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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
(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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