Deposit Bond

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From: Mike .


DEPOSIT BONDS
From: JODIE
Date: 13 Feb 2001
Time: 17:47:04

Hi ,

i was very very interested in these deposit bonds as my plans are to buy properties off the plan! Does anyone know how do the real estate allow u to do this? what exactly r they? and how can i go about paying the deposit bond rather than the whole 10% before the property is completed?

Thanx Jodie
 
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Max

Reply: 1
From: Mike .


Re: DEPOSIT BONDS
From: Max
Date: 13 Feb 2001
Time: 22:24:05

Jodie, Call me anytime on 0411 174 123 and I will explain to you how it all works. Regards Max
 
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Jodie

Reply: 1.1
From: Mike .


Re: DEPOSIT BONDS-Max,Simm,Terry etc....
From: JODIE
Date: 15 Feb 2001
Time: 17:47:22

Hi Guys,

Now im totally confused i think i better just tell u my situation then ask for your opinions. All this $19,500 business i live in Sydney's most expensive suburbs we are talking minimum $400,000 thats for a unit!

My situation: i have $25,000 cash in the bank & i work in the bank - will the bank give deposit bond to me for a $400,000 off the plan unit???? i do not earn 45K a year so is the answer no???

I want to buy off the plan then rent for a minimum of $400 a week taking approximatley $100-150 out of my pocket for a P&I loan. What should i do wait to save $40,000 or get a deposit bond or give up on the investment idea altogether????

help thanx Jodie
 
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Sim

Reply: 1.1.1
From: Mike .


Re: DEPOSIT BONDS
From: Sim' - MAX
Date: 14 Feb 2001
Time: 07:27:33

MAX, why don't you share your knowledge with the rest of the forum ? We're all here to learn !

Sim'
 
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John (Brisbane)

Reply: 1.1.1.1
From: Mike .


How Deposit Bonds Work
From: John (Brisbane)
Date: 14 Feb 2001
Time: 10:33:01

Hello Sim’, I’m with you there buddy!

I've done the HK course, so I'll tell you what I know.

You get a Deposit Bond from Deposit Bond Australia (DBA, AKA CGU Insurance) or a Bank Guarantee from your own bank if you are a high net worth individual. Both are essentially the same thing, but from different sources. You need over $45k/yr income and great credit rating to get just one deposit bond. Getting two is harder, getting three is very difficult. Hence a good relationship with a bank is a cheaper and more flexible option for this type of product. (Note To Self: shouldn’t use flexible and bank in same sentence) They are priced according to your credit risk, size of the bond, and duration of the bond.

A deposit bond is a guarantee by a third party that the vendor will get the bond in cash if she/he has right to it. If you enter into a contract on a long settlement period (over 120days) then the vendor will want this guarantee up front in case you default prior to settlement. The amount will typically be about 5% - 10% of the purchase price. You could give the vendor this in cash, but it does not make any difference to him as all this money goes out of his reach into a trust account anyway. To him there should be no difference whether it is an ‘unconditional promise to pay’ cash from a reputable financial organisation or if it is cash itself.

If you supplied a bond and then defaulted on the contract the vendor would go to the bond issuer for the cash, for which he would not be refused. CGU would promptly pay him the cash, and then CGU will come looking for you to recover their money. (i.e. two very BAD looking debt collectors)

If you follow through with the purchase, settle on the property and pay the full amount on the settlement date then the bond will not have been called upon. You have met your obligations and therefore the vendor has had no right to your bond. The bond is simply returned to the issuer (CGU) and cancelled.

WHY do all this? Well, you've got $15,000 to your name and you come across (3) $300k properties at a 15% discount to the market. They will be finished in 9 months but they will be sold this week cause the deal is so good (aren't they all?).

You could put down $15k and secure one, sell it at completion and make $45k. OR you could go to CGU, pay them $4.5k and get 3 deposit bonds each for $15k. You then go out to the market and try to sell the properties at say a 5% discount (just because your such a nice guy). Anyway you sell them all just before completion and make a $30k on each. All up you put down $4.5k and you made $90k. By the way, the full amount of $4.5k is tax deductible, while the other method using the $15k cash deposit, is not tax deductible.


It's all about leverage. They allow you to keep your money in your bank for as long as possible, and that must be a good thing. They also allow you to play around in the Big End of town even though you don’t have the money to do so. You have to be using highly charged strategies for you to have the need for deposit bonds. Umm……. Strategies, there’s a good discussion topic.
 
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Terry W

Reply: 1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: Terry W
Date: 14 Feb 2001
Time: 14:21:47

John

What happens if you can't re-sell the properties and you don't qualify for a loan that large.

Also do you have to pay stamp duty if you resell them before completion?
 
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Billy Boy

Reply: 1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: Billy Boy
Date: 14 Feb 2001
Time: 12:00:35

That's an interesting concept John. Wouldn't CGU or the bank secure your equity or something similar? You're talking about a 900K investment here.

And when you use a Deposit Bond is there a limit amount of capital that you can use it for ??? eg. in your example you had a 4.5k bond for a 300K investment.

I've printed your post and I'll probably read it about 10 - 20 times so it can sink in. Looking forward to your reply

regards, Billy Boy
 
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John (Brisbane)

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: John (Brisbane)
Date: 14 Feb 2001
Time: 13:19:51

Hi Billy Boy,

CGU do not register your assets as security but they do need to know that they can recover the money if need be.

You pay them a FEE of 4.5K for them to provide your vendor a 'promise to pay' 45K in cash, valid for 9 months. (these figures are close but are only provided as an example) You never get your 4.5K back.

It is an expensive source of credit, but it really allows you to stretch yourself. Hey, some people don't like debt or massive leverage, so this strategy is no use to them.
 
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Paul R

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: Paul R
Date: 14 Feb 2001
Time: 16:01:32

I found that a Deposit Bond was cheaper than the interest I would have paid had the deposit come from my LOC. I purchased the IP at the end of October last year with an extended settlement till the end of January. Deposit bond for $38,500 for this period cost $398. Interest had I paid the deposit from my LOC: $782 - saving: $384. Deposit bond was from Royal & Sun Alliance.

This didn't work for another IP with 6 week settlement, however. Deposit $41,500. Deposit Bond: $430. Interest on LOC: $366. I guess it depends on how long you need the bond before the premium increases.
 
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Robert

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: Robert
Date: 14 Feb 2001
Time: 13:55:15

Hi John.

I used a Deposit bond of $19500 and it only cost me $197. This was with Royal & Sun Alliance, I think $4.5k for it is extremely expensive. I also did not have to place any property down for a holding security...

This is just my experience with Deposit Bonds.

Robert
 
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John (Brisbane)

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: John (Brisbane)
Date: 14 Feb 2001
Time: 15:52:09

Hi Robert...

Yes, $4.5k for is extremely expensive (ie. inaccurate). I should have noted that the figures were provided for the purpose of the example only. My memory is a little rusty.

A Deposit bond of $19500 for $197 seems like a fair deal. What was the duration?



Terry W..

Q.) What happens if you can't re-sell the properties and you don't qualify for a loan that large.

A.) Always devise an exit strategy for all reasonable outcomes. You put this strategy in place before you enter into the deal.

This may mean that you would only flip property that you could make work for you as IP if you were forced into acquiring it.

Another strategy is to engage a trusted building inspector to do a final defects inspection prior to settlement. A good inspector can always find a defect. In some off-plan contracts the presence of a defect actually invalidates the purchase contract. Hope you've got a good solicitor cause you'll need him.

OR you could go out and hunt down a Joint Venture partner with a large debt capacity. Try to sell the property from that angle if you failed the first time around. And find some tenants fast! Ultimately you would hope to either sell out to your partner or convince them to jointly sell when the time is right.

You do not want to default as this is the most expensive option, and deadly to your future IP activities.


Q.) Also do you have to pay stamp duty if you resell them before completion?

That all depends on the way you structure the purchase contract. Vendors wont accept an option so you will have to use something like an assignable purchase contract. This type of contract allows you to pass the contract to someone else for them to settle. You never owned the property so you don't pay stamp duty.

Some will tell you there are better ways than an assignable contract to achieve the same end result. .......Robert, can you add anything on this subject??
 
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NigelW

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: NigelW
Date: 16 Feb 2001
Time: 13:09:22

John

To me this sounds like playing russian roulette with about 4 out of 6 chambers loaded!

This would only work in a rising market such as Sydney and Melbourne 1999-2000. If not, you are - to use a technical term - in deep S#@T!

You say you need an exit strategy if you can't on sell the unit at the necessary price. The examples you listed are creative but surely the smell of "blood in the water" will prevent these from working if you can't even offload the unit yourself.

I'm not disputing that people have made good $ from using this high leverage long settlement plan but let's not understate the risks!

If you can't settle on a contract the vendor (or in the case of a deposit bond the insurer) will sue you - plain and simple. If you can't pay them they will bankrupt you. If you're bankrupted you'll have buckley's chance of getting further financing and for some occupations this will prevent you from getting or keeping your job.

To me the strategy is closer to "gambling" than investing. Sure all investing is a calculated risk but here the downside is SO catastrophic that the potential upside is not high enough to warrant the risk.

Just my thoughts on the issue. I note you're a HK graduate - see my post below "show us the money!" for a challenge to tell us all how you're going with the strategies.

Cheers N.
 
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John (Brisbane)

Reply: 1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: John (Brisbane)
Date: 16 Feb 2001
Time: 16:22:41

..........I'm not disputing that people have made good $ from using this high leverage long settlement plan but let's not understate the risks!

.... I think I made pretty clear where the risks are.

........If you can't settle on a contract the vendor (or in the case of a deposit bond the insurer) will sue you - plain and simple. If you can't pay them they will bankrupt you. If you're bankrupted you'll have buckley's chance of getting further financing and for some occupations this will prevent you from getting or keeping your job.

...... Not disputing that.

........To me the strategy is closer to "gambling" than investing. Sure all investing is a calculated risk but here the downside is SO catastrophic that the potential upside is not high enough to warrant the risk.

..... Yep! That's why I don't use this kind of strategy. Makes for good reading though.



.....Just my thoughts on the issue. I note you're a HK graduate - see my post below "show us the money!" for a challenge to tell us all how you're going with the strategies.

..... Please, don't hold it against me just becuase I went to a seminar. This graduate stuff sounds like its getting mixed up with being a 'disciple'. Can we discuss my progress over dinner Nigel? Your shout?
 
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NigelW

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: How Deposit Bonds Work
From: NigelW
Date: 16 Feb 2001
Time: 16:39:10

John

Apologies if I've been tarring you with the "guru disciple" brush unjustifiably. The issue has just been getting under my skin lately. I must have missed the fact you were DESCRIBING rather than endorsing the strategy.

I'll certaintly do my shout of a beer and chew the fat about property investment strategies with you at some stage.

Cheers N.
 
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