Creative investors must read (long)

From: Nigel W


There is a great article on page 26 of the latest API. Whilst the title is slightly misleading as the issues concerned are much broader than just "early settlement" discounts, it should be compulsory reading for all outside the square investors.

It seems that an increasingly common practice is to have a contract with a purchase price of say $300,000 between buyer and seller and then a side letter between buyer and seller where the seller agrees to rebate or credit or pay back or whatever the buyer say $60K.

thus the real purchase price is $240K. The buyer then rocks up to the bank or their broker and says gimme 80% lend on a purchase of $300K and viola 100% finance no money down deal.

WRONG. In fact its not just wrong, its FRAUD. You have obtained money under false pretenses and everyone involved could be accessories to your criminal act.

Let's clarify. It is the deception, the lack of full disclosure to the lender which is the dishonest and illegal act.

There is nothing wrong with having a clause in your contract or indeed in another contract which provides some sort of rebate or under which the vendor pays the buyer's costs and stamp duty or some fixed fee for just being so darned good lookin'! The important point is that IT MUST BE DISCLOSED TO THE BANK.

As long as you give the bank all the documentation, if they want to finance to 80% on the above deal then good luck to you and bad luck for them for not properly reading your agreement/s. The flip side of course is that you can't dissemble or be dishonest if some bank johnnie/johnette rings and asks you what special condition 6.4A(3)(c)(i) actually means.

But remember too its not your job to do the Bank's job. you're quite entitled to say "look I'm not here to give the bank legal advice, I just want my loan. Please give me the money."

While the practice is not new, I think it is gaining prominence because a number of walk fast, talk fast "Property Gurus" tout this as one method of getting 100% finance when you haven't got 2 cents to rub together and as an easy generator of instant equity.

Apologies for the length of this note but I think its instructive to set out the following exchange I had with a "Guru" about 18 months ago at the introductory night of one of these seminars, in Brisbane. (I won't mention names. It's not the one you're all probably thinking of but someone like him). This took place over the course of about 10 minutes. I don't set this out to make out I'm some sort of hero or white knight, but just to highlight that you need to critically consider what you hear and read.

Guru - explained how to do the above. "Any questions?" "No. Okay let's move on..."

Me - "Wait a minute, I've got a question".

Guru - somewhat exasperated but motioning for me to proceed.

Me - "You just said you don't disclose your side deeds to the bank. Is that allowed?" (playing dumb to bait the hook)

Guru - "I've done over a dozen of these deals and the bank never has a problem with it" (A number of questions arise here. One irrelevant one for the wryly amused is probably why not just say 13?)

Me - "But you just said you didn't tell the bank, so how do you know if they have a problem with it or not? You haven't told them so they can't even make that decision."

Guru - "the banks screw you over all the time with high fees, this is just getting even!" (Audience laughs - hey everybody loves to kick the banks!)

Me - "If the banks wouldn't have a problem with it why are you hiding all the details of the deal from them?"

Guru - "It's not their business - I slap a confidentiality agreement on the seller so they can't discuss it either!" (Guru looks around with self satisfied smugness - they like to "impress" ordinary people with apparent familiarity with all the technical, scary legal jargon and secret techniques.

Me - "In my experience banks care about 3 things - the 3 "C's" - capacity to repay ie a job, collateral - what the house is worth and character - whether you've got a track record of savings and pay your bills on time.
From what I understand you're saying, you mislead the bank about the value of the collateral to get them to lend you more money than they would if they knew the truth."

Guru - Cuts me off at this point and switches to a personal attack to try to undermine my credibility "You say in "YOUR" experience. How many properties do you own?"

Me - "One" (at that stage)

Guru - "well I've bought more than a dozen" *derisive sneer from the guru at the fact I'd only bought one place vs his ?(there's that elastic measure again)* "and I have legal advice, a QC's opinion that says everything I'm doing stacks up and is kosher"

(This is just a prime example of "if you can't pound on the facts or the law you pound on the table". People (even solicitors) like to prance around claiming that they've got a barrister's opinion or even better a QC's opinion that they are right. It reminds me of the school yard game of my dad can beat up your dad...incredibly purile and largely irrelevant. Ask the ATO what they thought of those QC's opinions supporting those tax avoidance schemes...In the law, as in life, you're either definitely right, definitely wrong or the matter has yet to be conclusively determined by the courts. Just cause his lawyer says its so doesn't make it so. in fact his lawyer (if he saw one) probably didn't in fact indorse this practice. Most legal opinions contain numerous qualifications and assumptions.)

Me - "I'd get a new lawyer if I were you!" (Small titter from audience) "The practice you have just described is fraud. The bank can sue you for any loss it suffers. Depending what the loan says it can probably accelerate the loan and demand immediate repayment too. More importantly what you seem to be advocating to everyone here sounds like a criminal activity!"

(Some murmurs of disquiet from the audience as well as a couple of "Sit down and shut up's" from the back - oh well some people are just ungrateful or don't want their new found "wealth faith" to be rocked...)

Guru - (somewhat exasperated by this stage) "Look! You say one thing, I say another and my lawyers back me up. We've got a lot to get through tonight and all these good people here [butter up the audience] are here to listen to me [ooops there's that ego] telling them how to get out of the rat race and live a dream life because I've done it!
I'm happy to talk to you about it after the seminar tonight, and anyone else whose interested to explain what we do. I've got nothing to hide and what we do is perfectly legal and legitimate"

Postscript:

The "Guru" declined to answer my or other people's queries after the seminar as he had to "catch a plane" to give another talk in Melbourne [i guess it must have been my fault he was running over time] but promised all and sundry that we could email him on his website or his salespeople...er consultants could answer our questions.

Needless to say the salespersons' spruiking was the usual (this is all so secret...other people just don't know this stuff..."Mr Guru" explains everything in his weekend seminars...)

Caveat Emptor. By all means be creative, but don't sacrifice your integrity and good reputation and get a criminal record just to make a few lousy thousand...

Money comes and goes. fortunes are made, lost and won again. But Reputation - that is immortal.

N.
 
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Reply: 1
From: Gail H


Well, I am a barrister and here is my opinion - what guru describes is called obtaining a financial advantage by deception. It is liable to a term of imprisonment of 5 years under s82 of the Crimes Act (Victoria).

Cheers

Gail
 
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Reply: 1.1
From: Abc Abc




In the 1940's after the war there was a shortage of housing and just about everything else. Price control was implemented to prevent profiteering. There were contracts for property that stated the purchase price "and a brown paper bag". The bag contained anything up to 30% of the purchase price in cash.

This system worked for several years in Sydney and Melbourne to the sellers advantage, but there is no reason why it could not work the other way. You pay full price and the vendor gives you your deposit back in cash and as a separate contract not part of the contract for sale.

There will always be those who avoid, circumvent and bend the rules.

It's easy as abc.
 
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Reply: 2
From: Rolf Latham


Hi Nigel

How does this sit with the all the wrap deals that are out there "whithout" disclosure - like "just put it through and dont tell em its gonna be an installment sale" ?

Ta

Rolf
 
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Reply: 3
From: Rolf Latham


Hi Nigel

Just on that point, valuations are becoming an increasingly common request where once you could sail through with just a contract price.

The lenders generally are on to this sort of stuff, especially concerning new property, and anyone that tells you they can get away with a 20 % + mark up on new stock on a regular basis is full of themselves (at least today)

Ta
Rolf
 
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Reply: 3.1
From: Jeremy Laws


No one is dum enough I thought to run with that the way you said. I have heard of a discount for a 'fast' settlement though....
 
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Subject: Creative investors must read (long)

Reply: 4
From: Ross Sondergeld


Hey Nigel,



Subject: Creative investors must read (long)


Great post. Actually... it was SENSATION. ;)

And i would also like to congratulate you on challenging a "guru" at their
sales presentation. It takes guts to stand up in front of a room/hall of
people and outline the FACTS.

I wish i was there...


Ross on the Gold Coast
Buyerside Real Estate

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Subject: Creative investors must read (long)

Reply: 1.2
From: Ross Sondergeld


Hi Gail,


Subject: Creative investors must read (long)

You said, "Well, I am a barrister and here is my opinion - what guru
describes is called obtaining a financial advantage by deception. It is
liable to a term of imprisonment of 5 years under s82 of the Crimes Act
(Victoria).

Great to see a lawyer in property inevstment cyber space.

Good to get an expert opinion. Thanks...


Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" Imagine buying real estate the easy way...
...with a Buyer Agent on your side!!! "

Buyerside Real Estate Mobile 0412 289 464
Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
Robina QLD 4226, Gold Coast Buyerside@hotmail.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


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Subject: Creative investors must read (long)

Reply: 4.1
From: Bruce Graham



Gail,

It's only illegal if you get caught.

If the banks only knew of my deceptions they
would hang me.

Bruce G.(Sydney)
 
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Subject: Creative investors must read (long)

Reply: 4.1.1
From: Anonymous



I say go for it and do what ever you can to get back at the banks.

Just dont get caught.

For those with their heads in the sand, the banking system is one of the most corrupt systems in the world if you didnt know.

They have been screwing all of us for years
and doing it legally with the help of their partners in crime - the government.

For some real life examples read the Aust book " Bank behaving badly".

Or do some research on fractional reserve banking and find out how the banks use our money to create money out of thin air !!

Or check out this site to open your eyes :
"http://www.themoneymasters.com/


Bernie Frasher
 
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Subject: Creative investors must read (long)

Reply: 4.1.1.1
From: Dirk Diggler


Here Here Mr Anonymous, I agree entirely. Their is nothing wrong with creative deals, within reason as long as you are not caught!
I have very little respect for bankers. Given half a chance they would take your hard earned money and creatively blow it at the pokies. Not one month goes by were you read another story about a banker going to the grey house. And usually its one thats starts with N and ends with L!
What is wrong with inflating a contract price, if you have bought well below market and have an early settlement discount clause with the vendor? Bankers usually dont congratulate you for purchasing under market.
 
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Subject: Creative investors must read (long)

Reply: 4.1.1.1.1
From: Michael Yardney


I would like to argue with the point made that it's only illegal if you get caught.
THAT'S WRONG.
Illegal is illegal.
Don't do the wrong thing - by the banks or other people.
Becoming wealthy through property is easy, there are so many good examples of it in this forum. Always deal with integrity.
Now before you ask "what's he on?"..... I'm no angel!
I have done more than my share of incorrect things in my personal life many years ago and I'm still paying for it .. so I'm speaking from experience.
By the way, the banks are really just money shops - it's their job to lend you money. If they are not giving you what you want maybe you're pushing it a little. If you don't feel comfortable dealing with them, and I understand that, use a good mortgage broker like Rolf to act on your behalf. He will tame them for you.
Michael Yardney
Metropole Properties
 
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Reply: 2.1
From: Mike .


Hi Rolf,

You said:

How does this sit with the all the wrap deals that are out there "without" disclosure - like "just put it through and dont tell em its gonna be an installment sale" ?

Good question. Also how does this sit with Vendor Finance (WRAPS) Association given that they intend...

To develop a code of ethics in conjunction with the Department of Fair Trading by which association members will adhere to whilst vendor financing.

Point is will wrappers adhere to Fair Trading and Assoc ruling if lenders won't lend on a wrap? To get a loan, will wrappers have to continue keeping quiet about their wrap activities?

Mike
 
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Reply: 5
From: Michael G


Nigel,

Great read, just would like to add that this goes for wraps too. The big banks have made it clear they don't like wraps. Some lenders are fine with it.

Best advice I got was use a broker, disclose everything to them, let them sell you to the banks if need be.

Wraps is a business, meaning repetitive deals. So you don't want to lie to your business partner (the bank) for the sake of getting ONE loan. You're there to explain you want to borrow often, so its best to find the lenders you will work with you, not against you.

Work on the Character part, this will get you more money than fancy contracts. Bank's and bank solicitors start off skeptical and paranoid, they are not going to take your word for it, they are going to check everything out for themselves.

Just a thought

Michael G
 
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Reply: 2.1.1
From: Michael G


Mike,

No, there are ethical wrappers out there, you can still find finance, it just takes more effort thats all.

Put it this way, if someone's prepared to lie to their own lender, how the hell do they expect to be treated by their wrappee's?

Do unto other's as you would have done unto you :)

Just a thought
Michael G
 
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Reply: 5.1
From: The Wife


Great thread,

Just to add my 2 cents, a banker told ME how to do this so called 'creative' finance, not your average bank ' teller' though, one a little higher up.

The bank world is amazing, and is full of crooks, as are most industries. But seriously, you dont want to play hardball with banks, rather, make them your friends, your partners, think of it a little more differently, and stop dealing with bank tellers, go to either intelligent brokers, or go to someone higher in the bank or in the business section, they are allowed to be a little more creative.

The "Guru" in Nigels story was right about something, character, some bankers do take into consideration your track record. Many a time I have sat in front of a banker and said 'come on...I've done it heaps of times now, it worked,I made great profit, look at all the records I kept of the transactions.
( this is usually for buying multiple properties at one time)

Good Luck

TW
~IF it feels bad, trust your instincts and dont do it~
 
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Reply: 3.2
From: Nigel W


Rolf and others

The same principle would apply to wraps. In fact in my view, (and people should get specific advice for their circumstances) I think a bank would take a dim view of an undisclosed wrap transaction.

Why?

Well what does joe average bank want to do if you don't meet your mortgage repayments? Take possession and exercise power of sale. Banks don't want to be landlords, they want to be banks. The wrap tenant/buyer would be problematic for them exercising their rights. It's really hard to sell a property with a tenant in place, particularly when (to the average buyer) there's all this complicated stuff and web of potential rights and obligations in relation to the wrap buyer...

The basic principle I suspect is always, be up front and shop around because some bank/financier will always do the deal

(and of course, the easy way to find one who will is to ask Rolf, our resident mortgage broker!)

I should probably clarify, in relation to advisers such as mortgage brokers, that at the end of the day you only know what your client tells you. Whether you should have put 2 and 2 together and realised or suspected there was something dodgy going on is always a difficult call and its easy to be wise in hindsight. The best protection, as always is detailed contemporaneous diary/file notes of everything.

Cheers
 
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Reply: 5.1.1
From: Nigel W


On 4/22/02 7:43:00 AM, The Wife wrote:
>Great thread,
>
>>The "Guru" in Nigels story was
>right about something,
>character, some bankers do
>take into consideration your
>track record.

Actually I said that. I don't think the "Guru" had much character!

N.
 
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Reply: 5.1.1.1
From: The Wife


oops.sorry Nigel * gives you the new guru crown* :eek:)

TW
 
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Reply: 5.1.1.1.1
From: Nigel W


hardly. How about "guru in training"?

but i guess that makes me a "G.I.T"...hmm maybe not! ;^)
 
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