Big Problem

[JBR]

My friend has a big problem


He has been guided into doing a little "creative financing" by some not so clean characters.


Basic problem is that he was planning another deal to tie in with the house he has now. He is very young and turns out not too clever.

A bank has a mortgage over his investment prop in a major capital city. The mortage is 80% based and no Mortgage insurance. His problem is that the house is worth 100K less than the bank were led to believe. Big problem....

Not just that but teh original contract price was huge....too huge, and it will draw some attention for sure if it is looked at.

His deal would have worked well if another deal came in but it fell apart because someone died...heart attack i think....does that suprise anyone!

Very dangerous scenario. Playing with fire.....

He is really freaked out to say the least. Why because it is ilegitimate and he will struggle to keep the balls in teh air. If he manages to pull that off he will be stressed for the next 5-6 years and at the end of that will have nothing to show for it.

He has other options: Basically the person whoses name appears on the mortgage docs can dissapear. But with a gap of 100K the fraud squad will probably be close behind.

THey can easily check names etc.

So basically he has no money, and only half a job I think, and hes starting to worry me. Worst part for him is that he has got nothing out of it...just a very tight noose around his neck.

So I'm not a seasoned pro so not able to advise really.. Can anyone suggest anything for him

Hes a good guy who has just made a big mistake without even realising it. Sucked in is the phrase.

Cheers JBR

 

[michaelg]

Hi,

Is this some sort of cashback deal?

i.e. "I'll buy the house for $x, if you rebate my for $y, that way the bank will think the house is worth $x, and give me a loan for $x - $y ($z), $z being the bank loan and the underlying purchase price?"

Also is your friend still in the cooling off period?, or are they about to settle?, if still in cooling off, then they can recind the contract.

With bank's being as nervous as they are, how does the bank's valuer fail to miss this difference?

Michael G

 

[Aceyducey]

Sounds like he needs to have a good heart-to-heart chat with a solicitor & probably an accountant (maybe even a mortgage broker) BEFORE talking to the bank.

Unfortunately this looks like one of those uncomfortable learning experiences for him - but tell him that it is survivable, there are plenty of wealthy people out there who have made BIG mistakes in judgement at some point and still thrived. In fact, very few people succeed without a few gaffs on the way.


I'm curious too as to how the bank allowed the extra $100K through - what are your sources as to the market value of the property being so much less?

 

[Kevmeister]

His problem is that the house is worth 100K less than the bank were led to believe.

I too am surprised that the bank did not get their own valuation on this property.

I suppose if the property was originally "over-valued" at $500K and the loan is 80% LVR then being under value by $100K still means a property valued at $400K and a $400K (80% of the original $500K over-valued price) loan.

That would definitely be a learning experience, but not too bad a financial loss...

But if your friend is stressing so much I'm gathering the IP is not worth anywhere near this much?

My other question is who has benefitted from this $100K. Did he buy the property at too high a price (caveat emptor) or has he been ripped off? As michaelg said, is this some kind of cashback deal?

BTW, mortgage insurance would not have helped this guy. The bank doesn't say "Oh gee, oh well, good thing we had mortgage insurance, we haven't lost anything so let's not pursue this guy". The bank would claim any loss from the mortgage insurer and then the mortgage insurer comes after the property owner.

 

[asy]

hi JBR...

I have read, and re-read your post, and I'm sorry, I am still confused. I understand that you are worried, but your post sounds like it was written in a panic, and is not very clear.

Would you please have another try at giving us the details?

If you don't mind, will you please be quite specific (since this is largely anonymous!) and post consicely, thus:

Currently owned house (house1):
Current value:
Current mortgage:
Current Rental:
Anything else you think we need to know:
Also, who led the bank to believe this house was worth $100k more than it is?


Contracted on house (house2):
Contract price:
Settlement date:
Finance clause date (or is it unconditional?):
Date contract signed:
Any conditions on the contract:
Current approximate value:
Funds he has put into the purchase:
What do you meant the contract price was huge?


The other question to ask is:
What does he WANT to do?
Does he want to settle or get out of the deal?


And, just for our info, um, who sold it to him? Was it an agent? How did he get into this mess???
How did he think this was all going to work?

Look forward to your reply, but remember, we are none of us giving legal advice, in matters like this the advice of a good solicitor is invaluable... Also, time is of the essence, he needs good legal advice AND HE NEEDS IT NOW!!!

hear from you soon,

asy

 

[XBenX]

I too am a bit confused about your situation, post more details.

Its always good to know other people experiences.

 

[JBR]

I know a lot of details, but not all.

Yep it was a cashback deal....

I'd say the vendor was definately in......otherwise how could it have been done.

So he got some cashback as i understand it, but the place has been settled for more than a year.....and the "cashback" to service is gone. Thats what i'm led to believe.

The price was around 20-30 K above market to start with.....but no agents were involved. So I guess caveat emptor applies....he doesn't want to hear that though!

As for a valuation.....who knows what goes on

BY the way he knows the value because he got it valued just last week... independantly (haha should have done that in the first place)

Its actually a real mess for him.
Well i guess he thought he was smarter than he was, but I still don't think he deserves to pay for that all through his 20's. maybe he does

How dearly he pays who knows...

Its a criminal offence..no doubt! BUt I'd hate to see a young idiot like him go to jail for signing his name away.

Hes talking about making himself scarce......I'm assuming the bank would take the house and sell it.....not retrieve 100K of their money and either sue him for it.....well they would try....then not get any of their money, ( he gets a judgement against him but makes no difference to him),

and more than likely pass that on to the fraud squad.

After which he would be traced.....that is if he ever wants to work again.....ie tax department and fraud squad would share info right? SO when he works for someone and pays tax again his tax file number which is attached to his name/which is then attached to the other name (the one for the house) will show up, and the FS will trace him.

Or do the fraud squad continue to trace for more than 5 years or so. I think they do thank god I'm not certain!

I said to him, gees, its almost fugitive stuff. well it could be if he doesn't keep the balls in the air.

I helped him do the analysis of the property and on the figures it has to be one of the worst investments i've ever seen. This property will not make a red cent for 9 years....
based on capital growth/tax deductions/rental income.


But if he can repay 100K over the next 4 years he would survive. I suggested he may look at somehow putting another building on the back of the block to increase the rental return slightly, and maybe a sub-division later on but it would be too risky for him right now....ie he wants all banks as far away as possible.

He will also find it hard to fund...

Hes not a happy chappy....In fact hes starting to really worry me and yes I'm keeping an eye on him....who knows what he might do.

I've been broke before (actually twice in different businesses) but theres a big difference between being broke and what hes ended up in.

Anyway so I guess the lesson for all of us is stay away from "messy" deals...and do your homework.

He would be able to pull through this if he works like a dog for 5 years.....I've suggested that would work well and that if he can get through that even though he would have no life for 5 years, that he will be mentally tough in the future.

And, he assures me..... straight!

So anyway I've seriously suggested he gets a lawyers advice on this one...

Any other suggestions...

JBR

 

[XBenX]

Thats still all over the shop ...

 

[Kevmeister]

I'm confused.

So the bank has settled a loan on a property and it now turns out that the property's value is $100K less than the bank valued it at.

WHY SPECIFICALLY is this guy in a panic? The bank doesn't even know about the current value of the property, do they?

As far as your friend is concerned, the property is still worth the value he paid for it. He has no reason to tell the bank that the property may have reduced in value?

So why are the bank going to "come after him". If he's paying the loan I don't see the problem.

It *seems* like your friend is worrying about something that might happen (bank foreclosure for example), not something that will happen.

 

[asy]

Originally posted by JBR
Yep it was a cashback deal....

I'd say the vendor was definately in......otherwise how could it have been done.

Yep, the vendor probably knew all about it, and the vendor probably thought your friend did too. I wouldn't be too hard on the vendor unless you knew they had some "relationship" with the person who sold this to him. Who was it by the way??

So he got some cashback as i understand it, but the place has been settled for more than a year.....and the "cashback" to service is gone. Thats what i'm led to believe.

What do you mean, the cashback to service is gone?

Usually in a cashback deal, (or vendor rebate deal) the money that gets given back is done at settlement.
How did this deal work?

Its a criminal offence..no doubt! BUt I'd hate to see a young idiot like him go to jail for signing his name away.

Nope, sorry, this is not a criminal offence, the way you have portrayed it. Well, not on the part of the seller. The only offence your friend has committed MAY be obtaining funds by deception, and this depends on how much the bank knew, and what the original valuations came in at.

Hes talking about making himself scarce......I'm assuming the bank would take the house and sell it.....not retrieve 100K of their money and either sue him for it.....well they would try....then not get any of their money, ( he gets a judgement against him but makes no difference to him),

He is a dill. He should (IMHO) go to the bank, and say, look, this is whats happened, I don't want to default, can we come to an arrangement...
The banks don't generally WANT to default. If his suggestion sounds half reasonable they are likely to accept it...

and more than likely pass that on to the fraud squad.

For what? Unless you are talking about the funds by deception thing, and that would be a last resort...

I said to him, gees, its almost fugitive stuff. well it could be if he doesn't keep the balls in the air.

Not fugitive, but uncomfortable in the least...

Anyway so I guess the lesson for all of us is stay away from "messy" deals...and do your homework.

Good advice to anyone !!

So anyway I've seriously suggested he gets a lawyers advice on this one...

As per my last post, bloody good idea that! Depending on what he wants to do, since he has already settled I don't see that there's much the lawyer will be able to do.


I would be really interested to know who he bought this property through? Please let us know.

By the way, I am not saying that the seller was right in what they did, it obviously should have been explained MUCH better.. But then we don't really know what the deal was, your description is not really very clear. I am just talking about the 'legalities' as I see them in your post, and remember I am not a lawyer!!!!!

hope this helps

Asy

 

[Glenn]

Hi JBR,

I feel for your friend, especially as I was stung in a Ponzi scheme a few years ago....the things that rational, hard working people will do when a bit of cash is waived in front of their eyes is amazing...

It will be a good lesson for him from here on in as now the only investments I will make are direct property and shares/funds.

Glenn

 

[Lotana]

Are cashback deals legal?

I think in a cashback scenario receiving funds by deception is only one side of the coin. The other side is CGT liability. Of course, it is not triggered until the IP is sold, but when it is sold he would have to reduce the capital base by the amount of cashback to remain clear. I was offered a similar deal on a unit offered for $330. The vendor was keen to sell so they offered to put $380 in the contract, or up to $400 if I pay them $2 more. Valuations for similar units in the same building were around $380-400 (based on contract value of previous sales which I suspect were similar deals to what I've been offered). It was so tempting, that I had a sleepless night over it, but then called the solicitor and asked to change the figure in the contract back to $330. I can recall an article published in the API magazine about these deals.

Say cheese

Lotana

 

[michaelg]

Hi,

The ideas people have mentioned are worth thinking about. Something worth asking is whether your friend bought this as an investment property or not.

Get him to check his mortgage documents, see if he has waived his right for consumer credit protection.

Just check where he has sign and see if it mentions the consumer credit code. Usually if its an investment property you sign to say you're not going to be covered.

Basically, if he is covered under the consumer credit code, he can appeal to have his payments adjusted, this usually means the term of the loan is extended.

This avenue would only need be taken if he has a cashflow problem.

I spose, if he got the loan payments reduced sufficiently, he could also try and onsell with vendor finance with instalments equal to his loan payments to break even?

I like the idea of subdivision or moving putting another house on the back. I assume its a free standing house on a block of land.

If its close to a uni or something, maybe subleasing each room out, could boost cashflow too.

Also I would be interested to know how the cashback failed. As Asy said, in such deals this usually means the purchase is only valid once all the terms of the contract is met, one being that the mechanism of the cashback is fullfilled. If the cashback was not executed as the contract states, then would this not mean the contract was not completed properly by the vendor? When was the cashback suppose to happen?, Again, as Asy said, this usually is at settlement, how long has it been since settlement occured?

Michael G

 

[brains]

The way i see it (i could be wrong tho) is that if your friend was not aware of the deception he has commited no crime.

"Fraud squad"," fugitive" "making himself scarce"and terms are a little melodramatic, yes?

And another thing, why doesnt anyone attempt to pursue the guys the property was bought off, these are obviously the ones who have committed a crime.

ps: As a last resort, he could claim bankruptcy and can the whole deal........sounds better than your description of his next 5 years....

 

[Macca]

I am as confused as every one else, but I will add my bit.

To be able to over value a property by 100k it must be a reasonably high value prop. You couldn't o/v a 150k prop by a 100k but you could easy overvalue a 500k property by that much.

If the property was puchased 1 year ago it must have increased by something by now. There is no cap city in Australia that has not increased in value. Couldn't he sell the place and repay the loan? If there is a short fall of say 20k, then simply pay it off over 2-3 years and start again. He will protect his credit rating, and be a lot wiser next time.

Macca

 

[bundy1964]

If he can service the loan there is no problem......

If he can almost service the loan then there are people here who know some good baked bean and rice recipies

If he blew his cashback and is not close to servicing the loan then there is a quote that is appropriate "What doesn't kill you makes you stronger" plead stupidity to the bank and see if they can help.

bundy

 

[Jamie]

Hi All,

Have to agree with brains, Macca and Bundy here,

Surely the situation is not as dire as you imply? Has your "friend" explored all other avenues? Talked to an accountant, solicitor, fin. planner? Are the"valuations" by panel valuers?

Please let us know the outcome...

Jamie.

 

[Kevmeister]

I'm sorry, I am starting to wonder if JBR (the poster) is actually the person in trouble here. The lack of cohesion in his writing, and the melodrama (as brains put it) suggests it could be *he* who's under pressure...

 

[Lotana]

Kev,

I don't think it matters that much. Whoever the person in trouble is - we should help him/her if we can.

Say cheese

Lotana

 

[XBenX]

well said