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.