Money - Part II

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From: Lewis O'Brien


(Apologies to those that have read this post elsewhere - but my aim is to provide some insight for those who might be fooled by slick marketing).

I thought the Money program was a good start - but they didn't really explain what is going on. Seminars are only the beginning..

So - here is part II - how the gurus make it work. I don't know enough about any particular guru, so I will refer to an anonymous 'Guru'. Readers can draw their own
conclusions.

Step 1 - Guru secures property.

Many small developers need to pre-sell their (say 20 unit) residential development before they can get bank funding. They know that wholesale buyers, like Guru, will
buy the whole development off the plan. The completed development might be worth 300k per unit, but Guru will agree to buy for 250K each, relying on stamp duty
savings, the absence of estate agents fee and the offer to the developer of a quick all up sale.

Guru won't actually sign a contract of sale. Guru grants the developer a put option, which means that unless the Guru finds an alternate purchaser, the developer can
force Guru to purchase the property for 250k when the development is complete in 18-24 months. The put option is used in Victoria to avoid double stamp duty.

Once the Developer has the signed agreements and deposit bonds from Guru, the Developer's own bank will the finance the construction.

Step 2 - Guru finds Investors.

Guru now needs to find somebody to purchase the property in his stead before the development is complete. This is where the seminars fit in. Run seminars, 'educate'
prospective investors to your way of thinking and once educated, you can market the units in the development to them.

Step 3 - Sign up the Investor

Guru now structures each of the units for sale on the 'no-money down' theory of investment. The Investor is encouraged to purchase a unit directly from the developer
for 370k. This is done on the basis that the net price is 300k with a 70k rebate. This is done so that the bank will value the unit at 370k and lend on this basis while the
investor gets a 70k rebate to use as the 'equity'. No money down.

This sounds attractive to the investor - no money down (except perhaps for an expensive seminar) and you own a fantastic investment property that will increase in
value forever. Never mind that the bank has loaned you 300k which is probably what the property is worth - so you are 100% financed. Never mind that the bank has
only done this because it believes that the property was sold for and valued at 370k.

Step 4 Reap the gains.

Smart readers will have noticed that Guru agreed to purchase the unit for 250k and the Developer sold it for a net 300k. Smart readers will know that the developer
didn't retain the extra 50k.

So Guru has now purchased another (20 x 250k = 5 mill) $5 million of property, made another million dollars of profits and not used a cent of his own money.
Incidentally, he is probably also receiving trail and other commissions for arranging the finance.

The Outcome

The Bank has unwittingly 100% financed an investment property. They may, if they wake up to what is going on re-value the property and ask the Investor for a margin
call. (Banks, rarely admittedly, do this)

The Investor has no equity in an overpriced investment property and hence is unlikely to see capital growth for a number of years. The Investor probably doesn't realise that he/she has purchased the property from Guru.

Guru has made a lot of money and is looking for new Investors.

A final word of warning - given that most of the gurus have only been operating for 12-18 months - how many of the properties have actually settled? What happens if
the banks wise up and refuse to accept the overblown contract prices? Will the whole pyramid come toppling down?

I'm with Paul - how do I arrange a seminar to 'help' people make me rich?

I look forward to the thoughts of others on this issue.

Lewis O'Brien
FreeLawyer.com.au
 
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Reply: 1
From: Robert Forward


Hi Lewis

Thankyou for that great posting.

It's an eye opener if it's true (not saying I don't believe you though).

I wonder how many phone calls were placed between lawyers for these Guru's and Paul Clithero for doing damage to their reputation.

How I would have loved being a fly on their walls the morning after the show was aired on TV.

Cheers
Robert
 
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Reply: 2
From: Mike .


Hi Lewis,

Most, if not all the postings thus far, dealing with Seminar gurus, have questioned the spiralling costs of the seminars and whether investors are buying at FMV. Your post, which I believe is the first of it's kind, shows how these gurus make enormous profits from property sales to first-time(?) investors. I say first-time because I assume that once it is realized that they have bought above FMV the unhappy investor won't be in a hurry to buy again from the Guru.

This brings me to my main point:

You said: "The Investor is encouraged to purchase a unit directly from the developer for 370k. This is done on the basis that the net price is 300k with a 70k rebate. This is done so that the bank will value the unit at 370k and lend on this basis while the investor gets a 70k rebate to use as the 'equity'. No money down."

Mike: If the Guru hadn't added a further $70K to the cost of the unit, then the Guru would still make good profits based on "bulk buying" which is ethical and practised by some of our Forum gurus. The investor would also have bought at FMV but without the advantage of "no money down".
Or would they have bought it without "no money down", that is, if it was marketed as just another negative geared IP?

If the hook to buy is "no money down", then the Guru must be pretty damn sure that the bank's valuer will be conned by the contract price to value above FMV at $370K. If the scam is to operate on every development, then the valuer must get it wrong time and time again.

Do you see what my point is, Lewis? Your post was about the unethical and perhaps fraudulent activity of some seminar gurus but it also raises serious questions about the way valuations are conducted. How are consumers meant to be protected if the valuers get it so wrong time and time again?

Regards, Mike
 
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Reply: 2.1
From: Lewis O'Brien


Mike

My Dad always said that a sworn valuation meant someone had said "Fuck its worth $100". (pardon the French)

I think that valuation is an imprecise art at best, that is often abused.

Do you want to hear about the property that a client bought for $1.3m that was valued at 1.8m because the valuer thought the contract price was $1.8m (True story).

What about the half wit (employed by a large stock broking firm) who valued Securenet (a share admittedly) at $30+. Current share price $1.30.

Valuation is only a function of the assumptions you make. If you assume that property prices will increase at 10%+ forever, you can create all sorts of interesting valuations - on paper at least.

As always - do your own thinking and make sure you understand what you are doing.

Lewis O'Brien
FreeLawyer.com.au
 
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Reply: 2.1.1
From: Mike .


Hi Lewis,

A couple of months back my home was being valued by a bank valuer to establish my current LVR. I met the valuer (a young kid) when he came over, and just before he left I asked him whether he was going to give a "conservative" valuation for the bank who are notorious for coming in short.

He was emphatic that he was acting independently and without any kind of "instructions" to be conservative. Well, most people who know my place, thought it was worth $280K but the valuation came in at $265K.

Ironically, the valuation for the Brisbane IP which I was purchasing, came in as per the contract price! What do you make of that? Are valuers too willing to accept contract price for new properties because the market hasn't been tested?

Regards, Mike
 
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Reply: 2.1.1.1
From: Lewis O'Brien


Mike,

Two things are going on.

First bank valuers tend to err on the side of caution.

Secondly, if the test of market price is what a willing buyer would pay a willing seller then its hard to look past the contract price. I might add that it is also very easy to just adopt the contract price.

Lewis O'Brien
FreeLawyer.com.au
 
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Reply: 2.1.1.1.1
From: Mike .


Hi Lewis,

Thanks for your thoughts, so far. If valuers can't be relied on to look beyond the contract price, what other options do investors have of establishing FMV for new properties?

The only option I can think of is to get a number of rental valuations from RE Agencies or Property Managers in the area and determine whether the rental yield is correct for the area. Any other suggestions?

Regards, Mike
 
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Reply: 2.1.1.2
From: Rolf Latham


Mike

Most lenders rely on contract price rather than valuation on purchase up to a pre set limit. In some cases they may want to do a "Restricted Assessment" rather than a full val. This inlvolves checking out recent sales and a kerbside inspection.

Full vals for purchases are rare - usually only if not an "on market transaction" or it is way out of the norms.

Ta

Rolf
 
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Reply: 2.1.1.1.2
From: Michael G


Lewis,

Not too sure if I've seen many posts from you on this forum, but I'm pleased you're here.

Thanks for stopping by :) You're welcome anytime.

Michael
 
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Reply: 2.2
From: Rolf Latham


Hi Mike

The Lenders' Panel valuer is there to protect the lenders interest and therefore provides minimal protection to consumers.

Surely if its ok to spend 200 bucks on an independent val in Brisbane to protect oneself against paying too much, then the same applies here, perhaps even twice as much so.

Ta

Rolf
 
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Reply: 2.2.1
From: G V


Hi everyone,

I went to the money show @ Homebush Sydney. There were half an hour seminar each by different people. One of them was paul. there also he mentioned "get rich quickly" type of seminar and advised that there is no harm in attending introductory seminar but should be wary of courses being offered by these people at the end of the session.his talk was impressive. one of the those "get rich " guru's were also there. i also happened to listen to 'hans jakobi' . his talk was also good and was mainly about due diligence.
 
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Reply: 3
From: Bydntsel .


Just wondering.

Is it feasible that the developer having agreed to a price lower than he would have liked to achieve.

Now looks at all possible ways of cutting construction costs.

Resulting in the end product not being of the Quality expected buy the purchaser.

Any ideas on this from qualified builders on the forum.

bydntsel

"Follow your own advice"
 
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Reply: 2.2.2
From: Mike .


Hi Rolf,

Thanks for your thoughts. I didn't make it clear in a previous post that the valuation I refer to re: the Brisbane property was the bank valuation. I didn't get an independent valuation thinking that the bank valuation was good enough. Very naive, in retrospect.

So, in Lewis' example, would an independent valuation have ignored the contract price of 370K and come in nearer the 300K? If so, then an independent valuation, particularly for new or "off the plan" properties is still the best way to protect consumers. Is that right?

Regards, Mike
 
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Reply: 2.2.2.1
From: Rolf Latham


Hi Mike

In most cases an independent val will pick up large margins or developers rebates, especially if those are the instructions given to the valuer.

Yes its hard for the valuer to go on an area where there have been no sales of a partiular type of stock - but then that is why you use a professional in that area whi can use his/her gut feel to provide advice. You are not paying them for doing a Valuer General's data check - you are paying them for accumulated knowledge.

Ta

Rolf
 
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Reply: 3.1
From: Eddie Pertot


After having worked on 3 Apartment construction sites in Melbourne (1 in the CBD,2 in the inner-suburbs)there is no way that i can see any value in them at all

Eddie
 
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Reply: 4
From: Sam Coster


Well here goes, into the Lions Den. I will
probably be barred for disagreeing with the
encumbant veriety of Guru.
As I have said previous. I have attended the
first two HK seminars and gone out and done
my own due diligence.
I have found a Dev/Build who has just
commenced to build 6 units and is more than
happy to give me a option with a 4% discount
as long as I buy any units that I have not
sold at settlement date, approx 12mnths away.
The benefits to the B/D is that he gets his
building finance from the Bank and does not
have to worry if the units don't sell. He
save approx 2.5% on agents fees alone.
Now my side, from my due dill. I recon that
expected appreciation between now and
completion will be 8-10% and because I am out
there promoting the selling, not leaving it to
the Real estate agent, I can save at least
1.5% there.

I recon at the end of the day because I was
prepared to take the risk and get involved in
the process I can make approx 15% on the
selling price. If I didn't make it the D/B
would have.

As for using Put and Call Options how else do
you arrange your funding without incurring
Stamp Duty for a transaction that has not
even taken plaice.

At the end of the day, I have to either use
DB or Bank guarantees, in iether case I have
had to prove that I have unused equity to
back it.

Over to you.

Samc
Enjoy the journey, its half the fun.
 
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Reply: 4.1
From: Anonymous


Samc,

It is possible to get nearly double your
capability in equity through the right
financiers. The problem is, they want
a slice of your profits to do it.(Cause
they believe they have the correct connections in the banks)
Next problem, just say it goes belly up,
I know they'll be there picking up the pieces, for a great deal.
 
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