Bank Valuations and buying put options

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From: Keith J


My bank has valued a property significantly below my offer price, which was accepted. I know there were other buyers at slightly below my offer.

To persuade the bank that the property really is worth what I paid for it, could I buy a 'put option' exercisable at the 2nd highest bidders offer. This would reassure the bank that they could sell the property at short notice to the seller of the 'put', should I default. The 2nd highest bidder would be a prime candidate for selling the 'put', as they DO value to property at 99% of what I paid for it.

Is this something the banks would accept ?
 
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Reply: 1
From: Waverly Bay


Great to see you thinking “out of the box” to deal with a particular problem. Definitely no harm in approaching the banks to discuss this “put option” solution – we need people like you (and others) continuing to challenge banks to be creative with their lending !

The idea it seems is for you to buy a put (presumably on behalf of the bank) from the 2nd highest bidder.

As I see it, couple of things to bear in mind when you approach the bank:

1) Will the seller of the put (2nd highest bidder) be paid a premium by you? Generally, the period you set for when the put can be exercise and the “strike price” will affect the premium.

2) When can the bank exercise the put? Anytime over the term of the loan – 25 years?

3) Assuming the bank does exercise the put in say 2 years time, will the now-2nd highest bidder have the necessary finance to purchase the property under the put? Say the 2nd highest bidder goes bankrupt in 2 years time? Will the bank need to assess the credit risk of the 2nd highest bidder to ensure that it can pay the “strike price” of the put on exercise?

From personal experience, when the banks valuation comes in significantly lower than the purchase price – there usually is a very good reason. Unfortunately, it seems that a valuer will not assess a value based simply on offers presented by another independent buyer – wish it was that easy. This put idea will be hard sell for sure - but if the property means alot to you then the only way to find out whether its a goer - is to ask ! Good luck.
 
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Reply: 1.1
From: Jeanette .


I agree. If the valuation comes back low, there is generally a reason for it. I know of a case where someone approached the bank for a loan - the bank did a valuation - came back significantly lower. The buyer convinced the bank it was worth more than the valuation. The buyer defaulted. The bank sold the property. It wasn't worth more than the valuation and the bank lost money. Although I believe that valuers are conservative, they do base their opinions on 'actual' sales.
 
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Reply: 1.2
From: Keith J


On 4/5/01 11:57:00 AM, Waverly Bay wrote:

>The idea it seems is for you
>to buy a put (presumably on
>behalf of the bank) from the
>2nd highest bidder.

Exactly.

>As I see it, couple of things
>to bear in mind when you
>approach the bank:
>
>1) Will the seller of the put
>(2nd highest bidder) be paid a
>premium by you? Generally,
>the period you set for when
>the put can be exercise and
>the “strike price” will affect
>the premium.

I'd pay the option premium on behalf of the bank.

>2) When can the bank exercise
>the put? Anytime over the
>term of the loan – 25 years?

I'd envisage the period to be 1-2 years. By that time my IP value would have gone up and the put seller would probably have used his funds elsewhere. On the other hand, he would be getting a bargain after 2 years of growth if he was forced to buy at 2001 prices, so maybe a 25y period would be no greater risk for him.

>3) Assuming the bank does
>exercise the put in say 2
>years time, will the now-2nd
>highest bidder have the
>necessary finance to purchase
>the property under the put?
>Say the 2nd highest bidder
>goes bankrupt in 2 years time?
>Will the bank need to assess
>the credit risk of the 2nd
>highest bidder to ensure that
>it can pay the “strike price”
>of the put on exercise?

I think that may be where the theory fails to make it into practice. Although there may be an opportunity to start a business selling puts..... If it came off then we could all get 99% LVRs, and all it would cost is the put premium. So it is really a specialised form of mortgage insurance.

>From personal experience, when
>the banks valuation comes in
>significantly lower than the
>purchase price – there usually
>is a very good reason.
>Unfortunately, it seems that a
>valuer will not assess a value
>based simply on offers
>presented by another
>independent buyer – wish it
>was that easy. This put idea
>will be hard sell for sure -
>but if the property means alot
>to you then the only way to
>find out whether its a goer -
>is to ask ! Good luck.

In this particular case there are good reasons for that banks valuation - their rules state that if it has more than 4 living units it's a business loan. The solution was to go to another bank, who will lend 80% of the purchase price as their criteria is the zoning, not the number of living units.
 
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Reply: 1.3
From: Terry Avery


I think there are two points to be made here. The first is about challenging
the banks to be creative. Banks... creative and in the same sentence? I
think not. Creative with increasing the fees to customers, yes, creative
with lowering their lending criteria, no, I just can't see it happening but
am happy to be proved wrong.

The second point is who do you think is going to sell the put? The second
highest bidder. Am I missing something here but is this second highest
bidder trying to buy the house as an investment or to live in. If it's to
live in now I can't see them saying great I sell a put and sit on my deposit
(and maybe the grant the government is offering now and maybe not in the
future) and hope the option is exercised. Meanwhile I will keep renting or
live with the parents...

Now if the second bidder is a sophisticated investor they may be interested
but again will have to consider that they may get a better return on their
money now rather than in two or 25 years time. What if they commit their
funds in 18 months and then the option is exercised, oops, don't have the
money just now come back later. I am sure the bank will work through this
and more scenarios which will put it beyond their risk profile.

Sorry to rain on your parade but I just can't get excited by this scenario
at all. Creative though it is and all. Keep trying though, someone will
strike a combination which will do it for them.
 
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Reply: 1.3.1
From: Keith J


The property I had problems with was a multi unit dwelling, so it is definitely an investor who was the 2nd highest bidder. I agree that buying a put will only work in a few circumstances - I thought this may be one of them.

And being forced to buy a property in 18 months at todays price wouldn't be too onerous. But again it needs the right person to have access to funds at short notice. I understand the 2nd bidder has a couple of similar properties, so he may have been in such a position.

Anyway, it was just one of those ideas that needed a bit of discussion to bring me back down to earth.
 
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Reply: 1.3.1.1
From: Russell H


there is a company, 'Vantage Capital' who are selling a product which is a put option on property.

You buy the option from them at 7.7% (from memory) - it is exercisable in 7 years for a 50% guaranteed growth.
( which works out at around 5% pa including the cost)
Of course, this puts your LVR even higher.

They say that banks will lend against it.

However, I haven't checked them out any further, to be sure they will still be there in 7 years to pay up!

r
( however it goes without saying BE CAREFUL - deep pockets, short arms, etc)
 
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Reply: 1.3.1.1.1
From: Brad M


Russell

I haven't looked into Vantage Capital myself but I did notice an article in last week's Sun-Herald (Sydney) about this scheme and it mentioned that it is run by two former bankrupts.

So if anyone is considering this product then the article might be a place to start your research as I haven't seen in mentioned elsewhere in the press.

My initial impression is that I wouldn't touch it with the proverbial pole, but that is an uninformed opinion.


Brad M
 
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