Deposit Builder - a new vendor finance strategy

[Lofty]

It's not often that a new vendor finance technique crops up but it has and here is some information about it.

The new technique is called the Deposit Builder.

In short, it's made up of a standard Contract of Sale for the State the property is in, along with:

- in NSW, VIC and WA a Licence To Occupy.

- in QLD, TAS and ACT a standard Residential Tenancy Agreement (Lease).

Vendor finance specialist lawyer, Mr Tony Cordato, has been the driver behind this new technique and Tony has been kind enough to produce a two page information sheet on the Deposit Builder. To download it, CLICK HERE.

I have no doubt it will cause some 'discussion' ;-)

Cheers, Paul

 

[oc1]

Interesting, thanks Paul.

What's your opinion on using this technique with newly developed property?

Oscar

 

[Lofty]

Hi Oscar

I'm guessing it should work well, especially when coupled with eligibility for the FHOG.

Cheers, Paul

 

[cu@thetop]

Interesting read. Does the signing of the contract develop a CGT event in a property that has always been an investment property for example?. You may find yourself paying tax before receiving substantive funds.

Is the deposit released immediately or at settlement?

Not sure if a dispute arose as to tenancy whether the "licence agreement" would hold- especially where a tenancy agreement is used.

 

[Lofty]

Regarding your CGT question, I'd expect that, like and Instalment Contract, if it has always been an investment property and it's sold with a Deposit Builder, exchange of contracts would trigger a CGT event.

Yes the Deposit is released immediately.

In the States where a tenancy agreement has to be used, I'd expect any dispute would be heard in the relevant Residential Tenancy Tribunal. However the Residential Tenancy legislation in NSW, VIC and WA specifically exclude a Licence to Occupy resulting from a Contract of Sale. I can send you the extracts if you PM me.

Cheers, Paul

 

[Commentator]

Its good in the sense that in a perfect scenario its an accessable way for you to get around a few loopholes and get people buying earlier... but sounds like a financial instrument waiting to be abused by rogue mortgage lenders

 

[Lofty]

Yes, like very many financial instruments out there it could be abused. However it is good to see that the parties presenting this technique to the marketplace are strongly suggesting that:
- the Purchasers get independent legal advice before authorising the Contract of Sale, and
- the Purchasers consult with a mortgage broker prior to authorising the Contract.

Cheers, Paul

 

[tobe]

Its good in the sense that in a perfect scenario its an accessable way for you to get around a few loopholes and get people buying earlier... but sounds like a financial instrument waiting to be abused by rogue mortgage lenders

why single out 'rogue mortgage lenders'???

Im sure there are enough rogue vendors and purchasers to go around.

I dont see any immediate benifit for a finance person in this contract, except if they chanrge a fee for service, or receive a commission from the vendor.

Financiers arent paid a commission from the lender until settlement, and in this sort of contract that could be years hence. unlikely juicy target for rogue financiers.......

 

[Lofty]

Hi tobe

The mortgage broker involved in the consultation mentioned above is charging the Purchasers $375 as a fee for service.

Cheers, Paul

 

[tobe]

wow, they will be retiring in the bahama's in no time on those numbers....

I think its a much simplier concept than previous wraps/rent to buy etc by the way. Simplier is almost always clearer and harder to abuse.

 

[Aaron_C]

Its good in the sense that in a perfect scenario its an accessable way for you to get around a few loopholes and get people buying earlier... but sounds like a financial instrument waiting to be abused by rogue mortgage lenders

Only ASIC and the Government think that every single person is waiting there to be exploited by a rogue operator. This is simply untrue and has led to the ridiculous over-regulation of the industry.

 

[Token Funder]

What does the mortgagee of the subject property think of this do you think?

 

[Aaron_C]

What does the mortgagee of the subject property think of this do you think?

...."I get paid my interest repayments every month so I don't care"?

 

[Lofty]

I once asked a similar question, regarding Instament Contracts, of a solicitor friend and got the following response:

'The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.

An Instalment Contract is a Contract for Sale with a delayed completion.

The Bank / Lender’s consent is required for all Contracts for Sale, so there is nothing different here from standard procedure.

In terms of timing, a vendor notifies their Bank / Lender that they require a Discharge of Mortgage (by providing a Discharge Authority) shortly before completion is due. I find that Banks will hold open their discharge arrangements for a limited time, each Bank being different. The point is that the Banks do not like being notified a long time beforehand – some like the NAB require completion to take place within about 4 weeks after notification

Therefore, it does not accord with Bank practice to notify a Bank that a discharge is required under a Contract for Sale with a delayed completion until completion is imminent.

I trust that this answers the enquiry.'

As the Deposit Builder uses also uses a delayed settlement, I thought the above may be of interest.

However, all in all, I agree with Aaron ;-)

Cheers, Paul

 

[Token Funder]

...."I get paid my interest repayments every month so I don't care"?

You know better than that.

Or at least you should.

Question 1.
Does entering into a vendor finance agreement potentially create an interest in the property?

Question 2.
What do loan agreements say about creating interests in the security property?

 

[Terry_w]

'The answer to your question is a technical one – there is no assignment of property in an instalment contract. What happens is that the vendor is entering into a Contract for Sale. It is only on completion that an assignment (known as a Transfer) takes place.

This is assignment in the legal sense only. There is also the equitable side of the transaction. There would be an equitable assignment as soon as the contracts are exchanged - I imagine. I am not too knowledgeable on this area.

This would probably be why some states, such as NSW, require stamp duty to be paid before completion.

 

[Aaron_C]

You know better than that.

Or at least you should.

Yes Mr Banker. Clearly sarcasm is lost on those with such power.

 

[Lofty]

Question 1.
Does entering into a vendor finance agreement potentially create an interest in the property?
In the case of the Deposit Builder process, the purchaser is entering into nothing more than a Contract for the Sale of Land (in NSW). Upon exchange of contracts the purchaser gains an equitable interest in the property. These Contracts are exchanged every day and, if traditional lenders refused to allow the purchasers to take this equitable interest upon 'exchange' the whole 'exchange and settlement' process would fall apart.

Question 2.
What do loan agreements say about creating interests in the security property?
They all specifically disallow it. However, as we can see from Question 1, they all allow it ;-)

Cheers, Paul

 

[PropertyFreedom]

Deposit Builder vs Lease Option

Hi Paul,

I did meet up with you at the recent VF meeting in Brisbane when you did go over this new product with us. I do have another Q's.

When would you use a Deposit Builder product over a lease option?

Thanks

 

[Lofty]

Hi Matt

Short answer ;-) When I have checked out the potential buyer with a mortgage broker and feel confident they will get finance at the end of the deferment period. This is because the Deposit Builder is a far greater commitment than a Lease/Option.

Cheers, Paul