Hard Lessons Learned About Buying Real Estate

A couple, both Medical Specialists who own multiple properties, asked me to organise finance for their purchase of another property.  The asking price was $150K over the valuation, but the estate agent told them that they could get finance without a valuation from one of the big banks.  They rang the bank, who confirmed that they could get finance without a valuation on property valued under $500K, so they signed the contract of sale at the asking price with a settlement period of six weeks.

After gathering the usual supporting documentation, we proceeded with an application in their company name as trustee for their family trust as instructed.  The bank sat on it for a couple weeks and then asked for last year’s tax return.  By the time we received it from their accountant, we were in the fourth week of the settlement period.  The bank then came back with a conditional approval that required a full valuation, which meant that the clients would have to come up with at least another $50K in cash, which was totally unacceptable.

The bank’s reason for the valuation (and withholding any discount to their standard variable rate) was that the borrower was a company, not an individual.  I advised the clients to change everything to their names as individuals.  But, the clients were adamant that the loan be in the company/trust name for the purpose of asset protection and insisted that I escalate the matter with the bank.  The bank then replied with another approval subject to more conditions, including a copy of the ATO assessment of their just completed and submitted tax return.

With less than two weeks to settlement, I recommended a back-up plan with a different bank, one which could process an application and documentation much more quickly than the first.  The clients reluctantly agreed, but by the time they signed the new application, they had re-contacted the first bank, who advised them that the application had been set up incorrectly.  The owner of the property could remain the family company, but without reference to the family trust.  The borrower had to be an individual(s), not a company.  They further advised that an approval not requiring a valuation would be issued quickly following the changes.  They instructed me to proceed with the changes late on a Friday.

The following Monday, I rang their source of advice at the bank to make sure that all would proceed smoothly.  But, when he heard that approval had already been issued with a valuation as a condition, he said that the only way forward was to remove all references to the company and trust.  With everything in an individual’s name, he could get it approved within 24 hours without the condition of a valuation.  I turned the whole matter over to him in the interest of the clients having the best chance of meeting their settlement deadline.

  • Lesson One:  Have your finance pre-approved before signing a contract or make the contract subject to finance approval.
  • Lesson Two:  Have your supporting documentation ready for submission before signing a contract.
  • Lesson Three:  Banks treat individuals much better than companies or trusts.
  • Lesson Four:  Banks are not really interested in standalone loans; they’re always looking after their own clients and those who are willing to move all of their banking to them.
  • Lesson Five:  The banks change their policies without notice and their credit departments still call the shots and are always looking for reasons to decline applications as part of their risk management strategy.
  • Lesson Six:  Just because you may be a doctor with a very healthy income and balance sheet doesn’t mean that the banks will offer you special treatment.
  • Lesson Seven:  Structuring your finances with companies and trusts may have many advantages, but dealing with the banks isn’t even close to being on the list.

The lesson that I learned is that if a client engages me after signing a contract that’s not qualified as subject to finance approval, I must be very clear about the risk in meeting the settlement date.  I will also be much more forceful when a client doesn’t accept bank policy or my advice in relation to that policy.

I Don’t Get It…

While the local lenders continue to maintain extremely tight lending policies (example below), the health of the Global Financial Markets appears stronger than ever (as measured by the TED spread).

The TED spread is the difference between the yield on the 3-month U.S. Treasury bill (a safe, 3-month loan to the U.S. government) and the yield on the 3-month LIBOR (a riskier loan to a bank in the London wholesale money market).  It’s an important indicator of how much trust exists between large, international banks, which also makes it a good gauge of how freely capital is flowing through the international banking system.

In general, when the TED spread is high, banks are worried that short-term loans made to other banks won’t get repaid. When the TED spread is low, banks are confident that short-term loans made to other banks will be paid back.  A TED spread below 50 basis points is a good indication that the global banking system is healthy.  At the worst point in the GFC, the TED spread was almost 461 basis points.  Today it’s under 18.

What I don’t get is, given the very positive global climate above, why won’t a local bank do repeat business with an established client with an excellent credit history?  The case in point is a Sydney-based Radiology practice who acquired a new Ultrasound System late last year.  I helped them get a 5-year facility with a lender new to the practice.  So, when the same practice bought another replacement Ultrasound System and some IT this year, I took it back to the same lender and was shocked when they declined the opportunity on the basis that they don’t do sale and leasebacks on any equipment that’s over 30 days old.

Brokers Recommended for SME Finance

Small and medium sized enterprises are paying over 2% more for finance than homeowners and big business.  The banks are justifying the difference in terms of their cost of funds and risk premiums.  According to an article in today’s SMH, the executive director of the Council of Small Business of Australia, Peter Strong, said business customers were a soft touch.

”It is an easy target and there’s not many people there to defend us.”

Small businesses should increasingly look to use brokers to organise their financing rather than going directly to banks, he said.  This would bring more competitive tension to the market.