Creative contract pricing

[Williamyuan]

Read a Jenman article about Jason whitton mentioning a technique where contract price is artificially inflated for the benefit of bank valuation, but the actual price is lower because of a vendor rebate, eg buy property for 200,000, contract price 240,000, with 40,000 rebate, so can get loan on 240,000. Had thought about whether this was possible before, but didn't think people actually did this, mainly because hard to enforce the discount and would give you bad reputation with banks if found out...
Wouldn't do this myself, but wondering if people have heard of that actually happening or if it isn't technically feasible.

 

[Peter_Tersteeg]

I'd be very interested to see a copy of this article. It appears to be advising people to commit fraud. A bad reputation with the bank would be the least of your problems as if they detected it, they would report it to the appropriate authority.

You'd be unlikely to get away with it. You'd also have to put the inflated amount on the transfer of land (otherwise the the banks solicitors would pick up the discrepancy). If the contract being acted on by the bank and the office of state revenue is the one being used, there's probably little obligation for the vendor to rebate the $40k. If you tried persue them for it, your fraud with the bank would also become apparent.

The only way to do this would be to make an offer of $240k, then write into the special conditions that the vendor will rebate $40k at settlement. This is perfectly legal as everything is fully disclosed and you'll pay stamp duty on $240k.

The problem is the bank will see the special condition and either refuse the application, or simply value the property at $200k and lend against that amount, so you'd have to come up with the $40k for the vendor to pay back to you after settlement. You'd also end up paying more stamp duty.

One tactic I have seen executed successfully is to pay fair value for the purchase, then for the vendor to leave an amount of money in the deal for a period of time at a given interest rate. Most lenders don't like this sort of thing much either though.

 

[moyjos]

Isn't this essentially the same as developers "sweetening" the deal with cash back offers, free cars, free holidays etc?

The loan is based on the higher price and then the bonus comes after settlement.

eg: GJGardner cash back deal

Free Car

 

[Williamyuan]

The article wasn't promoting fraud, the article was criticizing such practices. Actually, I think the main problem with that idea is that it could be seen as a tax avoidance strategy as it would minimize cgt. Not a good area to get creative in, considering what happened to al Capone.

 

[Peter_Tersteeg]

Isn't this essentially the same as developers "sweetening" the deal with cash back offers, free cars, free holidays etc?

The loan is based on the higher price and then the bonus comes after settlement.

eg: GJGardner cash back deal

Free Car

Valuers and lenders are getting wise to this as well. They're deducting the value of the insentives from the purchase price.

 

[Terry_w]

The NSW law society has advised solicitors not to act with such contracts where the main purpose seems to be for the borrower to borrow more as this could amount to fraud.

There are also judicial comments criticising the practice.

 

[SYD]

Why is it when I see the word creative on SS I'm thinking the correct word should be dodgy?

SYD

 

[Andrew_A]

Isn't this essentially the same as developers "sweetening" the deal with cash back offers, free cars, free holidays etc?

The loan is based on the higher price and then the bonus comes after settlement.

eg: GJGardner cash back deal

Free Car

Yes there doesn't appear to be a difference from an ethical perspective, perhaps from a legal perspective there is. The sweetners after the deal help keep the values up which is what the game is all about.

 

[Terry_w]

It would be ok to offer incentives. This is very common and done not just in property.

But it becomes unethical where the sole purpose is to borrow more - unless done with the full knowledge of the bank.

 

[Rolf Latham]

It would be ok to offer incentives. This is very common and done not just in property.

But it becomes unethical where the sole purpose is to borrow more - unless done with the full knowledge of the bank.

and therein lies the challenge

Most real "contract stacking" dodgies are where there is no disclosure made in the contract, or to the lender or valuer, and often some form of sie agreement existed.

In the heady days of healthy cap gain ( which would hide such sins) there were businesses doing BILLIONS of$ worth of transactions with loaded contracts.

ta
rolf