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  • Property-a-holics

    No Money Down (NMD) deals ... are they legal ... ?

    At Property Tribes, we are of the opinion, that since April 2008, there are now no LEGITIMATE ways to construct no money down deals with the present mortgage products.

    Why? It's very simple and clear: If the discount or incentive is NOT disclosed to the lender, it is MORTGAGE FRAUD - plain and simple.

    In any property transaction, there must be total transparency so that all parties know how the deal is being constructed. Additionally, if you are not disclosing discounts (i.e. having the gross price put on the contract and having the property valued at the gross price), then you are also defrauding the Land Registry and the Inland Revenue and opening yourself up to some SEVERE problems, should you ever be audited. Make no mistake, these are criminal offences.

    With one in six property investors set to be audited in the future, it is only a matter of time before these fraudulent deal structures are exposed. I like to sleep at night so I personally will not entertain doing this type of deal, until I research one that is legitimate.

    I hope those people claiming big cash backs through "commissions" realise that they will be TAXED on that money as it is technically income. If you are audited by the Inland Revenue I hope you are confident that the money trail will stand up to scrutiny? If a company is offering you a "no money down" scheme, please ask to have it in writing so that you can have it independently approved and verified by the Council of Mortgage Lenders and/or the Law Society. You could also run it past your lender for their approval. If it is a legitimate scheme, the company offering it to you will have no problem with providing this information. However, I think you will find that they are unwilling to provide you with this information. That should tell you all you need to know.

    A further nail in the coffin of no money down is the news that, from the 1st September, all developers have to complete a form provided by the CML that states any incentives or discounts offered in the deal. This form has to be copied to the lender and both solicitors involved in the transaction. Whilst this is only applicable to new builds, I am sure it will not be long before this becomes the case with second-hand property.

    Can we also please be clear that BMV and NMD are not the same? Buying below market value is obvious. I buy everything BMV - cars, holidays, houses etc. I'd be daft not to!

    NMD is a separate issue. Yes, you need to buy BMV to achieve it, but the two should not be automatically linked.

    It is, of course, your choice whether you structure a deal in a No Money Down format, but at least understand the legal, financial and tax implications of what you are attempting to do.

    Another nail in the coffin of "no money down" deals and schemes, as the government launches a new agency to fight mortgage fraud ...

    Details from a recent press release:

    The National Fraud Strategic Authority (NFSA) has been established to co-ordinate the fight against mortgage fraud - with measures in place to capture the true value of new-build properties, to verify the true income of borrowers, and for lenders to report suspicious mortgage brokers.

    However, Sandra Quinn, NFSA interim Chief Executive, said that the UK is boom town for mortgage fraud.

    Ms Quinn explained much of the problem has stemmed from the UK not treating fraud as a serious crime.

    "Fraud is not a priority in the UK. It is often not reported. That is what we have got to change.

    "Some lenders report cases to the police, but for law enforcers it is not a priority and police say they will not pursue the criminals.
    This does create an incentive for lenders not to report fraud. And the fraudsters know this.

    "UK fraud is now booming. We have to make the UK hostile to fraudsters"

    She explained the fall in house prices has now brought more mortgage fraud to light, but the credit crunch will not make mortgage fraud disappear.

    "These people are career criminals and as new mortgages dry up fraudsters have not gone away."

    Ms Quinn explained in the US, fraudsters are now targeting households facing repossession, and offering people free accommodation in exchange for using their identities to make fraudulent loans.

    She added mortgage fraud is not a victimless crime and it does hurt people on the streets.

    "Mortgage fraud can bring down the value of property.

    "Where fraudsters have pushed up the value of new-build properties, when they disappear prices can then go through the floor. It can also leave people living in empty blocks."

    She added, "Where someone's ID is stolen, the fraudster can get false loans and then people find out they owe £150,000 they did not know about."

    Ms Quinn also explained one form of mortgage fraud, 'conveyancing take-over', can mean potential buyers lose out on a property as fraudsters take over divert mortgage cash from lenders, leaving buyers unaware until the check up to see why there is a delay.

    There is currently no agreement on the scale of mortgage fraud. The Association of Chief Police Officers (ACPO) estimate mortgage fraud costs £700 million annually, while others say it can be as much as £1 billion.

    The NFSA has already highlighted a number of weak links in the property chain that can lead to mortgage fraud, such as corrupt brokers, valuers, solicitors and bank insiders, false conveyancers, mortgage mules and new build buy-to-let fraudsters.

    Baroness Scotland, the Attorney General, said, "Government has committed £29 million to reduce the harm caused by fraud across the UK economy.

    "There is now a far stronger, more cohesive response to fraudsters' actions."

    As well as the creation of the NFSA, the City of London police is also leading a number of strategies to take mortgage fraud more seriously and become a UK centre for uncovering the criminals.

    A new National Fraud Reporting Centre (NFRC) is also planned to start operating in late 2009.

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    To play the devil's advocate a bit, Nothing Down is legal, works and can be accomplished. That said we are talking about shades of gray and people need to really understand the various shares.
    A definition of Nothing Down from the US (from a book called Nothing Down by Robert Allen that came out in the late 1970's or early 1980's) defines nothing down as none of your own money. It goes on further to define 'none' to be 5% of less so you might have a bit of cash in the deal.
    In almost all deal there is cash changing hands and most of the time the sellers get cashed out. Nothing Down does not mean no cash though I have even done a few were no cash changes hands even though control of the property changes hands. With that said, lets dive in a bit.
    How can Nothing Down be legal? Easy, get an equity partner to put up 100% cash for a deal and you put in the time to find the deal. To you it is a Nothing Down deal while your 'partner' has done an all cash deal. It is Nothing Down to you.
    In other cases the lender is putting up a lot of cash for the deal while the seller is accepting something other than cash for the balance. I am assuming here that you are upfront with the lender and the lender is fine with the details rather than the lender is clueless to the full transaction details.
    Another example that can work and be completely above board is when you use a bridge lender to buy a property based on the value. Short term financing from a real estate savvy lender who is expecting to be out of the loan in a matter of months (not same day refinancing bridges where the lender is taking zero risk after the dust settles). Transactions where the above might be common are development projects or where someone is buying in bulk and then selling off in smaller chunks.
    The key to Nothing Down is to think and to know what you are doing. In the UK a lot of naive investors and guru promoters have taken a narrow view of NMD and they forget the bigger picture. NMD worked when the lenders were stupid. It worked when the market was rising.
    One land mine that almost always exists with Nothing Down is the fact that the property is effectively over leveraged and it can not support the debt service for an extended period of time. Unless the property was severely discounted the debt service plus the true running costs will rarely line up. Nothing Down does not work so well when you have a buy and hold strategy. Nothing Down implies a multiple step process or a series of transactions tied to the property. The initial Nothing Down leg of the deal is part of a bigger story and will not work in isolation (buy to sell, buy and then refinance into long term financing, etc)
    John Corey
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    Just alerted to this via Twitter. It happened in August this year, but still interesting and relevant to this thread.
    FSA fines and bans Newcastle Home Loans for false information on mortgage applications.
    The Financial Services Authority (FSA) has banned Newcastle Home Loans (NHL), a mortgage broker based in Newcastle, from carrying out regulated mortgage activities.
    The FSA worked closely with Northumbria Police and the Solicitors Regulation Authority (SRA) in this investigation which involved a significant number of individuals across a range of financial, property and legal businesses in the Newcastle area.
    The ban of NHL was the final part of the FSA’s action in relation to NHL and connected individuals. Earlier this year the FSA fined NHL £170,000 for submitting false information in mortgage applications and for allowing David Purdie to act as its chief executive without FSA approval. NHL failed to pay this fine. The FSA has also banned NHL’s directors Linda Patterson and Grace Darling Purdie, and fined Mrs Purdie £85,000. Other individuals involved have also been banned - David Purdie, the shadow CEO, and mortgage introducers Michael Foster and Kenneth Robinson.
    NHL was used by its principals and by the mortgage introducers knowingly to submit mortgage applications to a lender which contained false information. This resulted in the lender unsuspectingly advancing sums which, in some cases, were considerably higher than the purchase price of the property.
    Margaret Cole, FSA director of enforcement, said:
    “The failures at NHL were serious, deliberate and occurred as a matter of routine. Its principals acted in a totally unacceptable fashion and their actions and the actions of those connected to the firm posed a serious risk to the lender and to market confidence generally.
    “In the last three years we have banned 60 brokers and levied fines totalling more than £1 million in relation to mortgage fraud. We will continue to tackle mortgage fraud and perpetrators will find themselves facing bans and higher fines.”
    Northumbria Police recently arrested Grace Darling Purdie, David Purdie, Linda Patterson and Michael Foster, among others. Its investigation, and that of the SRA, continues.
    The FSA’s investigation found that the individuals involved were not fit and proper and should be prohibited from any further involvement in regulated activities or authorised firms. In relation to Grace Darling Purdie, the FSA also found that she failed to exercise due skill, care and diligence in managing the business of NHL and took no steps to satisfy herself that the business was being conducted in accordance with regulatory requirements.
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    The way you've described your transaction appears to be legal as you mention using a private investor's funds, you also mention waiting six months before remortgaging. This is completely different to the case mentioned above.
    In that case those involved deliberately entered false information on their mortgage applications.
    Best wishes
    Rob Crane said:
    Venessa,
    Not sure whether I fully agree with you.
    I have done a nmd deal this year with a small amount of cash out and it was perfectly legal.
    I found a motivated seller through a leaflet I put out. Borrowed a private investor at 1.2% per month interest. Then 6 months later (after doing some minor works and renting it out), I remortgaged it with BM at 75% LTV. After all costs ended up with a NMD deal and £1400 cash out.
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    Hi Rob,
    If you paid for the property for cash, and then remortgaged it up to OMV after six months, that is perfectly legal.
    Likewise, if you borrowed the deposit and put 25% in at the net price provided that the lender did not ask where the deposit was coming from, as they do not like 100% financing.
    In both cases you needed a significant amount of money to start with, and you were fortunate to have a JV partner with those kinds of funds.
    The schemes I am referring to are where a discount is negotiated, but all parties are told the OMV price, not the discounted price. That is non-disclosure. Some mortgage brokers have falsified mortgage applications to this effect, and that is where the fraud comes in. You cannot use the discount as the deposit in any circumstances.
    Example:
    OMV of property = £100,000
    Purchase price = £75,000.
    You apply for a mortage of 75% of £100,000, meaning that you get 100% financing!
    Had the lender/valuer/solicitor/reputable mortgage broker been aware of the net price, they would have only put through paperwork of 75% of £75,000, meaning you would have to fund a 25% deposit. i.e. 25% of £75,000.
    Hope that clarifies this?
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    Vanessa,

     

    You are pointing out that mortgage fraud is illegal, no money down deals are not.

     

    Are they a good idea?

     

    That depends on the circumstances.

     

    Richard

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    Bit off the pace Richard this thread is from 2009.  Since then its become even more clear that NMD deals constitute mortgage fraud.   There are much more recent and definitive threads on here about NMD.  This is of course, assuming you are talking about how 99% of them (sold / structured, via mainstream BTL lenders).

     

    But claiming that "NMD deals are not mortgage fraud", you are just begging to be asked to back up that sweeping statement. 

     

    There are so many ways to set them up, are you suggesting all NMD deals aren't fraud? or is there a particular way of doing them you believe to be legal?  What are your experiences with NMD, how was it set up, who did it for you? 

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    Fraud or not, make your own mind up.

     

    I decided to speak to the principal 'High Street' buy to let lenders and this is what they said

     

     'What the lenders say'

     

    RobCommercial Management & Property Consultant, Wakefield, West YorkshirePlease visit my website, read the property blog & leave a comment; https://www.walkerfox.co.uk/blogE: rob@walkerfox.co.uk M: 07960 753550 T: @walkerfox S: Walkerfox

     

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    Arlo White said:

    Bit off the pace Richard this thread is from 2009.  Since then its become even more clear that NMD deals constitute mortgage fraud.   There are much more recent and definitive threads on here about NMD.  This is of course, assuming you are talking about how 99% of them (sold / structured, via mainstream BTL lenders).

     

    But claiming that "NMD deals are not mortgage fraud", you are just begging to be asked to back up that sweeping statement. 

     

    There are so many ways to set them up, are you suggesting all NMD deals aren't fraud? or is there a particular way of doing them you believe to be legal?  What are your experiences with NMD, how was it set up, who did it for you? 

     

    To be frank Arlo I made no sweeping statement, infact Vanessa did by saying ALL were fraud. I am just pointing out that some may not be.

     

    I understand that there is dodgy practice, however the term NO MONEY DOWN is misleading in it self but, if I managed to borrow 100% of the costs to buy a house perhaps through a combination fo personal loan or JV funds and a mortgage then where is the problem.

     

    My main issue is that through trying to understand how these things work you naturally search out other advice. Vanessa's statement is sweeping and definitive. I object to that stance.

     

    Richard

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    I am coming in here with an effort to understand...this is my view of how it is done legally, please let me know if this is not the case (I have not done this as I think the costs are too high).

     

    Property market value £100K

    Purchase £75K

    Bridging loan £75K (scary interest rates puts me off)

    six months later revalue and remotgage at £100K (more if the market is kind)

     

    Apparently No money down deal. However the fees and risk of bridging finance puts me off.

     

    Richard

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    In your scenario, are you assuming 100% bridging based on purchase price? because normally you will need to put down a deposit too.

     

    You normally find they will lend based on the purchase price not value, and you will still have to put down a deposit. NMD means generally speaking that on completion of the sale yo will get all your costs and deposit back.  So by definition you are waiting for 6 mths to pull back money, so it is very much 'money down'.

     

    You will have your acquisition costs, refurb costs, finance costs, etc - and probably deposit too - tied up waiting on the outcome of a remortgage valuation.  Which is far from certain you will get the value you need.

     

    If you are getting 25% off, and on a bridge of say 1.5% to 2% per month, then you will be spending 6k to 9k on bridging costs, without factoring in application and exit fees.  You will also have an arrangement fee for the remortgage and another valuation fee.  So you 25% BMV deal will end up being around 18% due to the costs.

     

    This is just traditional 'slow money down' investing, only the example you gave shows that a seemingly goodd deal looks a bit naff with fees etc.

     

    Far better to get a lower value prop on a bridge, then refurb it to add capital value, then refinance in 6 months.  By buying 25%+ BMV, and getting a serious uplift from refurbing, you can often make such a risky plan work.  There is still the big question mark about exiting onto remortgage: its not certain you will get the value or be approved for the finance.

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