Deposit Bond

[WebBoard]

From: Mike .


More on property deposits
From: eaglehawk
Date: 22 Oct 2000
Time: 18:29:44

Thanks for the replies. Now for a couple more questions. What is Henry Kaye's theory as far as using minimal or no deposit for his property purchases (Greg H. - 22/10 - thanks for the emphatic response!!!)?

Also to Greg H. (21/10)- what are the deposit power bonds you refer to, and how are they used? Again, to Greg (22/10) - interesting technique - could you tell me also about the deposit bond you propose as the 5% deposit (what it is, how it works, etc), what the "equivalents" to the deposit bonds are that you refer to, and what you mean by "exchange" (in the bit about "within 21 days of exchange"). Wouldn't you still have to use your own money for the 5% deposit eventually?

Thanks - as you can see, I'm a novice at this game - I'm just getting into it.

 

[WebBoard]

Greg H

Reply: 1
From: Mike .


Re: More on property deposits
From: Greg H
Date: 22 Oct 2000
Time: 20:12:57

The minimal or no deposit is because you have a built in equity at the time you buy below market

ie. a 300k valued property that you buy at 10% below that price = $270k PURCHASE PRICE. so you have 30k of equity (obviously there are other costs involved but I'm keeping it basic to explain the principle).

When you give a deposit to the real estate, the vendor does not get this money until settlement.The purpose that this is kept with the real estate in their trust account, is that if you default after the cooling off period in the contract (usually 5 working days), the vendor is entitled to this money. A deposit power bond is an insurance company that will 'guarantee' the vendor the deposit money if you default, then come to you to recover the money. They charge a fee for this, which is far cheaper than what it would cost you to hand over the "cash".

When I put "within 21 days of exchange", this is because you can legally exchange contracts on 0.25% deposit ie 300k = $750.00 ........not much at all! This cheque given to a real estate when you offer a price shows them you are serious, and legal to exchange, and magical things happen to r/e agents when they get a cheque. Then I go and organise my deposit bond.

Most vendors want 10% deposit, I offer them 5%. This means that if you default they get 5% from the insurance company, but then have to chase you for the other 5%. Some vendors won't agree in which case you have to give them 10%. The cost for a 5% deposit bond is cheaper for you to finance, and that is the sole reason I use 5%.

I always want MINIMAL cost to myself.

Hope this helps.

 

[WebBoard]

David P

Reply: 1.1
From: Mike .


Re: More on property deposits
From: David P
Date: 23 Oct 2000
Time: 11:00:03

That is very interesting Greg. How did you learn about this method? How do you manage to buy the property under market value, sounds like if you don't then you cannot buy without a cash outlay. This appears to be a important point to the strategy.

The other problem I find is having enough cashflow to keep the banks happy with wanting to lend money. What about getting around this?

David

 

[WebBoard]

Owen

Reply: 1.1.1
From: Mike .


Re: More on property deposits
From: Owen
Date: 23 Oct 2000
Time: 10:53:30

When you buy an IP in this way are you planning to on-sell (flip) it before completion or hold and rent?

I like the idea of using deposit bonds when buying a new development off-the-plan 12 months from completion and then flipping it for short term gain. If I do this how do the numbers work because I assume you still have to pay the deposit bond company the real 10% amount on settlement?

Example:

$300K IP x 10% = $30K deposit leaving $270K balance.

Deposit bond cost say $1500 (?)

Flip 12 months later before settlement for say $350K.

New buyer gives vendor $270K balance, deposit bond of $30K also goes to vendor, I get $80K cash from new buyer and still have to give $30K to deposit bond company to pay that off. This leaves $50K minus original $1500 investment = $48500 profit.

Anyone doing this and if so are my numbers right and how do you organise the contracts for this? Any capital gains tax implications? What about stamp duty? What amount and who pays it?

Any help would be appreciated.

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1
From: Mike .


Re: More on property deposits
From: Gee Cee Then the market turns
Date: 23 Oct 2000
Time: 19:35:29

I know a lot of people are making big $$$ this way.

The downside is that when the market suddenly turns and prices drop what was to be profits soon becomes BIG LOSSES.

I have been through the 1978-1981 boom, the 1988-1990 boom and yes history does seem to repeat itself.

If your lucky enough not to have the property sold before this happens the dollars are big.

BUT if you are holding as interest rates take a rocket, prices take a dive and you have to pay up the money to settle then sleepless nights can certainly endure!

As well there may be so many other similar properties available that not only will property values dive but rents also drop.

Not a pretty picture!

I prefer to call it speculating: not investing.

If you are willing to way up the risks and go for it great. I am just a bit too settled in my lifestyle to go back to doing night shift.

That's how I feel.

Gee Cee

P.S. OK call me a Pessamist.

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1
From: Mike .


Re: More on property deposits
From: Gee Cee Not having ago at ya
Date: 24 Oct 2000
Time: 05:12:54

Hi Owen

I read through my reply post this morning and it sounds a bit like I am having a go at you. I certainly wasn't. I am just a sceptic as to how long people can make $ buying off the plan.

Also thanks for your recent info regarding finance contacts.

Hope to see you at the Rockdale bash.

Gee Cee

PS Are you going to bring the Merc ?

 

[WebBoard]

Owen

Reply: 1.1.1.1.1.1
From: Mike .


Re: More on property deposits
From: Owen
Date: 24 Oct 2000
Time: 09:30:06

You must be a lot more sensitive than I am. Couldn't see a problem with your reply myself. You are 100% correct in saying flipping is speculation. You would only be able to do it in a certain market (boom time) and be very sure you could cover things should they go wrong. All finance in place etc.

I guess if you can't find a seller then you have bought well anyway and you just have another rental but that has to be calculated in as a possiblity. Risky stuff but interesting and pretty cool if it comes off. One at a time though.

As for lunch. Yup see you there. Michelle's coming too. Don't know anything about a Merc though. It'll be a Mangler...I mean Magna for us. The '82 Commodore Wagon was a victim of the hailstorm (should have bought it back from NRMA). Ahh the things we miss.