The problems of OTP ... Securing finance in the APRA environment

A good article.

http://propertyupdate.com.au/ticking-time-bomb-plan-property-investors/

 

Holy crap, we've all been so focused on what APRA means for us, I never stopped to think about what it means for these developers. Scary thought for both sides.

 

Stick to the big developers and they wont have any issues with banks. One bit of advice I've been told is if they take deposit bonds and bank guarantees they're cashed up. If not, then be careful.

 

I was a bit worried about this to begin with, then found out I could get 90% no LMI (allied health)

 

Don't worry everyone. At the end of the article, Michael Yardney says that the professionals at Metropole can help you avoid the ticking time bomb.

 

Hahaha

 

Yes. It would be for a ridiculous fee. Went to their Sydney seminar in approx March just for the info / education. Managed to dissuade my friend from signing on the dotted line.

 

And how do they help with bank valuation of OTP?

 

Nah mate that is not how it works.

The issue is when you take on a OTP product you are wearing the risk. Lets say you bought a 2 br unit last year and put a 10% deposit and it settles in early 2017.

Well between now and early 2107 if the market moves against you...then you better have deeep pockets.

Lets look at scenario and lets say you paid 700k for 2 brm unit. Lets say in 2017...the bank only vals this at 600k. We you know a problem.

The maximum the bank will lend with a 20% deposit is now $480. That means leaving aside the 70k you tipped in ..you are need to tip another 150k in! Well ...can you walk away from the deal?...well most developers have clauses where you will lose your 70k and they can also claw back any further loses also....

That is why you really have to be careful about OTP products...particularly when the market turns. Having said that if you buy early in the cycle..hen you should be okay...

 

I was talking more so about developers having funds and not going broke when banks tighten up and don't give em as much money as they originally did. In saying that, I don't know exactly how developers are impacted by APRA's tightening.. Anyone know any scenario's where they are? I know one particular one I think will go bust in Riverstone as they have bitten off more than they chew

 

Yep great point! ...that is going to be any issue also. It happened towards the end of the last boom!

 

Sorry edited my post as you responded. Have u seen any big residential developers go bust? (I'm not old enough to remember any)

 

Sure - heaps have. You have to remember that the developer doesn't hold your deposit. It is held in trust. Therefore if things tighten up they are not "all cashed up" like you say.

Many people will provide a bank guarantee rather than 10% cash.

Do you really think people would hand over 10% cash with nothing as security? oh wait... they probably would.

Blacky

 

You'd think the developers who don't require a release of your funds to fund the project would be in a healthy financial position. E.g Stockland, Mirvac, Lend Lease, Landcom (government)..
Good thing with these guys is if they go bust your money is in a trust account so they don't take it with them.. When I say cashed up I mean they have money and don't exactly require yours to get through the project..

I pulled out of some greatly priced H&L deals in NW growth centre in the mid-high 500s because the developer didn't own the land and wanted a release of my deposit to the invest in more property and to fund their developments...they have options on about 50 acres of land there. They will get bitten on the backside if lending gets tighter for them..nothing stays in a trust account. So risky but theyve sold 200+ of these packages

 

@ej89 Why do you think that Riverstone / Marsden Park area will be "under the water" when the interest rate increases ?

It is relatively cehapr than Schofields and The Ponds so it will get the good ripple effect when the Northwest rail has completed.

 

Watch this space in Sydney.....I predict that there will be alot of people defaulting on settlements as they can't get finance now.

I also feel it is the worst time to be a developer in Sydney.....other cities are ok.

 

@sash you're so anti Ponds & Schofields man.. ..

How did you know if those area is owned by highly leveraged Investors in majority rather than cashed up downsizer from Balcktown area ?

 

JH.....it is not me being anti...it is about how much the banks will value the end product.

If lets say someone pay 900k...and the vals come in 800k OTP.....that means the the bank will lend only 640 instead of 720k. That is a 80k shortfall....do most people have 80k lying around???

 

@sash yes, you're right man make sense that way.

I almost bought the property in Rivo earlier this year for 3/2/2 house 340sq M for $750,000 H&L package. But somehow I don't go ahead because all people in the forum (SS & PC) told me not to.

I guess we'll see how it goes after 2 years when interest rate is increased 2%.

 

Looks like you flop around a lot like a fish out of water???