Episode Valuable Property Investment Advice!

Transcription

1 Episode Valuable Property Investment Advice! The Complete Transcript 1

2 Welcome everybody! Hi, it s Rick Otton here from Creative Real Estate Street Smart Secrets to Real Estate Wealth. Hey Shane, how are you? Great to be here, Rick. Well, I ll tell you what, I ve had a number of people send me in different sort of deals and transactions and saying, How are we gonna put these together? Love deals! I know! I thought you would. So, I m gonna walk you through these. You ask me any questions and let s just discuss how we re gonna do these together. All right. The first one comes from Greg. The total debt is 415. Ah, this is juicy! Well, it s not really juicy but great. But the house is now valued at 250 due to a downturn in the mining of coal. Oh. Yeah. How do we fix it? Mine more coal [laughing]! [Laughing] Payments per month are 1,770, interest only. How can I get out of this house over time? Looking forward to your reply. Okay, so obviously it s a negative equity, it s upside down. We ve got a lot of these in Great Britain, about three million of them. This guy is about 165 in negative equity. 2

3 Wow! I mean I don t have a 100% solution but what are you thinking? Well, I mean the main thing there is that he s gonna have to get that debt load down. Yeah! And just looking at that, and as you said Rick, that is quite a bit. However, it may be a case on this one where the debt not so much get rid of it all, but it can be reduced. I think it s possible. But one of the questions I ve got because the first thing I was thinking to get this debt load reduced before we do anything else. The first thing I want to know is that load of 415, whether it s crossed with another property? If that load of 415 debt is secured by only a property with a $250,000 value, I reckon that lender is gonna be pretty negotiable on negotiating that debt load. But, if that s crossed with another couple of properties, so he s got that loan secured by two or three other properties, lenders may be reluctant to do that. Do we know where that valuation came from, the 415? Well, the total debt is 415. The house is now valued at 250. So I d say probably he s called the real estate agents and the real estate agents have said what that house is worth. Okay. I ll tell you where we re seeing more of this in parts of Australia now; as the lenders are now pulling out of the mining towns. I m getting 3

4 more and more calls from sellers who are trying to sell in mining towns but the buyers can only 50% or 60% bank loans or can t get any bank loans. Yeah, who s living there? Yeah, as the banks are pulling out and they ve got these great houses. I just had a gentleman the other day who s bought a place for 1.6 million and he s down to $850,000. Wow. So my thinking on that is whether it s crossed. Yeah, I m with you as well Rick on I think that Greg will definitely need to talk to the bank on this one and see what they can do to help out as well. I think that s another point because if they themselves are staring down the barrel of $160,000 loss I m sure they would probably come to the party with him on helping out on this one. Yeah, to some degree. I m not too sure if they re gonna come back from 415 to 250. Aw, no. I don t think there will be a total wipe out. No. But just looking at this you would tend to say that he definitely needs to find someone who s gonna go in to the property. It will be an opportunity for someone to move into the property. I think they ll have to make payments on this thing. 4

5 They will. Not as a tenant. No, they definitely will. If the people come in making payments they ll probably pick up all the outgoings like the water, the council, the rates, the repairs. If he s in there at 5.11% you might get someone coming in at like 7%. Yeah, and I think too if he extends out the timeframe in which he gives that opportunity to someone as well I mean this is not gonna be one of those deals that he s probably gonna get out of in three to five years. It might have to go longer, more like seven years or something like that, that he can give someone an easier payment plan over a little bit more period of time. That s gonna help just reduce the hurt factor on that deal. And even then I reckon we could cover off a lot of that and we could bring this down with both those things; speaking to the bank and also having the person come in and make payments with an interest rate that s a couple of percentages higher than his interest rate. And then those extra payments of course, can go against the debt to sort of bring this debt down. Yeah, absolutely. And with no outgoings as well that will help save a lot too. Yeah. If I had some guy come in on a 20 year payment, I mean as far as I m concerned he can sort of come in and make payments and I ve got some guy that s gonna pay it virtually all off for me but, as you said, over a long period of time. That might be the way forward on that one. 5

6 Here s one. This is from Christy. The seller s mortgage is equal to the value of a four-bedroom house. Well, there we go. No equity, that s a house for a dollar there. The house is rented for 375 a week. The mortgage is in arrears 6,200. Because the mortgage is in arrears 6,200 they ve got total loan debt of 400,000. So, we ve got a four-bedroom house with a total loan debt of 400,000, there s 23 years left on it at 5.8%. The interest rates might drop down on that one just a little bit. Okay, here s what we ve got. We ve got a $400,000 house with a $400,000 value. The seller has personal credit card debt of 70,000. Wow! With the CBA, which is the Commonwealth Bank. It s interesting, I just want to sort of progress of this. We ve brought in the new Credit Act, which started on the 1 st of April. I think the days of people getting multiple credit cards from multiple lenders has probably all come to a stop now because all debts from all lenders now have to be on the credit reports. This is interesting. Wow. The seller has an injury and sickness and therefore, no income other than Income Support payments, which of course do not cover the bills. I think the person is saying, How do I get out of a 400,000 house with 400,000 worth of debt that I m only renting for 375/week, obviously negatively geared which means more debt, more payments are higher and I ve got no income because of sickness and injury. Yeah, well I think it s gonna be a similar concept on that one. If they re prepared to move outta the house and look to go and rent while they get themselves back together financially, they can start paying down their debts by having someone come in and make payments on the house over a period of time. There s probably 6

7 something that they can do there with talking to the banks about maybe being able to get the bank to help them out, maybe move that arrears amount to the end of the loan for them or something like that? They could talk to them about doing that so that s not overshadowing it. And then, cutting up the credit cards [laughing]. Yeah. I mean you don t know the situation with these people but $70,000 in credit card debt is a lot of money. That s 22-23% interest, yeah. You don t know anyone s personal circumstances so you can t make any judgements on that. But this one will be a simple case of obviously financing that house to someone else who wants to come in and make payments on it. Well, that s it, yeah. And they ll give you some money upfront to get started. At least on a $400,000 house, you wouldn t take any less than $10,000 upfront. Yeah, probably 10 or 15. I was thinking 10-15, but no less than 10. Yeah. And again, maybe on that credit card side of things they can have a chat to your local bank and see what they can help you out with. Yeah, I understand that one. Okay, here s the one. Gosh, we ve got another person here someone s got a friend with a terminal cancer/illness, this one s in New Zealand, and they want to get rid of the property. Okay, the mortgage on this one is 216. Wow, the 7

8 outgoings are 2,200 a month. The rent is only 1,100 a month. So they ve got 2,200 going out, 1,100 coming in, the market value of this property is 235 and they re suggesting that maybe they can put it on the market for 240 sweat equity with sort of like $9,000 worth of repairs and hope for someone with a 16,000 deposit. Now, I can see what they re thinking here. They want a 16,000 deposit because there s this other 15,000 debt and they re hoping that the upfront money of 16 will cover out the debt. How do we sort of make this happen? My thing is this, if you want to get a sweat equity, which means some buyer is gonna come in and do the work on the house, I reckon they might give you some money upfront. I m not too sure they re gonna do the work on the house plus give you another 16 on top of that. I think that obviously, we can t see the house so we don t know what sort of work needs to be done to it. We probably need to know what kind of value can that work lift the house up to. If you know that it can lift it up to a higher value, you probably will find that someone will come in and they may be able to drop some money in upfront there and then do the work as well. I m just wondering 2,200 is a lot going out on that. I know. Well, you know why? Cause it says here Will be paid off in 10 years. Now, I wonder so the mortgage is 216, outgoing is at 22 a month, will be paid off in 10 years. Now they ve either taken out a very short loan, so they ve taken out a home loan for 10 or 15 years, or there s just not much there s only 10 years left. My thinking, as soon as I saw that, the first thing I d be doing is I d get the thing pushed out to 15, 20, 25 years. I was just about to say the same, Rick. You might even look at asking the bank to restructure the loan or something like that on 8

9 that one cause yeah, it seems a lot of money going out on such a small loan. I remember many years ago I had a lady who bought a house on a 10 year loan. The whole idea was if I pay it off in 10 years I ve saved all this interest, blah, blah, blah. She had a chicken shop where she was chopping up chickens. [Laughing] At the end of the day she had some hardship there and she found she had a hard time making the payments on the 10 year. Now, what would have been a better move was for her to have been to have taken this to a 25 year loan and made extra payments to pay it off as a 10 year. So, if you run into financial difficulty you can just go back to extending those payments back out. There s something else that he said here. Listen to this. The market price is 235,000 but the house next door, on a smaller lot, is on the market for 180. Ooo. Yeah, now what are you thinking? Well, when you re selling everybody is gonna come along and compare. It doesn t matter whether it s apples and oranges. If the house next door sold for 180 and you re trying to sell yours for 235, or 250, or whatever it is, everybody is gonna ask the question, Why is that one 180 and why am I paying 235? Yeah, now here s what he s thinking. I know where he s coming from. He s thinking he s worth 235 because it s on a bigger lot of 9

10 land. The guy next door has got the same house but he s on a smaller lot and this guy is on a bigger lot. Doesn t always make the difference. Not in this market. No, it doesn t, does it? Nobody wants to mow lawns. It is funny Rick, cause land is everyone thinks, Oh, all the money is in the land. But right now people aren t really looking at the land. They want the house. Yeah, that s why they re building houses right up to the boundaries, right? Cause no one wants to mow the lawn anymore. Everybody would rather just have a computer room for the kids. I m not saying that s right or wrong but it s just how it s changed. It still doesn t solve his problem. I think that is gonna be Well, you know what I ve found over the years? If I try to sell a house, say a three-bedroom or four-bedroom house, for 180 and say we ve got the house next door, three- or four-bedroom on for 235 and it s got a bigger lot, right? No one will pay the extra for the bigger lot. They ll say four-bedroom, four-bedroom; they ll always take the 180. I can say, But mine is on a bigger bit of dirt! No one really cares. Yeah, he s definitely gonna have to offer something a little more. So, as we were saying before, giving someone the opportunity to come in there and fix it up themselves the way that they want it might be the way to go here, and then allowing them to make payments on it. It s gonna lessen the amount that he s got out. What s he got there, 1,100 going out? 10

11 So here s what we re gonna do; we re gonna increase this loan from a 10 year loan and drop it back to a 20 or 25 year loan. That ll bring that 2,200 more in line with the 1,100. But this is rent only is 1,100. So if we made those home payments instead of rent that ll probably bring that up to 1,400 or 1,500. So the 1,100, because it will be a house payment, will be more like 1,500 or 1,600 coming in. I then drop those payments from 2,200 going out to much lower cause I ll make it a longer term. And then that now covers it. So now, we re in a situation where this person has some medical issues and they can t work, so that really covers it just really right there. Yeah, it exists on its own then. I actually think on a property like this at 216, 220, 235; you re gonna get 10,000. You might get 15,000. Yeah, if you ve got someone coming in to do a reno I think that you would probably get 10,000 upfront for them to come in, for the right for them to come in and improve the property. Yeah, but they re all about what s in it for them and we re just gonna have to see how that one sort of works out. Okay, here s the next one I ve got. This one is from Ivan. Ivan needs to upgrade his property. Okay, I ll actually read it word for word. I don t know if Mr. Rick checks his directly, yes I do, Ivan. Here it is. But I will ask for help and advice how to get solved my property quicker as I need to upgrade to a bigger property for a growing family. He lives in Victoria in a place called Edithvale. Any idea where Edi Mm-hmm, yeah. 11

12 Yeah, you know where Edithvale is! Where the heck is Edithvale? Is it in Melbourne somewhere? It s on the Mornington Peninsula side. It s just southeast Down there where the pinot noirs are growing! Not that far south. It s north of Frankston so it s sort of in between Melbourne and Frankston, in that southern Okay, not really in the great wine-growing region? No. Okay. So he s got a three-bedroom unit and a value of more than 400,000. He s got a mortgage of 240,000. So he s getting close to half debt/half equity and he s paying about 1,400 a month. This is interesting. What advice is the best way to sell it having in mind that I need to buy a bigger house immediately? Vendor finance or seller finance will replace the repayments but will not give me the power to buy the next property straight away. What could my options be? So he s saying if I seller finance this thing that s great, it will look after the debt service on the thing. But it will not give him the power to buy another property straight away. Well, I d have a few questions there. I would think of it as like buying a second property. Has he asked the question of whether he can if this thing is covered, will he have the money and also the borrowing power to actually go and buy? What is it exactly that he is going to buy? Has he picked something out? Does he have it in mind? Is it there? 12

13 Well, I think he s trying to get his cash position. There s two things you can do. What a lot of people do is they ll go and do a crosscollateralization. They ll go and get the new property and then the bank takes position on both properties. I just don t like crossing properties. I just don t like that. I mean how often do we get sellers lose the whole lot in the domino theory cause the banks have crossed and taken control. So that s where you get the bank that lends you money, but instead of taking security of one piece of property, they take security with the other pieces of property which really stops you moving forward. And sometimes, as you and I both know, it s just better to throw it on the market and sell it if you want the cash. Just go and see your local agent and put it on the market, sell it, and get your cash out and move on. It doesn t always have to be this way. Yeah. There s a couple other things. If we know that the lack of deposit is the biggest hold back for people s inability to buy properties maybe he puts the property on the market for the full 2,3, or 5% more than what he expects to get, but he just finances people s deposits or part of their deposits. Yeah, absolutely. Most of these things you need a the agents can do this. It s like the first man with 15,000 deposit can get the bank loan and he ll sort of make payments on the rest. The other one, which we didn t think about, was simply get an increase on the loan debt. So if he s got 40,000, 240 loan debt why doesn t he just get that pushed up to 360? Now he gets the money out. The guy that can come in he s only got 40,000 equity left in it. So it s 400,000, he s got loan debt of 360, he s taken the cash bit 13

14 between the 250 and the 360 to go to the other property. The great bit about this is if he tried to sell that thing for 400 you know that he ll get offers of 390, 385, right? Yeah, absolutely. And by the time he takes out the holding costs, payments on the mortgage, agent fees, opportunity costs; he ll be back to 360 anyway! Yeah. So he might as well get Barry, the mortgage broker, to pop in, upstamp it, get a new loan at 360, pull out your cash, keep that old one, then you can sell it. Now, here s the thing; so that the bank is okay about lending him some other loan for the second property, they re gonna want to see he s got some servicing on that first one. So, he can sell the first one with instalment payments. Sure. He could sell that for 430. Some guy comes in and makes payments and covers everything! No outgoings, it s all been covered. Yeah. Yep. That sounds like a good plan to me. I would definitely look into upstamping the loan and then setting that one to forget it and just let it run on its own. Whenever I can, if I can think of a way, I always prefer to try to borrow my equity out of a property in a creative way that someone 14

15 else is gonna pay it because I can sell the property for more. To sell a property for cash, I mean sure, if I have to, but if I can sell it for some sort of Creative Strategy that adds value to it so I can sell it for more money. Yeah, well cashing in and out costs you money as well. Yeah, it costs you money and let s face it; how many people have got the cash in this market? One of the things I ve been reading, and let s face it this market is changing, is this oversupply of home units that s coming into Melbourne right now. In six months time it will all be gone, or nine months, or whatever. But everybody who tries to sell out for cash is fighting in a feeding frenzy. There s just not enough buyers, so they get sort of hit doing that. Okay, talking about this frenzy; vendor financing. One of the questions I get asked all the time. People say, Do the strategies work in a booming market? What are your thoughts on that? Well, [laughing] it s hard to know by looking in the papers. Some will say it s a boom, some say not. I ve just found that whether the market is going up, down, or sideways, there s always different people in the market so there s always people that don t have deposits or there s always people that are new immigrants to the country. I think that vendor finance works in any market. I have yet to see a market I ve only been in this for a little period of time, but I ve also been in property investing for awhile and I think it d have its place in any market. Yeah, it doesn t really change. People say to me, In a booming property, do people still use these strategies? And the strategies, I actually haven t found change. People say, Well, in a booming market people can t just sell for cash. And I say, Well, yes and no because you ve still got to have buyers being able to get in there. 15

16 And see, emotional reasons don t change with people. The reasons as to why people buy and sell and want to move away from something; they don t really change. The strategies in vendor finance itself it s an evergreen, it s not a seasonal thing. I don t think it s seasonal at all. No, cause if the market goes down people say to me, Do these strategies still work? Then they go, If the market goes up do these strategies still work? They re not actual seasonal strategies. In actual fact I think they re fantastic cause they really are recession proof and they re not affected by the economic cycle. So whereas say in a falling market developments aren t really working well cause if you re building the developments in a falling market you re on your way to poverty, right? Different strategies will work in different economic cycles. But all these kinds of strategies aren t really affected by economics. Well, and it s so individual too. I mean the very term of vendor finance, what it s about is the person who has the property is gonna become the bank. So you re just setting the rules between two people. That s not really a market driven thing. It s an opportunity for two people to get together and create something out of it. Okay. The next question that s come in here is the person wants to do a lease option. So the person is coming in rent to buy, a person is gonna pay some money upfront, and let s just say I m buying this property from you. Okay, so you ve got the property. I m gonna come in, you re gonna rent it to me, and I m gonna pay you some upfront get started money. How much of my money that I pay you are you gonna allocate towards me purchasing the property? And how do you work that out? 16

17 Well, of the upfront money - all of it. And with the payments - I keep it the same as a bank. It keeps it fair. Say you look at a bank and they ve got the interest rates right now are about 5%. I ll go to a bank website, I ll go on the bank calculator, and have a look and see what part of that is the interest component? What part of it s principle? So I look at it that way. If I want the person out of the deal or I want the deal to go quicker or I want it to go smoother, well then it s up to me. I may credit more towards it. It just totally depends on where you want to go and how you want to do it. Okay, now hang on. Let s just back up a little bit. So let s say I come to see you and I want to make payments to you. Let s say I give you 10,000 upfront, you ll credit that towards the price of the house. Yep. And then you might realize that after say three years, because I ve been making payments to you, kind of like paying off a bank, you might think, Well, I haven t really paid much more in principle to pay off this house, but based off what your exit strategy is, like how fast you wanted out of this deal you might rewrite it in such a way that a high percentage of what I m paying you comes off the principle payment. Yeah, well that s the beauty of these deals is because it s between you and them, I might say, We can get you out now. If it means that I forfeit $10,000 of the profit that I ve got in there I ll do that because it gets them into a loan, they then own the property outright, I m out of it, they re out of it, and we re all on our way. So, it leaves it open for you to be able to change that if you need to change it. As you know, things change. You might set it up for three years but then, after a year you might decide hey, these guys are great, they re going really well. Why don t we credit them a little bit 17

18 more on their if they re good payers you can credit them more. There s so many different things that you can do. I would say every transaction I get into gets massaged and moved around somehow. How many times have you had where people come along and Barry, the mortgage broker, has said to me, In two years time I can get these people out Rick, but they re gonna be 8,000 short. And I ve gone, Fine, let s just fund them the 8,000. Cause if I m making the 40,000 or 50,000, and we talked about this in an earlier podcast, I want my money now and not in 20 years. If I get somebody who s been making payments, there s 60,000 profit in it, and I can get it funded but they re gonna be a few grand short, I ll just go, Yeah, whatever. I ll give them the credit. Yeah, absolutely. Or I ll increase the credit. Or sometimes you might have a lender who says, This guy needs a 45,000 credit. He s only got a 43,000 credit. I ll go, Fine, I ll give him 2,000 more credit. Do you know what I mean? Absolutely, and it leaves it open for you to do that and that s the win/win/win. And I think that s the flexibility of these types of transactions. Well Rick, it s that time again. Really? Again? Yeah, we ve gotten to the end of another one. We d just like to let everyone know out there if they d like a free property information pack and they live in Australia they can go to creativerealestate.com.au/freepack. Rick will ship that to you free of 18

19 charge. If you re in the U.K. you can go to rickotton.co.uk/freepack. And of course, if you ve got any questions and you d like to send them in, send them to support@creativerealestate.com.au. And people can also get the transcripts from creativerealestate.com.au website. Great! Then they can read what we just said! Well, I think we re gonna go now until next week! Next week it is! All right, see you soon. Bye. 19