Possible new strategy?

[Damap]

I was somewhat surprised when recently helping a family member into a house to discover that anyone can gift deposit/equity to another and the bank are quite happy with this. It used to be that the buyer had to show proof of saving the money.
So I am wondering if there is an opportunity to help people into homes who otherwise couldn't get in and what the risks might be.

For example buyer A has good income and reasonable credit but no show of saving $150K deposit to buy in Auckland where they currently rent. They do have kiwisaver and or some cash, let's say 30K

Investor finds a property that values genuinely at 750K. They buy it for 600K.

So the investor enters into contract with buyer for 750K and 30K deposit. My dilemma is around making the rest of it work.

In the case of my daughter I simply gifted all the equity as deposit as it wasn't a make money opportunity. But as a commercial opportunity is there a way to leave the equity in so the bank supplies a mortgage for 80% (or 70%) of 750K, so they are not exposed.
In the example above this means a 600K mortgage and the seller has 30K deposit so seller is in profit, buyer is in the house and bank has no unusual risk.

The balance of the 750K or part thereof now has to be dealt with. Could that be set up as a second mortgage? Private loan? Other options? As the seller is already 30K up (gross margin), there is no actual exposure to investor. One might agree to sell it for 700K and forgive 50K. There are endless variations but can this be made to work transparently without becoming a grey area?

[orion]

Yes can be done.
However the seller will pay GST and income tax on the extra that has been perceived to be received if it was bought as a property to trade.
If it has been a rental or own home and would not otherwise be subject to tax, then should all be fine.

[Nick G]

Sounds like a spin on vendor financing and it would be a second mortgage and should the market dip 10% the seller would be exposed.

[Damap]

Seller can't be exposed they are already in the black. As property is already sold and they are in profit how can they be exposed? I assume you mean they may not get all their profit? Value dropping has zero effect on that if buyer is simply paying 2 loans. Where does the exposure come?

[Nick G]

OK I see.

You're gifting the equity that becomes the deposit. Your risk is that if the buyer defaults you have the second mortgage so you would therefore charge a premium on the bank lending rate to compensate yourself for that risk, reward you for choosing that transaction vs simply selling the property at market value to someone who can afford it and incentivise the buyer to pay you back first.

So you've put yourself in the position of a second tier lender. You raised the capital to loan through a property transaction as opposed to having the cash at hand or borrowing the cash cheaply to lend out again at a higher rate (and CYA with loan insurance).

[Damap]

Yes so no real risk, just loss of profits. I used to do lease options to help people into homes for many years. I see this as a possible new way to help others out who can't get in any other way. I'd rather see good people in houses than squeeze every last dollar out of the deal. What I don't know is whether there is an "ethical" issue with the banks. They may not like the buyer being leveraged above what they are lending.

[ivanp]

As far as I know, banks normally set security amount of about 1.5x times to amount of their loan - at least that's what I've seen every time from major banks in the last two years. So if a buyer gets 600k loan, their bank's priority amount is set to 900k and you can only get second mortgage on anything above 900k which is not possible until the house price increases to above 900k...

So, to get 2nd mortgage above 600k you'd have to negotiate with a bank to make a non-standard agreement...

[Damap]

No Ivan, you hold the second not a bank, so that is not a problem.

[ivanp]

My point is that with standard loan agreements of major banks you wouldn't be able to get 2nd mortgage. It seems to me that the standard agreements are specifically designed to exclude any chance to get 2nd mortgage.

[Damap]

Not if you hold the mortgage there is nothing stopping you at all. How does their security limit make any difference?

[ivanp]

Do you understand what is mortgagee priority amount?
If a property sale price is $750k and 1st mortgagee lends say 80% of it, $600k, then I'm saying that most likely they will put priority amount of $900k (=$600k * 1.5). My understanding of the "priority amount" is that second mortgage can be only registered above the priority amount.

[Dunning]

IMHO The bank would have a security interest of up to 900k. This gives them security and legaly right to cover costs for interest, holding fees and sale expenses etc. As holder of the second mortgage you would be you would have to wait for the bank to be discharged before being paid if the bank recalled the loan. This would involve more risk in case of default. This would be too much risk for a main street(ie cheaper) lender.
Like you say, only your 150k profit is at risk(as long as it's ring fenced)

[Damap]

My understanding of the "priority amount" is that second mortgage can be only registered above the priority amount.

Not if it's your loan, makes no difference at all. That's why I keep asking you what the issue is. If I leave money in as a second the banks security makes no difference to me at all.

[ivanp]

The issue is that essentially you leave your money ($150k) unsecured.

[Wayne]

The issue is that essentially you leave your money ($150k) unsecured.

Potentially unsecured - if the bank takes all that the house is sold for (interest, expenses as mentioned above).
You are secured for the difference between what the bank takes the total sale price if sold by mortgagee sale.