Finance

[WebBoard]

From: Mike .


Need Advice
From: Joe K
Date: 03 Feb 2001
Time: 09:46:28

Hi all, I am in the process of buying my first IP. It is an off-the plan unit and due for completion in about 8 to 10 months time. I talked to my bank and was told that I would not have any problems with getting a loan for the purchase price + the costs. I have been told not to apply for the loan now but wait until about two months before completion of the unit and then apply for the loan as I might incur application fees + valuation fees twice if I go ahead with the application now as the offer will lapse. The bank has provided me with a letter saying they have approved my loan for the full amount to purchase the property without any formal application.

Now, do I take the banks advice and apply for the loan later or apply now before exchange of contract and then the offer might lapse and would have to re-apply ? I have asked my solicitor to have a finance clause inserted in the contract but he indicated that the seller is not willing to insert the finance clause. Do I go ahead and sign the contract and take the risk that the bank may refuse me a loan? Please I need all the advice from all you experienced investors. Thanks in advance for any advice.

Joe K

 

[WebBoard]

Paul Murphy

Reply: 1
From: Mike .


Re: Need Advice
From: Paul Murphy
Remote Name: 202.53.46.195
Date: 03 Feb 2001
Time: 14:18:50

Joe,

It would be my suggestion to consider talking to other financiers rather than the one you have. You should not be charged twice for application fees or valuation fees.

If the bank is worth it's salt, it will give you a loan approval in writing, but because you are purchasing off the plan, it will have a condition which will be along the lines of "subject to valuation on completion". As you are buying off the plan, there is nothing tangible for them to value. They will establish their own idea now, and approve on that basis. Then, they just want to protect themselves that what you bought on paper turned out to be reality. It is on completion that they will formally engage a valuer. You should not pay twice for this.

If it were me, I would be applying for a loan now, not later. Also, as you don't have formal loan approval, it would be risky to sign an unconditional contract of sale for the property. What would you do in the unlikely event that you couldn't get finance at all? If you couldn't settle, you will lose your deposit and could be sued for losses. Not a risk worth taking in my view.

If the vendor wont accept a subject to finance clause, I wouldn't be proceeding. A subject to finance clause should be drafted to indicate the size of the loan you are applying for, and also detail a date by when you have to have approval -normally around 4 weeks. Even if you get this clause in, be careful. It is assumed that once this 4 weeks has passed, your contract has become unconditional if you have not advised the vendor or his solicitor that you have been unsuccessful (using all reasonable endeavours) in your loan approval.

Hope this is of assistance. Risk management is one of the first things you should learn when investing.

Paul Murphy The Investment Institute