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No need to secure loan for OTP purchase?

Discussion in 'The Buying & Selling Process' started by ATANG, 14th Jan, 2016.

  1. ATANG

    ATANG Well-Known Member

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    Was chatting with a friend of mine as she was having difficulties getting a loan for a purchase that she made last year, a two bedder in Brunswick. She's paid the 10% deposit but the rest need to come from a loan, that's like half a million.

    I am just surprised that you don't actually need to have a loan secured before you could purchase the apartment? At least in my home country, you need to have a loan secured before they could let you progress with the purchase.

    It just made me thinking how risky it is for these buyers, say if any of them cannot secure a loan (due to different environment two, three years after they purchased) and they would have to forfeit their deposit?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    loan approvals generally last only 3 months to expire.
    No need for a loan approval to sign a contract either.
     
  3. jaybean

    jaybean Well-Known Member

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    You hit the nail on the head. And this is why OTP is generally frowned upon by seasoned investors unless you score a good deal or you're buying in a clearly rising market. It's just too risky. If it comes in under valued by 100k, you're either screwed...or if you have the cash, you're still in a bad spot - that's a lot of non-leveraged cash to sink into an investment.
     
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  4. The Y-man

    The Y-man Moderator Staff Member

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    @ATANG

    It's a lot WORSE than just losing your deposit!

    You still have to settle the deal - you can't just pull out by forfeiting the deposit - so the vendor can potentially come after all your assets etc (to fire sell and realise the cash).

    The Y-man
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Vendor could potentially sell for a lower price and then come after the purchaser for this plus extra costs they incur relating to the resale. Could be a lot so if you think you cannot settle you should seek legal advice on the contract tomorrow.
     
  6. jaybean

    jaybean Well-Known Member

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    Yikes. Does this happen often? Or do the legal fees disuade most companies from coming after buyers?
     
  7. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    There are about 100 others reasons to frown upon OTP...this is just ONE of them. :)
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Most times the vendor just keeps the deposit and resells. But in a falling market they are more likely to sue because of the loss and ease and likelihood of success.
     
  9. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It's common practice. The bank won't lend against something that doesn't yet exist.

    This is why OTP makes me nervous - especially if the property is in a large development.

    Cheers

    Jamie
     
  10. ATANG

    ATANG Well-Known Member

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    That's not the case in Malaysia, we had to secure the loan before they let us sign the S&P. If anything falls out from the bank, the developer will fully refund the deposit. I am just surprised there's no law like that in Australia protecting the buyers.
     
  11. RPI

    RPI Property Lawyer, Town Planner Business Member

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    Some of the OTP stuff that was purchased Pre-GFC but who needed valuations post GFC was particularly bad. One building on the Gold Coast that we were acting for buyers in was very interesting. On between 2 and 3 occasions per unit, the bank vals come in low, we said can't settle need a price reduction, receivers threaten to sue, take more than 3 months to agree to price reduction, bank vals expired and new one needed, bank vals come in lower again, buyer can't settle & need price reduction, receivers threaten to sue, take more than 3 months to agree .......
     
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  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    This is essentially one of the biggest pains of OTP. There's a reason why so many people say to avoid it like the plague.
     
  13. cheekykoon

    cheekykoon Well-Known Member

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    It is scary especially the valuation differs by 10-15% even from the same office different valuers... Makes valuation industry so much more opaque.
     
  14. MTR

    MTR Well-Known Member Premium Member

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    unless you are the developer selling stock OTP

    Not all product is the same, some will make great investments IMO.

    I have sold 3 OTP townhouses in Melb that will be completed in February, and they are attractive product as they will be cash flow positive, also huge savings on stamp duty, close to CBD, rail and lower entry level.

    Buyers must pay 10% deposit and its unconditional after cooling period because bank values will not come in, unless townhouses are close to completion.

    My point is there are bad investments and not all OTP are bad, not all are in large complexes, with high strata fees etc etc

    MTR
     
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  15. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Agreed @MTR. Have said many times OTP can work.

    Rarely :)

    Plenty of bad established stuff as well!
     
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  16. MTR

    MTR Well-Known Member Premium Member

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    Absolutely, there is a very scary thread on investors who jumped into EOS armchair developments, sobering.

    MTR
     
  17. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    You've got me stumped...what's EOS?
     
  18. MTR

    MTR Well-Known Member Premium Member

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    it's a company that was promoting OTP to investors in Perth
     
  19. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Gotcha. Ta. :)
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And some OTPs take a few years. You hear about all the ones who bought apartments in Chatswood for $800k now worth $1.2m....You dont hear the bad tales. In NSW the past few years saw many OTP contracts and now prices have jumped bandit developers had screwed the buyers by telling them to pay more of they would rescind using unconscionable contract terms. Stories of contracting a 3bed to be told its a 2bed take it or lose it. etc.NSW Govt seems to have patched it but its not perfect. I saw a few clients who got burned. They now have a deposit which didn't earn a cent and no property in a market that rose 20% +. And a developer who used them to fund their project. Very bad experiences all around.

    I recall 15 years back the deposit bond market crashed when prices dropped too. The deposit bond insurers got smashed.

    Lenders only can approve once the property can be accessed to value it. In some sites there can be a disaster if valuations all come back slim. Buyers back out and values crash !!!! Lenders can blacklist projects, suburbs or areas where this occurs. This is why Meriton are Australia's leading landlord in Alexandria Zetland etc.

    OTPs for SMSF can be worse too. Generally major lenders don't do OTP SMSF loans at all or very very low LVR. Has this changed better or worse under the new post APRA regime ?????
     
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