only registered in the case of default. On repayment of principle then the contract for the sale of the 2 br unit is recinded.

If you are interested in this deal then let me know and I will send the contact details to you. Apparently the developer would like this to be done this week.

Cheers

 

[handyandy]

Hi Aikido

So from what I am interpreting the security is a sales contracted for $650k with a deposit of $250k, being the original loan with an interest payment of $22500 for 3 months.

Or is it that its contracted for $400k and you never see your $250k again?

Either case the security doesn't seem like much security as there is no 'hurt' component in the deal. The developer can simply count the unit sold with the full price less the interest payed.

Cheers

 

[Aikido]

Hi,

The unit is "sold" to you at $400,000 on default. You just hold the contract at the time of giving him your "deposit".

 

[Simon]

So if he defaults then what?

He gets an interest free loan and a full price sale. Both very attractive outcomes to him.

You get a full price apartment that you may never have wanted in the first place. Not an attractive outcome in my eyes.

It is in the developers interest to immediately default and hand over the contract as security.

I think this is Andy's point.

I would rather see it all happen at $300K or less so the developer has an incentive to continue paying the interest and return the loan principle rather than just hand over the contract.

 

[peteb]

Hi,
doesn't he mean you buy the unit for 400K (valued at 650K) BUT you already gave him 250K so the balance is only 150K.
you have paid a total of 250K + 150K for a 650K unit ....
Peter

 

[geoffw]

My Brother in law was a biggish developer. Several years ago, there was a similar offer from a developer- well, it sounded even a lot more attractive.

I asked BIL- his response was that if the developer could not afford it with his own finance, then he's out of his depth, and should not be touched.

Investors did get burnt badly.

 

[Aikido]

Hi,

Peteb is correct in that you would be purchasing a property valued at $650,000 for $400,000.

So for the sake of paying you interest of $22,500 he would stand to lose $250,000.

 

[Les]

G'day Geoffw,

Thanks for the example from BIL. As always (for all others) this forum is called Caveat Emptor for obvious reasons. If it sounds like a reasonable deal, (and it could be), just be sure to protect your own interests legally from the start.

The subject matter is an interesting one (thanks, Aikido) for the further education of our readers.

As I've never been involved in anything like this, I can't comment further. Interested in any further input though. This really is one of those "could be, maybe not" subjects,

Edited later:- After posting this, I went back and looked a bit harder at the English involved in the original post. As such, I did comment further (next post)

Regards,

 

[Les]

G'day Aikido,

Peteb is correct in that you would be purchasing a property valued at $650,000 for $400,000.

Hmm - I didn't read it that way, and neither did Simon.

The unit is "sold" to you at $400,000 on default. You just hold the contract at the time of giving him your "deposit".

Doesn't "default" mean that you don't get your $250k back? In which case, you've paid $400k +$250k (defaulted) for a $650k unit. I'm still with Simon at this point.

Sounds like "the words" in the contract are very important, Aikido. Can you show just how they would be interpreted? e.g.

"Sale" of 2br unit for $400,000 to the investor (other 2 br units sold in the development for $650,000). Contract is kept by the investor (financer) but not registered to avoid stamp duty. Title is only registered in the case of default. On repayment of principle then the contract for the sale of the 2 br unit is recinded

Legally, just HOW is this interpreted? As Peteb suggested, or as Simon suggested?

Regards,

 

[Aikido]

Hi Les,

To clarify the points you raise. The use of the term default seems to be the sticking point here. So I will try to explain further.

When you lend the money to the developer a contract for exchange is written up to show you purchasing the unit at $400,000 with a $250,000 deposit. In the case of the developer not paying you back your principal and interest at the end of the term then you complete the purchase at $400,000.

I suppose what complicates things is that the developer really does not want to exchange contract but is supplying you with a form of security that he will repay the money. So you hold a valid sales contract that once registered means that the title belongs to you. The agreement is that once the developer repays your money then you rescind the contract. To avoid paying stamp duty on this you would not register the title unless the developer breaks his side of the agreement.

Hope that helps.

 

[Les]

G'day Aikido,

Thanks for the clarification. The way you state it, it sounds like it could be a good deal.

I guess the "sticking point" comes about because the $250k "deposit" just happens to be the same amount that the unit is "discounted". Is that REALLY meant to be a FURTHER discount of $250k (as you say)? Or is it the developer finding a clever way of selling the last one at full price? How sure are you that you have got it right?


Now, Aikido, your interpretation of the facts COULD well be correct - but what if your take on this offer is not as the developer is thinking? Or are YOU the developer? Hehe - I don't know - just asking, is this you? Or a friend? It could be an interesting deal....

Whatever, the wording on the contract is of ultimate importance so that all ambiguity is removed,

Regards,

 

[thefirstbruce]

Can you explain how having security on something that isn't built yet is security? There's a lot of things that can go wrong between completion and lending.

If this guy can't complete on time and get all the project sold off for the price HE thinks its worth, he is heading for insolvency and he won't be finishing the product. and that means the project gets flicked by the administrators for a fraction of what it's worth, and the only ones that get their money back are the first mortgagors, staff, and liquidators.

why on earth is he having delays getting the final pmt from the bank?
is this bank mainstream or a high credit risk lender like Bluestone.
if he was cutting it so close to the line, he shouldn't have started without presales.
If he doesn't have presales, then he has most likely overpriced the project, especially in a soft market.
what security is the bank already holding over the development?
has he already overrun his schedule?

I wouldn't do anything until I had spoken to the bank that he is having trouble getting money from.

 

[Aikido]

Hi Les,


It does seem like a coincident but I can assure you its not the way the deal was intended when I spoke to them about it. I don't think the developer is interested in giving any sort of discount for the property. He is only trying to solve his short term financing problem with the bank.

Did I mentioned that legal fees will be paid for was well?

I would like to be the developer one day

 

[Aikido]

thefirstbruce,

I didn't go into that. Questions like that I think need to be looked at on a case by case basis. Why do people get bridging finance? Money he was expecting to come though from another party didn't eventuate as promise leaving him in a lurch, banks dragging their feet in valuing the property for drawdown, material shortage so he pays some people cash to get preference....

I can't answer that question

 

[alexlee]

Agree that it should be looked at on a case by case basis. So in this case, why is the developer having trouble drawing down final funds from the bank?

I assume when you say 2 other units in the development sold for $650k these are signed contracts for off the plan. When were the contracts signed? If it was signed, say, in late 2003 I'd be more worried about the valuations. Will a bank valuation give a value of $650,000 now?

One issue I see is that if the developer defaults, it's likely to be because they can't complete the development. So you're left with a loss on the loan AND you can't act on the contract because the development isn't finished. Also your loan is likely to be much lower down the food chain if the developer goes bust. I'd be looking for stronger guarantees other the development itself.
Alex

 

[peteb]

Les,
I read it that way because that was the only way that made sense in terms of 'being a good deal'.
Also I wouldn't do this deal myself as I see it as too much of a risk.
A signed contract of sale doesn't mean much if the development is half finished and he is broke .......
Other good points such as present day valuations of the property need to be looked into.
Peter

 

[Simon]

Sounds like a much better deal than I originally read it as.

Has he any completed units he can offer as security rather than a unit which, as yet, exists only on a plan?

 

[simonjulie]

I'm with the others on this.
IMHO,If the units are not completed and have no occupancy certificates in place then there is no real security to speak of. The only real security the Developer has to offer is the land that the building is on.
Simon

 

[handyandy]

Hi Les,

When you lend the money to the developer a contract for exchange is written up to show you purchasing the unit at $400,000 with a $250,000 deposit. In the case of the developer not paying you back your principal and interest at the end of the term then you complete the purchase at $400,000.

I suppose what complicates things is that the developer really does not want to exchange contract but is supplying you with a form of security that he will repay the money. So you hold a valid sales contract that once registered means that the title belongs to you. The agreement is that once the developer repays your money then you rescind the contract. To avoid paying stamp duty on this you would not register the title unless the developer breaks his side of the agreement.

Hope that helps.

This still doesn't work. As now it is very one sided to the lender.

If you wanted to be devious then you would enter this deal pay the $250k, collect the $22700, take the contract for $400k less $250k deposit and register it. Done deal.

You have now bought a unit suppossedly valued at $650k for $377300 (400k - 250k - 22700). As Simon says, not a bad deal but one that doesn't work for the developer.

I don't think the issue of a contract that is not registered can be documented in a contract as you would be documenting an illegal act (failure to register the contract). So it would be very hard to have a secondary loan contract (but not impossible).

Just as a word of caution when a developer gets a loan it is staged and made available in progress payments. My understanding is that these payments don't get released to pay for the work to be done but rather after the work has been completed (progress) thus it is depended on the developer having funds available (working capital) to reach each stage. It would appear to me that this builder has no working capital left and is now in a deperate situation. I say this as my understanding is that this is a very bad indication that the project may not be able to be completed as per the variuos other posts.

Cheers

 

[thefirstbruce]

The way I'd lend this guy $250k would be to lend money to his relative or wife, in the form of a $250k deposit on a contract to buy another asset (like unencumbered PPOR) fully owned by the relative, that has absolutely no association through a trust or company structure with this project company or holding company. The price negotiated would be ~15-20% below market value to cover interest until settlement, and in costs. The relative could then lend to the developer and wear all the grey bits. If this guy is bona fide, he shouldn't have a problem with his relatives or wife trusting him. If he doesnt have a relative prepared to do this, then I wouldn't touch him either.

THough there are risks associated with this too, as deposits can be notoriously difficult to get back in the face of the vendor playing silly buggers.