Costs in the contract

[carswell]

I am currently in the process of doing my first wrap (Terms contract), I have found my buyer, screened him and have gone through the contract.

We are almost at the stage of him looking for the property. He has agreed to pay listed price plus my costs, so in the contract is it better to put the listed price plus my cost as the price he is paying me for the purchase of the property or is it more benifical to put the list price as the price he is to pay and then listing the cost seperately, this way it reduces my capital gain and also saves him some stamp duty.

Your comment would be much appreciated.

Matt

 

[paulzag]

Hi Matt

Congratulations on getting started. That puts you in the top 30%, 20% or 10% depending on whose figures you use.

I am curious as to whose strategy you are following.

If you already have a terms contract but are unsure how to phrase it something is wrong.

In NSW and Qld you need a specific property on the contract. So you should know your costs to within fifty bucks worth of disbursments. You cannot enter a truly binding terms contract while your purchaser hunts for a property. I am guessing you have a suitable property in mind.

Secondly your solicitor (who drew up the terms contract) should guide you on how to phrase the price. I believe you should put a specific dollar amount down. There are stamp duty and enforcability issues here.

I would be tempted to have your costs payable outside the contract.

You shouldn't be having any capital gain either! Wrappers in NSW and Qld normally operate as a trader. Of course you may prefer incurring a Capital Gains Tax liability on the contract's exchange date. I don't.

Lastly I don't like letting wrapees find their own property. As a rule you waste a huge amount of time on deals that never come off. Sure I've allowed some people to find their own house, but it normally doesn't work.

Let us know how you're going.

Regards

Paulzag
Dreamspinner

 

[kylie500]

The laws on wraps differ between states - where are you?

When you say that your buyer will pay listed price plus your costs, do you mean that they are paying you the same price for the house as you've paid for it? (plus your costs). Normally, you'd add a contract profit into the deal, as well as an interest rate spread.

You'd really need to have the property under offer before you could have the contract drawn up, although you could go through a generic contract with your buyer just to explain the terms and how it all works.

I had the specific dollar amount of the sale put into my contract. The costs you incur are deductible anyway, so I'm not sure there is much benefit to listing them separately, and the money you receive from the buyer to cover your costs may be classed as income anyway (any tax people here please correct if I'm wrong...)

The way I understand it, the capital gain I pay is broken up per year. For example, I received a $15,000 contract profit over a 30 year term. So my capital gain per year is assessed as $15,000/30 = $500 per year. I much preferred this to paying CGT on the whole $15,000 in the first year!

I have had buyers find their own house which worked out very well. I've also had others (who I didn't end up wrapping to) who went looking for their own house, who wanted to buy houses that were around twice what they could afford.... so I think it depends on the buyer - and you need to set very clear guidelines as to what you are prepared to buy and what they can afford. If this works, it can save you time in looking at houses.

Kylie

 

[paulzag]

Hey Kylie

Did you ever have a buy find the perfect house for themselves that would be a nightmare to sell if they ever defaulted? It happened to me, and they did default. Luckily prices had jumped, and they'd spent $40K renovating, so they bought me out 2 weeks before the auction.

On the capital gain tax side, make sure you've covered your bases. The basic application of Capital Gains Tax law is that the property is sold on exchange. Things may have changed over the last few years, but unless you were set up as a trader, that was the case. I guess the Vendor Finance Association could throw some light there.

I guess I shudder when I hear people re0inventing the wheel. Sure when I did my first wrap and lease/options there were no wrap packs or associations. We made the rules up as we went along. Now however there are great cheap sources of information.

Regards

Paulzag
Dreamspinner

 

[carswell]

Sorry Paul & kylie, I should have given you a little more info.

The method I was taught was from Rick Otton and I know Rick's stratergy is to buy the house first then find the buyer. The reason I have gone the other way, is I did not want the house sitting for months while I was trying to find the buyer. I know houses can sell very quickly under wrap contracts, but because I advertised in the local paper up here in Cairns and did not receive a very big response, I was worry that the house could more then like be on the market for a while. So for my first few I thought I might find the buyer first and give them a price range that they can afford (Going on my Calculations)and let them go out and choose the property.

The listed price is what is what it is advertised for, so my profit will come for me negotiating a discount off the listed price. I am getting my buyer to choose a few properties so I can go with the one that gives me the best discount.

This is all a big learning curve for me, they say your first property is your least profitable. Because it is all new, I find myself sometimes commiting to different things with the buyer and then thinking afterwards that I should have commited to something else. I do not want to say one thing to the buyer then change it at a later stage, I just do not think it is very professional. As long as I learn for next time that is the main thing.

I am just finding it really hard to know how much to add on or mark the property up, I do not want to rip people off, but at the same time I do not want to skim myself too much either.

I have heard other people who find the buyer first say they add 15 to 20% onto the purchase price.

On a $150k house that is 22.5K to 30K, I do not feel comfortable marketing properties up that much. I just want to do the right thing by the buyer and the right thing by myself, it is finding the happy medium that is difficult.

The steps I have taken so far are:

Advertised for buyer. (Found a good candidate, with a sizable deposit and on a good income.)

Got the buyer to fill in an application form and provided me with his credit file.

Verified income and got tenancy references, all check out OK.

Met the buyer and went over the contracted. Gave him a copy to take to his solicitor. I also told him he would have to pay me a document preparation fee and he would have to pay stamp duty on exchange of the contracts.

After he has received legal advise, then the next step is for him to go out and choose the house.

Other points:

My contract is a Deacons contract which came with Rick Otton's Wrap Pack.

I charge a 2% spread.


Before I do my next wrap I am really going to have to think how I am going to provided myself with a better margin without feeling as though I am overcharging for the property. I just do not feel right charging people $15K to 20K over the market price.

Anyway just something I will have to give a lot of thought to on my next wrap.

Regards,
Matt

 

[asy]

Originally posted by carswell
Before I do my next wrap I am really going to have to think how I am going to provided myself with a better margin without feeling as though I am overcharging for the property. I just do not feel right charging people $15K to 20K over the market price.

Hi Matt...

I understand where you are coming from, but remember, you are selling your right to the capital gain, and giving ppl a 20 or 25 year contract.

If the property is $150k, and rough rule of thumb is it will double every 10 years, then in 20 years time the property will be worth approx 600k. $25k doesn't seem much in a capital gain, over that time, of $450k, does it?

I understand that Rick's method allows them to cash out in a year or two, but, the reality is, you are still selling your capital gain, and they are buying somehting they would not have otherwise been able to buy. And they don't HAVE to cash you out, they may choose to hold you to the 25 year deal.

By all means, don't rip ppl off, but look at it in perspective.

hope this helps,

asy

 

[paulzag]

Hi Matt

Thanks for the added detail. Yes you are on a learning curve and you will make mistakes. If you survive them you will be that much better off for the long run.

A concern I have is that if you have Rick's Wrap Pack it is a turn-key manual for wrapping. Why are you changing the fundamentals?

Interest on a first month vacancy is $875.00 maximum ($150K @ 7%). HAve you considered delaying the settlement and marketing the property during the settlement phase? That is worth negotiating with a vendor. A professional image is easier to project if you are offering a simple deal. Think "here is my house, this is the price, that is the contract."

If you have to negotiate a discount with the vendor in order to make money, there is not enough in it for most wrappers. Plus you risk resentment from the buyer who wonders if he could have negotiated a better deal.

You are tying up your borrowing capacity and taking a risk. That is worth something.

Regards

Paulzag
Dreamspinner

 

[carswell]

Thanks everyone for your comments.

I suppose it is a liitle daunting at the start, but once I have my system in place it will become a lot easier. It is just a matter of developing a system.

Once again, thanks.

Regards,

Matt

 

[kylie500]

Paulzag,

Yes, we did have potential buyers who found unsuitable houses. In our case, it was people finding houses in small country towns, that we thought would have been difficult to resell if the buyer defaulted. You do need to be careful in your selection of property and definitely consider the resell options if your buyer defaults, because, as you obviously well know, it does happen.

We followed Steve McKnight's wrap system. I'm not that familiar with Rick Otton's system.

Matt, we bought a house for $72,500 and resold it to our wrap buyers for $88,000, with a 2% interest rate spread. They knew all this right up front and were happy with it. What asy says is very true, you are providing a service to these people that they may not be able to get elsewhere - and you are giving up your capital gain. With this particular house, I've watched it increase in value to the point where it is now worth well over $100,000 over a two year period, so in this case, we would have been better off buying and holding this property. So you need to consider all these things and not feel that you are ripping people off when you are doing wraps.

 

[carswell]

Kylie,

Is Steve McKnights system, where you find the buyer first and then they chooses the property but they pay a percentage mark up on what ever the property costs you? Or do you find the house first then the buyer?

Matt

 

[asy]

Hiya Matt...

Kylie, hope you don't mind if I answer, feel free to disagree or add

The differrence between Rick and Steve's methods is simply their cashout timing.

Steve's system is to wrap to 'battlers', ppl who in all likelyhood will not soon qualify for a loan and help them into their own homes. He expects the wrap to last the majority of the wrap term, and therefore the interest spread is more important to him than the markup.

Rick's system is to wrap to 'difficult loans', ppl who have money, or would qualify for a loan except for one little thing, which may be a prior bankruptcy, or no savings history, or something like that. He expects the wrap to last only a year or two, and even helps his wrappees find bank loans. Using his method, the markup is more important than the interest spread.

hope this helps,

asy

 

[kylie500]

No problems asy.... I didn't know about rick's methods anyway...

In Steve's system, you find the buyer first and then the house. But I have done both... in one case I found the house first, so I basically held an open house and spoke to everyone about the way it worked, they looked through the house, and in the end I had quite a few buyers that I was happy with (and quite a few I wasn't!). In another case, they buyers found their house.

I like Rick's idea of helping them get out of the wrap in only a year or two. This way, you get paid out your contract profit and can use that money, rather than having it tied up for a long time. I wish one of my wraps would pay me out now!! Also, if you were to wrap to someone who had a substantial deposit, it reduces the amount of money you have in the deal, which I like.