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From: Scott Elsom
THE BACKGROUND:
We recently purchased a block of flats with 6 other investors. On several advisor's advice we formed a company to purchase the property. Purchase price was $460K. Total borrowings were $368K. Council has indicated that it has no objections to subdividing the back half of the block (approx $200K profit on the subdivision).
As this is a new company with no trading history we have had to offer personal guarantees in order to secure the loan.
The guarantee holds us each liable for the full amount of the loan. The aim was (and still is) to get the guarantee removed once the subdivision has taken place and the company has a successful trading record. This guarantee means that I now have a $368K increase in liabilities instead of a $52K increase.
THE PROBLEM
This wouldn't be a problem if I wasn't wanting to buy property before the guarantees are removed...which I wasn't planning on doing. But the neighbour of one of my properties recently asked me if I would like to buy their place. This would be a great buy for us, but my bank won't look at me because of the guarantee.
I am looking to secure the new property against an existing property with a mortgage through CBA. Bank valuation has come back with more than enough equity for a 80/20 split on both. It was after the credit check that they queried the guarantee.
SOLUTIONS THAT I'VE THOUGHT OF
1. Buy the new property in my wife's name.....but....she's on maternity leave and only gets about $12K net in non-salary income (rents and dividends) and already has some debt ($100K approx). The bank did not like this option.
By the way, it sucks that they won't take her wage into account while on maternity leave (maybe we have a discrimination case!)
2. Omit telling the bank that I'm a director of the Investment company and don't tell them about the guarantee...not my cup of tea...and they'll find out anyway when the do a credit check.
3. I have tried telling the bank about the agreement that the 7 directors have which stipulates that we are each liable for only 1/7th of the total debt....bank said that this agreement meant nothing to them.
4. I've tried telling the bank about the flats that we bought.....cash positive, situated in Newfarm (1 km from the CBD in Brisbane), purchased for the Unimproved Land Value (UCV), approval in principal to subdivide...they didn't want to know about it, all they were interested in was the $368K debt.
5. Try a different bank...this is an option. I have suggested to CBA that I will walk. They pointed out the break fees ($1800) that I will incur and the set up fees that I will incur with the new lender. This is perhaps my best option...a couple of thousand $$'s is not a lot, in the scheme of things...but is still hurts! Besides, I'm just going to encounter the same problem again if I have to do it again with another bank.
6. My other option is to sell my shares in the investment company. We have had a number of people wanting in, so I know there is a market out there for them, but it is a great opportunity that I don't want to pass up. On balance the neighbours property is probably the best deal though...BUT I WANT BOTH!
THE QUESTION
Has anyone had any experience with company guarantees and getting around them?
Does anyone have any other possible solutions that may allow me to keep an interest in the flats as well as purchase the neighbour's house?
Thanks
Scott
THE BACKGROUND:
We recently purchased a block of flats with 6 other investors. On several advisor's advice we formed a company to purchase the property. Purchase price was $460K. Total borrowings were $368K. Council has indicated that it has no objections to subdividing the back half of the block (approx $200K profit on the subdivision).
As this is a new company with no trading history we have had to offer personal guarantees in order to secure the loan.
The guarantee holds us each liable for the full amount of the loan. The aim was (and still is) to get the guarantee removed once the subdivision has taken place and the company has a successful trading record. This guarantee means that I now have a $368K increase in liabilities instead of a $52K increase.
THE PROBLEM
This wouldn't be a problem if I wasn't wanting to buy property before the guarantees are removed...which I wasn't planning on doing. But the neighbour of one of my properties recently asked me if I would like to buy their place. This would be a great buy for us, but my bank won't look at me because of the guarantee.
I am looking to secure the new property against an existing property with a mortgage through CBA. Bank valuation has come back with more than enough equity for a 80/20 split on both. It was after the credit check that they queried the guarantee.
SOLUTIONS THAT I'VE THOUGHT OF
1. Buy the new property in my wife's name.....but....she's on maternity leave and only gets about $12K net in non-salary income (rents and dividends) and already has some debt ($100K approx). The bank did not like this option.
By the way, it sucks that they won't take her wage into account while on maternity leave (maybe we have a discrimination case!)
2. Omit telling the bank that I'm a director of the Investment company and don't tell them about the guarantee...not my cup of tea...and they'll find out anyway when the do a credit check.
3. I have tried telling the bank about the agreement that the 7 directors have which stipulates that we are each liable for only 1/7th of the total debt....bank said that this agreement meant nothing to them.
4. I've tried telling the bank about the flats that we bought.....cash positive, situated in Newfarm (1 km from the CBD in Brisbane), purchased for the Unimproved Land Value (UCV), approval in principal to subdivide...they didn't want to know about it, all they were interested in was the $368K debt.
5. Try a different bank...this is an option. I have suggested to CBA that I will walk. They pointed out the break fees ($1800) that I will incur and the set up fees that I will incur with the new lender. This is perhaps my best option...a couple of thousand $$'s is not a lot, in the scheme of things...but is still hurts! Besides, I'm just going to encounter the same problem again if I have to do it again with another bank.
6. My other option is to sell my shares in the investment company. We have had a number of people wanting in, so I know there is a market out there for them, but it is a great opportunity that I don't want to pass up. On balance the neighbours property is probably the best deal though...BUT I WANT BOTH!
THE QUESTION
Has anyone had any experience with company guarantees and getting around them?
Does anyone have any other possible solutions that may allow me to keep an interest in the flats as well as purchase the neighbour's house?
Thanks
Scott
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