Financing deposit for purchasers on second mortgage..

[duncan_m]

I'm selling some of my houses.. and as I'm apt to do, I feel really bad for the Tenants.. some of whom have been renting from me for years.. I'd like to give them first right of refusal on the places, and would be prepared to leave 5-10% in the deal secured by a second mortgage..

I'm wondering what the mechanics of this are.. how would they frame their finance application to the bank, how is the second mortgage set up (and enforced if necessary).. has anyone done this?

 

[Qlds007]

Hi Duncan

Yes done it on many ocassions for both existing and new stock.

As long as the tenants (would be purchaser) can show serviceability on both your loan and the 1st mortgage then you will not have too much of a problem.

Certainly some lenders will not allow the deposit to be borrowed but this is now becoming more and more common.

You have the choice of actually registering the loan by way of a 2nd mortgage or doing by way of an unsecured charge. Difference is the cost of registration of the mortgage which varies from State to State.

Most States adopy a standard mortgage document and as long it is UCCC compliant your Solicitor should be able to provide you with a copy.

 

[duncan_m]

Certainly some lenders will not allow the deposit to be borrowed but this is now becoming more and more common.

OK great.. so those tenants who elect to buy can go to a Broker and explain the Landlord is leaving 5% of the purchase price in the deal secured by a registered second mortgage and provided they meet the usual serviceability guidelines etc they shouldnt have any problems getting a loan?

 

[duncan_m]

Hi,

Another question

I guess this could apply to any purchaser? If I elected to sell these properties myself I could conceivably advertise "no deposit required" and do the same thing?

 

[Qlds007]

Duncan

Correct on both counts.

 

[Jaffasoft]

What's the best structure from the boat of, 'Purchaser' to try get one of these loans across the line?

Is 70% and 30% carried back as the deposit better chance then the FHOG payed into the 30% as soon as it's released so making the carry back effectively 20% then. Then again maybe the FHOG would need to be used for closing costs or can this be loaned as well.

And also could the deposit be a long time say two/three years until you start paying it off...is this unheard of ?

This could give the purchaser the option to reno the property over a period of time and either use that equity to paydown the deposit loan or sell the property and pay them out!

Do you see anything like this happening Qlds007 and or any suggestions.

 

[Kristine..]

Hi Duncan

It seems that, due to your soft heart/guilty conscience you are getting a couple of issues mixed up here.

You can, of course, offer your tenants right of first refusal. You can even offer a few helpful hints regarding how they might purchase the property. Beyond that, however, you are treading in a minefield.

Sure, they may not know that 106% loans are available at Standard Variable Rates, sure they may be interested to hear that you 'would be prepared to leave 5-10% in the deal secured by a second mortgage' .. but think for a minute:

If you were wanting to buy a property, wouldn't you want to negotiate the best deal possible? The lowest price possible? By offering to 'leave 5-10% in the deal' they may not be able to negotiate the lowest price. In fact, they may agree to pay a price which is more than valuation.

Lenders and Valuers would consider this an 'off-market' transaction, not tested by being put to the market in the usual way. This is not an arms length transaction. As you have enjoyed an amiable relationship with the tenants over time, how would they feel if the valuation came back '5-10%' less than the contract price? Wouldn't they feel that you had taken advantage of them and of the previous good relationship?

If you are offering them the right of first refusal, and thus avoiding engaging an Agent, that is already a 2.5-3.5% cost saving to you. It may be worth your while to have sworn valuations (not market appraisals) prepared for the properties to determine what would actually be fair market value.

However:

Why are you selling? If you are selling due to your change in lifestyle and drop in income, don't you owe it to yourself to get the best price possible for the properties? Why give money away? If you mix the situation up no one will emerge the winner, not you, not your tenants, and both parties may feel unhappy with the result for years to come.

You may find that the best favour you can do your tenants is to give them plenty of warning that you intend to sell the properties. Let them know which Agency will be handling the sale. Apart from that, it's up to them what they decide to do. They have to look after their own best interests, you have to look after yours.

Step back a bit, you can see more clearly from a distance.

Cheers

Kristine

 

[duncan_m]

Step back a bit, you can see more clearly from a distance.

Kristine,

I'm actually looking to maxmise the sell price AND make a bit of profit on the loan I carry back..

I'm seeing very clearly.. thanks