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.
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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