Who wraps? Need advisor ASAP

[Kitti]

Hello all,

I am seeking your recommendations for a property lawyer/ appropriately qualified advisor to help structure a wrap for me.

A fairly genuine (seeming?) couple would like to purchase a property from me and have agreed in principle to a wrap structure. I have an existing mortgage over the property and need both a) advice on equitable interest premium and fee/cost base, and b) contracts drawn re: the above.

I am not interested in paying a spruiker, being 'educated' for a fee, or buying a system.

Would very much appreciate referrals of service providers based on your experience.

Ta!

 

[Lofty]

Hi Kitti

I'll assume by Wrap you mean you'd like to sell with an Instalment Contract (the name of the legal paperwork that makes a Wrap work). I'll also assume the 'couple' you mention would be classified as 'consumers'.

An Instalment Contract (IC) is a credit contract and because you are selling to consumers, the IC will be regulated by the National Credit Code (NCC).

Because you are simply selling a property you own it is likely you won't need an Australian Credit Licence (ACL) to undertake this transaction. However, because the IC is regulated by the NCC the complete transaction must be structured as if you did have an ACL. (As always, don't take any notice of what I say. check with you legal adviser)

There are 6 important areas you will need to conduct correctly to keep your transaction compliant:
1. Marketing - You should abide by Australian Consumer Law and the NCCP Act 2009 in your marketing, especially relating to the price of the property, any regular payments involved and displaying the 'comparison rate'.
2. Application - You must gather the necessary financial information from your applicants, as per ASIC's Responsible Lending requirements.
3. Qualifying - You must verify the information you have collected from your applicants and qualify your applicants 'serviceability' as per ASIC's Responsible Lending requirements.
4. Instruction - That is, ensure you know how to instruct your solicitor correctly, so what you have agreed between you and your applicants is reflected in the IC produced by your solicitor. Your solicitor will then send the resulting IC to the buyer's solicitor. My suggestion is to never sell a property to buyers who will not get independent legal advice.
5. Possession - We have a Possession Checklist. This outlines what you needs to happen before you hand over the keys.
6. Administration - When you setup an iC the result is a loan that needs to be administered in accordance with of the requirements of the NCC (there are many). We suggest you use a specialist vendor finance management company to do this (kind of like a Property Manager in the Rental marketplace).

So, as you can see, getting the name of a solicitor to draw up the legal paperwork for your IC is just a small part of what has to be done. If you are in NSW I'd recommend Cordato Partners or, if you're in Vic I'd recommend Lewis O'Brien and Associates.

Good luck with your project.

Cheers, Paul

 

[Kitti]

Paul- I really appreciate your considered and very informative response. I'll certainly approach the solicitor you recommend (NSW) and will keep in mind the valuable service you provide should the deal look like it might get off the ground. I'm determined not to count those chickens just yet - as we know, purchaser excitement and best intentions are one thing, signing on the dotted line is another altogether.

I've run some preliminary figures. Would appreciate the input of people with more experience in this area than I (i.e. just about everyone - I read Steve's first book about 7? years ago and have given the strategy barely a thought since then).

Sale price - $366,000
Interest - honeymoon of 5.75% for 12 months, then reverts to 1.5% premium on standard variable rate of my bank - so about 7.35%
Deposit - their call. Possibly 3%.

Opinions welcome.

 

[Terry_w]

Sale price - $366,000
Interest - honeymoon of 5.75% for 12 months, then reverts to 1.5% premium on standard variable rate of my bank - so about 7.35%
Deposit - their call. Possibly 3%.

Opinions welcome.

Impossible to comment without knowing at least some further details.
What is the property worth if you sold 'normally'

How will you benefit by getting paid in installments?

 

[moyjos]

Make sure there is an end date on the wrap. Don't let it run for the full 30years of the bank's mortgage.

Make it 5 years after which there should be some equity in the property whereby the buyer can refinance to a regular mortgage.

(of course don't listen to anything I say..get your legal advice )

 

[Lofty]

First of all I'd like to agree with Terry, i.e. make sure you're clear on the benefits you believe selling with instalments will bring.

With more and more people deciding to sell their properties with vendor finance (VF) Instalment Contracts or Deposit Finance, quite a few are opting for relatively short terms, e.g. 5 years, with a large 'balloon' payment at the end of the term, i.e. the buyer has to refinance and pay off what they haven't paid off during the relatively short term.

Our discussion here does not include properties being sold with a Lease/Option (Rent To Buy) or Deposit Builder, as the National Credit Code (NCC) doesn't regulate these two VF strategies. However both Instalment Contracts and Deposit Finance are credit contracts and therefore regulated by the NCC. It's these two forms of vendor finance we'll look at here in relation to 'balloon' payments.

The following example is an extract from ASIC's Regulatory Guide 209.68 and relates to a consumer's 'capacity to repay and substantial hardship'.

'Example 10: Balloon repayments
Some products involve a large 'balloon' payment at the end of the loan term. While a consumer may be able to manage the regular repayments under the loan, whether the product is suitable for them also depends on whether they will be able to make the final, much larger, payment. We would expect the credit licensee to satisfy themselves that the consumer understands, and has the capacity to cover the final repayment before offering this type of product to the consumer.'

After reading this extract I'm sure you'll agree that structuring a loan agreement (Instalment Contract or vendor financed Mortgage) to a consumer, that does not have a zero balance at the end of the term of the loan could be problematical. We don't do it because, as ASIC indicates, how can we satisfy ourselves, at the time we draw up the loan, that the consumer will have the money to pay the balloon payment when it falls due?

In my opinion the government and the courts and tribunals are always going to 'look after' the consumer, e.g. the National Consumer Credit Protection Act 2009. We simply write up on home loans (instalment contracts) for 30 years, just like all the traditional lenders. All our buyers, except one, have refinanced without compulsion between 4 and 6 years after moving in. The exception has been with us for 10 years but the cash flow is so attractive now, we happy for him to stay as long as he likes ;-)

Cheers, Paul

 

[Kitti]

Impossible to comment without knowing at least some further details.
What is the property worth if you sold 'normally'

How will you benefit by getting paid in installments?

The sale price is around current market value I believe. The benefit to me is that this is a lifestyle acreage and I am losing a tenant mid-winter. High LVR and another recent purchase mean that my tolerance for a long period of vacancy to market is nil. I am also a sole-operator these days so am not in a position to maintain/present for sale.

There is plenty of demand to rent and is cash flow neutral, so no burning need to sell. There are real (most non-financial) benefits to me to sell to these purchasers using this method. This might not sit well with everyone on the forum, but I really like this couple and would feel great about helping them achieve their dream in a tricky time of life.

Paul, agree completely with your position on balloon payments. I had already discounted this option for the same reason you mention: they and I would like to think they will be in a position to refinance in a few years, but anything could happen and neither of us can guarantee the future.

I was considering perhaps another small (.5%) step up on the interest rate, say at the 5-year mark to further incentivise the refinance. I definitely do not want to be holding the mortgage for 10+ years.

 

[Paul@PFI]

These transactions make an assumption that credit markets and finance availabillity are a constant. Also for the equity assumptions this assumes property prices rise. If prices fall then there is a possibility of no equity. Both yours and theirs ? If banks limit lending then spreads would change for risk etc and the margin of 0.5% may be insignificant too. At 12% a .5% margin is a fraction of a 4.8%....Banks INCREASE spraeds with the base rate increasing and never use a set margin.

eg .5% at 4.8% = 11.6%; at 12% it is 4.35%... Around 1/3rd.
Perhaps add a 3% or even higher margin at 119 months ??

You could end up being a long term fianncier with your credit tied up at a VERY attractive rate for a borrower with no incentive at all to change the arrangement especially if you have all your equity in the game and they have none. Its just cheap rent.

 

[Lofty]

Hi Kitti

All the Instalment Contracts I've seen, have two methods of adjusting the buyer's interest rate:
1. The buyer's interest rate is 'locked' to the underlying loan rate. The underlying loan rate is generally called the Indicator Rate (or Reference Rate). This means the buyer's interest rate moves up and down, in lock step with the Indicator Rate.
2. The buyer's interested is normally set at x% above the Indicator Rate, i.e. at a 'premium' to the Indicator Rate.
3. As Paul alludes to above, to encourage a refinance at some point in the future, often this 'premium' is increased a number of years down the road.

Cheers, Paul

 

[Emo21]

if selling a house like this and you increase the premiums yearly to encourage complete pay back how is this treated from a tax point of view. will this still be classed as rent and are all the deductions still allowed. and if yes how is cgt implemented and is the discount affected

 

[Terry_w]

if selling a house like this and you increase the premiums yearly to encourage complete pay back how is this treated from a tax point of view. will this still be classed as rent and are all the deductions still allowed. and if yes how is cgt implemented and is the discount affected

Generally on an emerging profits basis. Income on an installment contract is not derived at time of signing contract

ATO ID 2004/407 http://law.ato.gov.au/atolaw/view.h...9991231235958&recnum=34&tot=3263&pn=ALL:::ALL



Here are some other relevant tax rulings:
ATO ID 2004/407 Income Tax Assessable income: residential properties instalment sales contracts - investor not carrying on a business http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2004407/00001


ATO ID 2004/25 "Income Tax
Trading stock: residential properties instalment sales contracts" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200425'

ATO ID 2004/26 "Income Tax
Trading stock: residential properties instalment sales contracts - stock on hand" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200426'

ATO ID 2004/27 "Income Tax
Derivation of income: residential properties instalment sales contracts - carrying on a business" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200427'

ATO ID 2004/28 "Income Tax
Assessable income: instalment sales contracts - default profits - carrying on a business" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200428'

ATO ID 2004/29 "Income Tax
Allowable deduction: instalment sales contract - payment to vacate on default" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200429'

ATO ID 2004/406 "Income Tax
Derivation of income: residential properties instalment sales contracts - taxpayer not owner of properties" http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID2004406'