Vendor Finance and Licensing

Discussion in 'Innovative Techniques' started by Lofty, 3rd Nov, 2012.

  1. Lofty

    Lofty Member

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    If you've been following the Innovative Techniques Forum for awhile you'll have noticed I've been encouraging vendor financiers to get properly licensed for more than two years now.

    A recent judgment in the WA Supreme Court has been talked about on this forum before and resulted in yesterday's edition of VFI News. I post the contents of the newsletter here to supply vendor financiers and potential vendor financiers with more information about a issue that a lot of people in the industry have been trying to avoid for some time.

    I would like to thank Mr Tony Cordato, Australia's most experienced vendor finance lawyer, for the following contribution to this issue of VFI News.

    Licensing, as it applies to our vendor finance industry, has been a hot topic of discussion of late and with this in mind Tony writes, "I provide this commentary on where I see licensing intersecting with vendor finance –

    VENDOR FINANCE & LICENSING – after the WA Supreme Court Judgment in [name withheld]

    - The fundamentals of real estate and other professional licensing is that a licence is necessary if the person is carrying on a business. What carrying on a business means is a grey area. I have a letter from ASIC in the context of Credit Licensing that making a one-off credit contract is not carrying on a business. But ASIC provide no guidance on how many a person can do – that is why I say a ‘handful’ of transactions can be done without a licence, particularly as an adjunct to another business. The lesson to be drawn from the WA judgment is that WA Consumer Protection is looking closely at what constitutes a business.

    - Every vendor financier, rather than trying to figure out whether what they are doing is carrying on a business – should after doing their first transaction (which ASIC has clearly said is not a business), take steps to obtain a licence. They should obtain a real estate licence for Rent to Own or an Australian Credit Licence for Instalment Contracts and Deposit Finance. Once they start the licensing process (by lodging the application), they do not need to suspend their activities – they can continue to do transactions while their licence is pending, although I would recommend they become a Representative of either a Licensed Real Estate Agent or an Australian Credit Licensee while doing so.

    - Real Estate Agents Licensing does not apply and has never applied to owner sellers of real estate. Why? - because owner sellers are principals not agents. Even if owners sell more than a handful, except in Qld, they are not required to hold a real estate licence because they are not acting as agents because they are selling their property, not someone else’s property. Of course, if they sell on credit terms, they may need to hold an Australian Credit Licence, but not if they sell on standard terms or on a Rent to Own.

    - The position of Joint Venturers is a grey area. It has been thought that their position is analogous to an owner seller, because the joint venture gives a joint venturer a financial interest in the property, which at law is called an equitable interest, which is protectable by caveat. However, a recent decision in New Zealand has cast doubt upon this line of thinking, and it looks like their position is analogous to the carrying on of a business (as outlined) in the first two bullet points. In other words, one-offs are permissible, but after that they enter into the licensing grey area, and should apply for a licence.

    - I would like a close look at the judgement before making any comments about misleading advertising because it is fact specific as to what constitutes misleading advertising and representations when selling with vendor finance."

    [promotional material regarding the Vendor Finance Institute removed]

    More information from ASIC regarding the issue of 'in the course of a business' is available by Clicking Here.

    Considering today's article in The Age regarding Vendor Finance (CLICK HERE) it looks like it's time for sections of the industry to come to the realisation that Licensing of VF is here to stay.

    Cheers, Paul
     
  2. Angel

    Angel Member

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    Thank you Paul.
    So what licences do we require in Qld? To sell by option.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Angel, credit licenses are Australia wide. Regardless of what state you're operating in, you'll need to obtain one, or become an authorised rep of a license holder.

    On that note, Paul, I'm wondering if anyone has put their hand up to allow other vendor financiers to act as authorised reps of their license. There could be a reasonable business model in it. Keep in mind you'd need to have auditing and compliance processes in place.
     
  4. cu@thetop

    cu@thetop Member

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    Will licensing stamp out predatory behaviour?
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    Yes! In exactly the same way it's stamped it out in the rest of the finance and real estate industry!!!

    :rolleyes:
     
  6. Lofty

    Lofty Member

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    One of the most frustrating points in regard to vendor finance (VF) is the legislation coverage of the three most popular VF techniques. Instalment Contracts and Deposit Finance (sometimes called a Second Mortgage Carry Back), are credit contracts and are controlled by the National Credit Code, i.e. federal legislation. However a Lease/Option (often called a Rent To Own) is controlled by the various State based Real Estate Agent Acts.

    Peter, our company, VFI P/L, have started a Credit Representative Program - https://vendorfinanceinstitute.com.au/home/?page_id=993

    Angel, the Qld Property Agents and Motor Dealers Act 2000, legislates residential leases and options. As mentioned in the newsletter, you don't need a Licence if you are Leasing a property or selling an Option on a property YOU OWN. However, if you don't own it, you need a real estate agent licence to organise a Lease or an Option on a property.

    I have noticed an improvement in the VF industry since the National Credit Code (NCC) came into force in 2010. However the NCC doesn't control Lease/Options. The next hurdle, to help to ensure compliance throughout the industry, in my opinion, is to get the industry to understand the part that real estate agent coverage may be needed in their business.

    Unfortunately the VFI can't setup a nationwide real estate agent Representative Prorgram as the various Acts won't allow it.

    Cheers, Paul
     
  7. Rolf Latham

    Rolf Latham Member

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    no

    but to some extent it keeps honest folks honest

    ta
    rolf
     
  8. Angel

    Angel Member

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    Can I pay a fee to a licenced Real Estate Agent who does these transactions as part of his regular business, to do the paperwork for us as a one-off transaction. I dont want to make this into a continuing business.

    As long as his agent's licenses are current, we can use his licences, and i dont require any for myself, is that correct?
     
  9. Lofty

    Lofty Member

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    Hi Angel

    That sounds sensible to me. Send me a private message if you would like the contact details of an experienced Qld vendor financier who has his real estate agent licence.

    Cheers, Paul
     
  10. Melaniejo

    Melaniejo Member

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    Working with Lease Options

    Could you please give me guidance about using Lease Options as an Investor?

    I would like to work as an investor and collect ‘transaction fees’ for setting up landlords with tenant buyers.

    I want to make sure I am staying within the Law.

    I have been searching online and have found a lot of conflicting issues.

    I see that investors are using this technique in America (calling it Assigning Lease Options or Wholesaling Lease Options) and have found that a Real Estate Agents Licence is not needed (in America)……

    It is said that in this particular real estate transaction, being an investor with an equitable interest, a real estate agents licence is not needed as the house is under ‘Option Contract’. Thus as an investor it gives me the Option to purchase it. I then sell that option agreement to a tenant buyer and step out of the deal.

    I am selling the Option Agreement not the house.

    My question is…Do I need a Real Estate Agents licence in Australia to do this? I live in Victoria.

    One other Question…..What are the implications if I were to set this up and do it as a business……is there a difference doing it as an investor v’s working it as a business??……Licenses, registrations etc…..I will be asking a Solicitor about this, just thought someone might have some feedback on this thread :)

    Cheers,
    Melanie
     
  11. Rolf Latham

    Rolf Latham Member

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    An REA license is diff to a Credit licence

    Id be seeking some specific legal advice on that concept

    ta
    rolf
     
  12. Lofty

    Lofty Member

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    Hi Melanie

    In the Victorian Estate Agents Act 1980 the definition of a real estate agent is:

    'estate agent or agent means any person (whether or not he carries on any other business) who exercises or carries on or advertises or notifies or states that he exercises or carries on or that he is willing to exercise or carry on or in any way holds himself out to the public as ready to undertake the business of—
    (a) selling buying exchanging letting or taking on lease of or otherwise dealing with or disposing of;
    (b) negotiating for the sale purchase exchange letting or taking on lease of or any other dealing with or disposition of;
    (c) collecting rents for any real estate or business on behalf of any other person;'


    As you mentioned, I'd definitely suggest you get your own legal advice on this matter and definitely take no notice of my following personal opinion ;-) As a very experienced vendor finance solicitor enjoys saying, 'if it walks like a duck and quacks like a duck, it's a duck!' Here he's referring to how the courts these days look very closely at the 'intent' of an act. If the court were to judge that your actions were intended to circumvent the Estate Agents Act, then there's a good chance it may rule that you were acting as an estate agent.

    My suggestion is to have a good look at getting your estate agent licence. You'll be surprised at what's involved. Hint; look up the mutual recognition arrangements between States and then look at what's involved in getting a NSW licence.

    Cheers, Paul
     
  13. Melaniejo

    Melaniejo Member

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    Oh my....:confused: all this legal jargon certainly doesn't walk like a duck and quack like a duck :rolleyes:

    Thanks for the reply Paul, very helpful.

    My husband is a Real Estate Agent.....I wonder if he were to get his License he could do the transactions?? No doubt there is a whole heap of legal speak for that too ;)

    Off to the Solicitors I go......

    Cheers,

    Melanie
     
  14. Lofty

    Lofty Member

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    Hi Melanie

    Yes, I'd look seriously at ensuring your husband's real estate agent licence is current and then becoming a Representative under his Licence. The course to get your Representative Certificate is usually only a weekend course.

    Cheers, Paul
     
  15. scha9799

    scha9799 Member

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    Hi Paul and all,


    If I setup a company with 5 other partners, then we purchase a property under the company.

    None of the shareholders are real estate agent or credit license, and we intent to on sale the property under installment contract or lease option.

    Is this deem to be running a business ? what if this is just one off transaction for the company we setup?

    Also technically the company is owning the property, and we are just the directors/shareholders of the company. Under the legal system, are we (directors/shareholders) still considering to be the legal owner of the property? (which means if only do a one off transaction we don't need a credit license ??)

    What does "owner" means? A property is held under a company or trust. The owner of the property is a company or trust, so do the company directors/shareholders need to have a credit license ? what if it's a one off transaction ?
     
  16. RPI

    RPI Member

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    There are quite a few "it depends" questions in here. Some of those you can change by the wording of legal documents, a lot no amount of legal wording will override the statutory classifications and obligations. I would say get some proper legal advice before you establish the company, and ensure you set up properly.

    At an educated guess you would be up for about $2500 + GST for your advice and for the docs for your first transaction and $1000 + GST for docs and advice for subsequent transactions.
     
  17. Terry_w

    Terry_w Member

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    If the company owns the property the company is the legal owner.
    The shareholders of a company have no interest in the property - no legal interest and no beneficial interest. They could not lodge a caveat over the property for example. Same with directors.

    Not a good idea to have 5 directors either.
     
  18. Terry_w

    Terry_w Member

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    If the company is operating as trustee, then it is a different story.
     
  19. Lofty

    Lofty Member

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    Hi scha9799

    Terry has covered the question of ownership but as you initially mentioned a company and then a company/trust, as he says, that's a different story and you need to take some expert professional advice as mentioned by Darryl.

    On the issue of licensing you need to closely watch the licensing catch-all in the legislation, i.e. the meaning of 'in the course of a business'. There is a link to a discussion of this issue in my initial post in this thread. However, let's look at how a court might look at the scenario you've described, i.e. A brand new company buys a residential property and sells it with a credit contract.

    As Tony Cordato mentioned in my first post in this thread, he has a letter from ASIC indicating that an individual can do one of these transactions without an ACL. However I suggest you seek some expert professional advice in this area as I could easily see a court deciding that your brand new company was conducting this transaction 'in the course of a business'.

    Cheers, Paul
     
  20. Terry_w

    Terry_w Member

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    Without knowing anything about this area I would think operating under a company structure would make you fall under the definitions of business.