SELLER FINANCE Discussion (from a Viber chat)

[drbubb]

SELLER FINANCE Discussion (from a Viber chat)

Can Condo Sellers finance their own secondary market Sales?

... Here is How the Viber chat was introduced ...
We have two members of our group (perhaps more), who are considering selling their Condos
at decent (high?) yields and assisting the Buyers by giving Seller Finance.

I want to talk about what the Seller finance might look like, and the best way to market these Condos. 
There are also some other important related issues, such as
+ WHEN will the Capital Gain tax be paid, and +WHEN will the Title be turned over?.

The proposed transactions will also have to be documented.  What will the documentation look like?
The basic concept might be something like the 10-10-10 financing arrangement that our
good member N. has mentioned before. 

But N. and I wonder if the Buyers be willing to wait 10 years for a Title transfer, when the Seller is not
a well known Bank. I worry, the BIR may want to invalidate these transactions if they are too slow to close.

SELLER FINANCE - a discussion, between: Mr.A and Mr.B

A: My examples:
+ I have a unit that I am considering to sell. I think the buyer can expect to earn a Gross Yield of 8%, and perhaps more.
I may be prepared to offer 75-90% “seller” finance for that
+ Another friend. T, has tried to sell units with a yield in excess of 10%, perhaps as high as 11-12%.
Many buyers were interested, but they mostly wanted finance to buy, and they had trouble finding it.
So is pondering where it would be easier if the finance, or a portion of it, might come from the Seller.

B: Here is my take:
Normally a trusted broker is needed for the 10-10-10 arrangement.
Especially someone who is known to broker these deals.
However this may only be a function of the right marketing
In terms of documentation

A: WAIT a second, are Buyers willing to wait 10 years for a Title?

I: Yes. (Some are.) If they can actually afford to make all the payments
There are at least 4 ways to document a transaction like this…

(continues)

[drbubb]

FOUR ways to Document Seller Finance transactions:

1. Deed of sale with mortgage
2. Contract to Sell.
3. Rent with option to buy incorporated inside the Rent / Optional sales contract
4. Rental agreement with a separate option contract

========

Expected taxation method & timing:

+ The first 2 is taxed up front by the BIR

+ Number 3s taxation is at risk of being similar (ie taxed upfront)

+ Number 4 is taxed as income tax on the rents. The deferred sale could be documented as number 4

Mr A: Your documentation makes sense. But this will force the buyer to report Rental income, and pay tax on it, right?

B: Right! Otherwise you get taxed upfront. (on the sales proceeds)

A: I thought you only get taxed after you hand over the Title > then you will need to pay CapGains tax

B: Remember that tax applied is not proportionate to the payment, but instead a function of the contract price

(Ie the AMOUNT of Sales proceeds matters more than the TIMING of the actual payments)

B: ... A CTS is taxed as well, with the presumption that a significant portion of the contract price is already paid

(In usual transactions, there is NOT a long delay in the Buyer getting paid. so BIR assumes that happens.)

A: So what if Buyer defaults, and you have to unwind the Cap Gains Tax Payment?

(ie the Seller has paid CGT, assuming  that the transaction would actually go through. But the buyer defaulted.)

B: Claiming tax credits is so far a headache. But this could be possible (in theory)

A: hmm. That is getting really complicated, from a Tax standpoint

B: Which is normally why documentation 1 and 2 pricing/agreements separate the payment of the cap gain tax to be for the account of the buyer

A: I see. Have you seen the actual documentation, and cases where it went thru the BIR?

Second question: Are there specialized brokers handling the sales transactions involving Seller Finance? 

Obviously, the reason to do this is to get the Seller a higher price, so the agent needs to find those Buyers who actually need the seller finance (this may be MANY FILIPINOS), and are willing to pay a somewhat higher purchase price to get it.  Probably prospective target Buyers might be those who thought about buying New properties, and hesitated when realized New Properties are over-priced, and offer poor, LOW YIELDS.  Here the price would be maybe closer to Primary market, but above price of a CASH purchase

B: I do not know anyone (specializing in transactions like this) in Makati. But i can ask my contacts in QC if they know anyone

A: My own unit that I consider to sell is in Makati. T's unit(s) are near BGC. 

As you may know, I am a big supporter of local knowledge and business dealings with people who truly understand and know the properties they sell.

I am not sure I would be comfortable involving a QC-based broker in a transaction in Makati or BGC, where the broker does not know the neighborhood

B: I haven't yet done a deal like this, but I have done some work with a lawyer who has done such transactions.

QC based people might know folks who do deals like this in Makati

A: i Maybe ask if the Lawyer has selling channels.  But remember we need a get a good price to make the extra work, risk and hassle worthwhile.

A: I suppose another approach might be to just pay something for sample documentation.  And then try to find the Buyers ourselves.

(But that might turn out to be mere charity to the lawyers, if nothing happens. haha.) So perhaps not.

[drbubb]

DRAFT CALCULATIONS, for a Seller Finance scheme

Property has an estimated Rental value of P26-30,000 monthly

Property SOLD at P 3.8 Million

"Very Aggressive", 90% Finance
Buyer pays Capital GT: (6%) : P228 K
Buyer pays Transfer, etc.       : P 50 K, est.?
Total Purchase price ———> P4,078K
Buyer Equity, about 10%.     :  P 380 K
Finance amount @ 90%—-> P3,420 K
Interest rates: Year1: 6%, Year2: 7%, Year3: 8%
Assume Principal payments: 6%,7%, 8% per annum, rising

"Very Aggressive" 90% Finance, P 3,240k, P380k Equity

Yr 1, 6%  :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 : (detail)
Interest   :  51.3 :  50.4  : 49.6 :  48.7 :
Princ.6% :  57.0 :  57.0 :  57.0 :  57.0 :
Debt Svc: 108.3: 107.4: 106.6: 105.7:
Montlhly :  36.1 :  35.8 :   35.5 :  35.2 : ave. 39.2 k monthly
Debt OS : 3363 : 33 06 : 3249 :  3192 = 84% of P3.8M cost
Yr 2, 7%  : Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 : (summary)
Montlhly : 40.8 :  40.4 :  40.0 :  39.6 : ave. 40.2 k monthly
Debt OS :  3126: 3059: 2993 : 2926 = 77% of P3.8M cost
Yr 3, 8% :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 : (summary)
Montlhly : 44.8 :  44.3 :  43.8 :  43.3 : ave. 44.1 k monthly
Debt OS : 2850: 2774 : 2698 : 2622 = 69% of P3.8M cost
=== ===

"Aggressive" 80% Finance, P 3,040k, P760k Equity
Yr 1, 6%  :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest   :  45.6 :  44.7  : 43.9 :  43.0 :
Princ.6% :  57.0 :  57.0 :  57.0 :  57.0 :
Debt Svc: 102.6: 101.7: 100.9: 100.0:
Montlhly :  34.2 :  33.9 :   33.6 :  33.3 : ave. 33.8 k monthly
Debt OS : 2983 : 2926 : 2869 : 2812 = 74% of P3.8M cost
Yr 2, 7%  : Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest  :  49.2 :  48.1 :  46.9 :  45.7 :
Princ.7% : 66.5 :  66.5 :  66.5 :  66.5 :
Debt Svc: 115.7 : 114.6: 113.4: 112.2:
Montlhly : 38.6 :  38.2 :  37.8 :  37.4 : ave. 38.0 k monthly
Debt OS :  2746: 2679: 2613 : 2546 = 67% of P3.8M cost
Yr 3, 8% :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest  :  50.9 :  49.4 :  47.9 :  46.4 :
Princ.8% : 76.0 :  76.0 :  76.0 :  76.0 :
Debt Svc: 126.9: 125.4: 123.9: 122.4 :
Montlhly : 42.3 :  41.8 : 41.3 :  40.8 : ave. 41.6 k monthly
Debt OS : 2470: 2394: 2318 : 2242 = 59% of P3.8M cost
=== ===

I also want to show below,  the calculations for:

"High Gearing" 70% Finance, P 2,660k, P1,140k Equity

[drbubb]

SELLER'S REACTION to the Figures above:

"I would not be willing to do 80% or more finance based on these numbers and assumptions.
What I want to AVOID, is leaving the Buyer/ borrower in a situation where the required debt service too far ABOVE Market Rents.

The comments suggest market RENT is 26-30K, but the buyer needs like 40,000 or more.
There is too much risk for the Seller finance at 80 and 90% finance. imho
Would be interested to see what the numbers look like at 70 or 75% percentage of Seller finance.

NOTE: I see that interest rates and principle payments are ramping up.
Interest: 6% in year 1, then 7% and 8%
Principle payments at: 6% in year 1, then 7% and 8%
What is this based on, please?"

[drbubb]

Let's look at 75%, 70% and 65%. with all the detail on 70% Loan

"High Gearing" 70% Finance, P 2,660k, P1,140k Equity
Yr 1, 6%  :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest   :  39.9 :  39.0  : 38.2 :  37.3 :
Princ.6% :  57.0 :  57.0 :  57.0 :  57.0 :
Debt Svc: P96.9:  96.0 :  95.2:   94.3:
Montlhly :  32.3 :  32.0:   31.7 :  31.4 : ave. 31.9 k monthly
Debt OS : 2603 : 2546: 2489 : 2432 : 64% of P3.8M cost
Yr 2, 7%  : Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest  :  42.6 :  41.4 :  40.2 :  39.1:
Princ.7% : 66.5 :  66.5 :  66.5 :  66.5 :
Debt Svc: 108.1: 107.9: 106.7: 105.6:
Montlhly : 36.4 :  36.0 :  35.6 :  35.2 : ave. 35.8 k monthly
Debt OS :  2366 : 2299: 2233 : 2166 : 57% of P3.8M cost
Yr 3, 8% :  Qtr.1 : Qtr.2 : Qtr.3 : Qtr.4 :
Interest  :  43.3 :  41.8 :  40.3 :  38.8 :
Princ.8% : 76.0 :  76.0 :  76.0 :  76.0 :
Debt Svc: 119.3: 117.8: 116.3: 114.8 :
Montlhly : 39.8 :  39.3 : 38.8 :  38.3 : ave. 39.1 k monthly
Debt OS : 2090: 2014: 1938 : 1862 : 49% of P3.8M cost
=== ===

Highlights:

75% Finance
===== :  Start : Year1 : Year2 : Year3 :
Mo.Ave : ——->
Debt OS: 2850 : 2622 : 2356 : 2056 = 54%
=====
65% Finance
===== :  Start : Year1 : Year2 : Year3 :
Mo.Ave : ——->
Debt OS: 2470 : 2242 :  1976 : 1672 = 44%
=====

[drbubb]

GETTING A BANK LOAN...

Checklist of Pre-Processing Requirements

A. Housing Loan Application Form

• Duly accomplished Application Form
• 2 valid Identitifcation Cards (for list of acceptable IDs, click here)
• If married, both spouses to sign on the application form
• If with co-borrower or co-mortgagor, separate application form is needed

B. Income Documents

If locally employed (working within the Philippines)

• Certificate of Employment (COE) indicating salary, position and length of service
• Latest Income Tax Return (ITR) for the last 2 years

If Expat Pinoy (Overseas Filipino Worker)

• Contract / Certificate of Employment (COE) authenticated by Philippine Consulate
• Crew Contract and Exit Pass validated by POEA (seaman)
• Proof of monthly remittances
• Notarized or authenticated Special Power of Attorney (BPI FSB Format)

If Self-Employed

• Articles of Incorporation and By-Laws with SEC Registration Certificate
• Audited Financial Statements for the last 2 years
• DTI Registration
• Income Tax Return w/ Statement of Assets and Liabilities (SAL) for the last 2 yrs
• List of Trade References (at least 3 names with telephone nos. of major suppliers/customers)
• Bank Statements for the past 6 months

If Practicing Doctor

• Clinic address/es and schedule

If from Commission

• Vouchers or Bank Statements (last 6 months reflecting commission income)

If from Rental of Properties

• Rental/Lease Contract (indicating name of tenants and rental amounts with complete addresses of properties being rented)
• Photocopy of Title (TCT/CCT)

C. Collateral Documents

• Clear copy of Owner’s Duplicate Copy of TCT/CCT
• Lot Plan with Location/Vicinity Map certified by licensed Geodetic Engineer
• Photocopy of Tax declaration / Tax receipts / Tax clearance
• Endorsement Letter / computation sheet / Contract to Sell from developer stating the contract price (for accredited developer/project)

[drbubb]

Interesting Discussion on BANK VALUATIONS from a recent Viber chat

C / Hi guys, does one of you know how the banks in PH set the “lending value” of a property?

Assuming you want to use the unit as collateral for a loan. Purchase prices are not necessarily representative, nor are zonal values etc. thanks!

B / Depending on the use of the loan

Typically that’s 60% of the appraised value. The appraised value of a particular property normally is the current prevailing average market price minus a discount of 10% or so

C /

I see - and the appraised value is based on some internal expert right?

B /

To be more accurate, you want to get your own appraiser, and then assume that whatever value he gets, you may want to discount that by 10%

That will be the banks AV

C /

Interesting - so I get an own accredited appraiser and then give that to the bank. Most likely they will take 10% off from that.

B /

Assuming this is a qualified appraiser, then yes. The BSP actually has a list of 10 accredited appraisers for properties. Some banks may even rely on the appraisals of this 10 and put a smaller discount to the property AV

Who is on That List of 10 might change each year

MORE / using leverage to grow...

A next step in RE might be...

Leveraging up and increase exposure and have more properties that pay for themselves. The risk is always that at some point the cash flows don’t match cos you lose one or several tenants.

To increase flexibility, some may want to extract equity from a fully paid property ... to use the funds to "bridge" the purchase of another

B /

Yeah that’s a good plan. Typically done by developers both smaller ("pocket developers") and the larger ones. Rarer now for the larger loans because of the real estate loan limit in the banks, but still doable for home equity loans. Some banks may still not be beyond their RE loan limits but may still charge higher rates

 

[drbubb]

NEW PROPERTIES are Too Expensive...

Says this article:

"Condominium prices also escalated beyond the reach of ordinary Filipinos, with a 26-square-meter studio unit now being sold for more than P6 million in the Manila Bay Area. Most banks require a family to have a minimum monthly gross income of P90,000 to avail of a P4.8-million housing loan with a 20-year repayment period for a P6-million studio unit provided they have ready cash of P1.2-million representing the 20-percent downpayment."