All Topics / General Property / Steve has inspired (but yet, confused) me – can you help?

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  • Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi all,

      I've been reading Steve's book "Millionaire".  While reading it, a particular paragraph JUMPED out at me.   The possibilities were inspiring, but, in thinking further, it left me with questions that I hope others can answer.   First, here is the paragraph summarised (from p170 of "Millionaire") :-

    Quote:
    By offering a 50% Deposit when purchasing a property, you might be able to negotiate a 10% discount – and if you have those $$ sitting in a Term Deposit earning 3%, this way would produce a far better return

    Quote:

      That is a summary of his words.  By doing a few calcs, I could easily see that a 10% discount with 50% cash in the pot would yield BETTER than 20% (and that could be 20% over a few weeks – rinse and repeat with the SAME cash for a mighty return per annum).  So, calculation-wise, I understand where he is coming from.  

      The part that I don't get is this – WHY does a 50% deposit offer much more incentive to a seller (or RE agent) to offer a 10% discount.  My thoughts are "I can see value in a 100% cash offer – it can be a VERY short settlement, leaving the seller to "move on" quickly.   

      But WHY is a 50% cash deposit much better than the standard 10%?  Both would require a loan from a lender, thus delays in settling…..

      I figure I must be missing something, as Steve prefaced the paragraph by referring to it as an "advanced strategy".   Can anyone shed some more light on this "50% discount" and its benefits?   Thanks,

    Benny

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Benny

    No sorry i can't say i have because i haven't read Steve's new book.

    Word of warning though remember anything more than 10% deposit could make the purchase an installment contract and this has consequences for both sides.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of FreckleFreckle
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    @freckle
    Join Date: 2012
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    Believe me there's nothing new in finance. This kind of stuff gets newbies all excited like it's some kind of secrete revelation.

    Wall Street developed complex derivatives that only a few autistic savants can understand on a good day for the same reason. Baffle 'em with BS and they think you're a genius.

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Freckle,

    Quote:
    Believe me there's nothing new in finance.

      You are probably right – but it is new to me, hence the question.  Just wanting to understand a bit more about WHY/HOW it might work….. 

    Benny

    Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    and actually CASH offers Might not be a quick settlement anyway.

    Just because you can settle and have the money available, doesn't mean the the sellers bank has all the discharge papers and potential valuations of the sellers other property already organized. You'll still find that it can take up to 3 weeks if the seller has finance on the property.

    Profile photo of wilko1wilko1
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    @wilko1
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    Its just simple seller psychology. 

    There might be 3 offers on the table.

    the seller is asking 500k for his property. (He is a desperate seller, he might even accept 470k)

    Person 1 offers 500k with a 1k deposit and subject to finance, the agent discovers he has never bought a property before before and he is currently unemployed.

    Person 2 offers 480k with a 10k deposit, assures the agent they will be able to get finance, but they want to have a builder a structural engineer a pest inspector and a council officer to look over the property for issues all of which would be subject to in the contract as well as a 3 month settlement

    Person 3 (thats you) Offers 450k for the property with a 225,000 dollar deposit. (50%) with no subject to finance and no other conditions 1 month settlement

    Seller goes I need money ASAP or im going to default on my business loan or the money is getting split in a divorce and i honestly want this over with NOW. not potentially in 3 months and theres no guarantee Person 2 or Person 1 can even afford it or wont pull out. 

    Im going to take person 3's offer. If they don't get finance or default on the contract then at least im protected in that i have their large deposit and then if the market downturns and you only sell for 400k they can also sue to get the difference in Loss of selling price between your contract and the next sale contract. $225k in a agents Trust account is going to be easier to work with then 1K.

    So you end up paying 450k for a property that was advertised at 500k that the seller would of taken 470k and you feel like you got a 10% discount to the "asking price" by offering a offer that gave the seller the smallest risk of not getting paid possible.

    Profile photo of BennyBenny
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    @benny
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    Hi Wilko,

       Can I draw you out on one point that I am unclear on….

    Quote:
    Im going to take person 3's offer. If they don't get finance or default on the contract then at least im protected in that i have their large deposit and then if the market downturns and you only sell for 400k they can also sue to get the difference in Loss of selling price between your contract and the next sale contract. $225k in a agents Trust account is going to be easier to work with then 1K.

      Perhaps I am labouring under a delusion, but isn't a seller only entitled to something like 5% or 10% if I were to default – or is it the WHOLE deposit (as I think you are indicating)?.   I've never come across this, as I have never put more than 10% down. 

      Anyway, if the seller is allowed to keep all of a deposit, that pretty much answers my original question.   Thanks for taking the time – I appreciate it.

      Re a 100% cash contract, yes I agree the seller's side of things could add delays, but a buyer could likely settle in a matter of days if paying cash, couldn't they?  But NOT if a 50% deposit is involved, surely.

    Benny

    Profile photo of wilko1wilko1
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    @wilko1
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    I wasn't indicating they could have your entire deposit . But if you breached a contract they would have ever right to sue you if they then sold their home under what you offered. And with a larger deposit in the agents trust account they would have a greater chance and or greater possibility that they would in fact do this. 

    Yes if a buyer was paying cash they could settle quicker.. But they can still only settle as fast as the seller. If the seller cannot settle for a month then neither can you. 

    But if you are saying that you have the possibility to settle faster then a 50 % deposit then yes you do as you'll need finance on the 50%. But as I said before if the buyer is going to be delayed 3 weeks etc in settling anyway you might as well take finance.

    the only reasons I haven't taken finance on property before was for unlivable houses that I would of only got valued at less then land value anyway. So it seemed quicker and easier 

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
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    Be aware that (in Victoria) once a contract is "unconditional" (ie finance is approved, you are happy with your building and pest and any other conditions that apply to the contract), the vendor can request early release of the deposit.  You can respond to this request, or not.  If you do not, they get the deposit after 28 days by default (so long settlements have the potential to be dangerous if you have a big deposit on the table).  You can decline to release the deposit, but there does need to be a valid reason.

    I never release deposit early.  Once it is in someone else's hands, there is no control over what may happen.  If they were unable to settle for some reason, you may not see your cash again.

    With this said, I must say I find it ridiculous when I am presented with the argument that a vendor supposedly wants a bigger deposit (since they won't be getting any of the money till settlement anyway).  A more rational argument is that the selling agent wants the deposit to be of a size that at lease covers his/her fees, so that if the deal falls over, he/she can still get paid.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of wilko1wilko1
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    @wilko1
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    I think the vendor arguing for a bigger deposit is a social upbringing. The majority of houses being sold have been owned for a while and anyone above their 40's would have grown up in a time where you HAD to or it was socially accepted to offer 10 percent as per the same conditions as a regular auction. 

    jacm what are some of the reasons you have given for not releasing the deposit early because I'm guessing you have had long settlements before. 

    Profile photo of BennyBenny
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    @benny
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      Some very interesting insights coming out here – thanks for those, Jac, Wilko, Qld007, etc.    It all helps to get the bigger picture…….

    Benny

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    wilko1 wrote:
    jacm what are some of the reasons you have given for not releasing the deposit early because I'm guessing you have had long settlements before. 

    I don't give reasons.  I simply do not respond to the request, which is essentially saying no. 

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Ryan McLeanRyan McLean
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    @ryan-mclean
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    Post Count: 547
    Benny wrote:

    Perhaps I am labouring under a delusion, but isn't a seller only entitled to something like 5% or 10% if I were to default – or is it the WHOLE deposit (as I think you are indicating)?.   I've never come across this, as I have never put more than 10% down. 

    Anyway, if the seller is allowed to keep all of a deposit, that pretty much answers my original question.   Thanks for taking the time – I appreciate it.

    Benny

    In most states the only deposit required is that 0.25% deposit before the cooling off period. The rest is up to the contract to state the terms and conditions.

    So yes there could be the case if and when you defaulted the owner could keep the 50% deposit. But if I was the buyer I would ensure that I could get my full 50% back if the deal didn't go through.

    I believe it may be easier to secure a discount for a urgent seller simply because you have more money so it looks to them like more of a sure deal. A desperate seller rarely wants to gamble on a higher price that could really easily fall apart, so they may be inclined to sell to a person with a large deposit.

    But you would still have to go hunting for deal and discounts, it wouldn't just happen because you have a 50% deposit.

    Ryan McLean | On Property
    http://onproperty.com.au
    Email Me

    Profile photo of Ryan McLeanRyan McLean
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    @ryan-mclean
    Join Date: 2010
    Post Count: 547
    Benny wrote:

      The part that I don't get is this – WHY does a 50% deposit offer much more incentive to a seller (or RE agent) to offer a 10% discount.  My thoughts are "I can see value in a 100% cash offer – it can be a VERY short settlement, leaving the seller to "move on" quickly.   

    But WHY is a 50% cash deposit much better than the standard 10%?  Both would require a loan from a lender, thus delays in settling…..

    I figure I must be missing something, as Steve prefaced the paragraph by referring to it as an "advanced strategy".   Can anyone shed some more light on this "50% discount" and its benefits?   Thanks,

    Benny

    I just had a thought. Is Steve talking about the AUSTRALIAN market or the AMERICAN market? I know Steve has done quite a bit of investing in the US.

    If it is the US market then traditionally a lot of sellers will provide owner financing (providing the loan instead of a bank or traditional lender). So if you were to offer them 50% up front and some other buyer only offered 10% there would literally be a 40% difference in the cash they received up front and thus you may be able to secure a discount.

    Because the seller is acting as the lender as well this could easily get you a discount.

    But in the Australian market where almost all sales are cash sales (you get the money from the bank and pay the seller cash) the large deposit would have less influence over the purchase price.

    Ryan McLean | On Property
    http://onproperty.com.au
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    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Ryan,

    Quote:
    Is Steve talking about the AUSTRALIAN market or the AMERICAN market?

       Bingo!!    You may have just hit the nail on the head, Ryan.   The book came as a gift when attending Steve's seminar on investing in commercial property in the US.  He shared the stage with "Uncle Zally" who is an investor from Florida.   So, it could be that his words may be something more relevant to the US.   Thanks for the thought,

    Benny

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