With the property market becoming more valuable, there are more and more strategies becoming more popular. I think some of the readers of this blog, some of these strategies might come in handy to give some options of getting in and ahead.

Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to circumvent alienation clauses in mortgages. Proponents claimed the sale was not really a sale because it was a lease; however, courts argued otherwise.

Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.

Basics of an Option

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.
• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.
• The term of the option agreement is negotiable, but the common length is generally from one year to three years.
• Option money is rarely refundable.
• Nobody else can buy the property during the option period.
• The buyer can sell the option to somebody else.
• If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.
• The buyer is not obligated to buy the property.

Basics of a Lease Option

• Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.
• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.
• During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.
• The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.
• The option money generally does not apply toward the down payment.
• A portion of the monthly rental payment typically applies toward the purchase price.
• Option money is rarely refundable.
• Nobody else can buy the property during the lease option period.
• The buyer generally cannot assign the lease option without seller approval.
• If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.
• The buyer is not obligated to buy the property.

Basics of a Lease Purchase

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.
• Buyer and seller agree on a purchase price, often at or a bit higher than market value.
• During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.
• The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.
• The option money generally does not apply toward the down payment.
• A portion of the monthly lease payment typically applies toward the purchase price.
• Option money is nonrefundable.
• Nobody else can buy the property unless the buyer defaults.
• The buyer typically cannot assign the lease purchase agreement without seller approval.
• Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.
• The buyer is obligated to buy the property.

Doing a Lease Option / Lease Purchase

Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.

Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:

• Get a home inspection.
• Examine the title policy.
• Obtain an appraisal.
• Read seller disclosures.
• Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.

• Sellers generally get market value at today’s prices and relief from paying a mortgage on a vacant property.
• Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.
• Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership.
• Buyers also receive a forced savings plan since part of the lease payment is credited toward the purchase price at the end of the lease option agreement.
• If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money and may retain the right to sue for specific performance.

For more information, contact a real estate lawyer.

By Elizabeth Weintraub, About.com Guide

The First Home Owners Boost, which was introduced in October 2008, came to an end on December 31 but there is still assistance for first-home buyers. The $7000 First Home Owners Grant (FHOG) remains in place and most of the states and territories have additional benefits.

If you are buying or building your first home you can still apply for grants of $10,000 or more and transfer duty concessions worth thousands of dollars.

The FHOG is administered by state and territory governments and has been available since 2000. The Boost meant that for contracts made between October 14, 2008, and September 30, 2009, first-home buyers purchasing established homes would receive a total grant of $14,000 and buyers of a newly constructed home would receive a grant of $21,000. The Boost was wound back progressively, so that for contracts made between October 1, 2009, and December 31, 2009, first-home buyers purchasing established homes would receive $10,500 and buyers of a newly built home would receive $14,000.

On January 1 the Boost was cut out altogether. Grants reverted to the old FHOG scheme plus any additional state or territory supplements.

FHOG works the same way in each state and territory and applies to houses, townhouses and apartments. Supplementary schemes have rules that vary from state to state.

NSW

In November 2008, the NSW Government introduced a $3000 supplement to go with the Boost, available for first-home buyers purchasing a newly constructed home.

First-home buyers in NSW could receive a benefit of up to $24,000.

The supplement remains in place until June 30 and, combined with the $7000 FHOG, first-home buyers purchasing a newly constructed home can apply for a total benefit of $10,000.

After June 30 the only grant available will be the $7000 FHOG - available for buyers of established and newly constructed houses.

There has been a cap on the FHOG since January 1 this year. The home purchase must be for less than $750,000.

The NSW Office of State Revenue also offers a scheme called First Home Plus. First-home buyers can apply for an exemption on transfer duty on homes valued up to $500,000 and concessions on duty for homes valued between $500,000 and $600,000. The duty on a $500,000 home is $17,990. The NSW Government paid $1.7 billion of first-home benefits last year.

Details at osr.nsw.gov.au.

VICTORIA

Victoria’s State Revenue Office has a First Home Bonus scheme that is available until June 30 and offers $11,000 on top of the $7000 FHOG for first-time buyers purchasing a newly constructed home and $2000 on top of the FHOG for purchasers of an established dwelling.

Victoria also has a Regional Bonus scheme operating until June 30.

First-home buyers can receive another $4500 on top of FHOG and the Home Bonus scheme if they buy a newly constructed dwelling in a regional municipality.

Victoria has exemptions from land transfer duty. If the home is the principal residence and the purchase price is below $440,000, the rate of duty falls from 6 per cent to 5 per cent.

If the price is between $440,000 and $550,000, the concession is a flat $3100.

Buyers who entered a contract after May 6, 2008, are eligible for both the bonus and the transfer duty concession. Details at http://www.sro.vic.gov.au.

AUSTRALIAN CAPITAL TERRITORY

The ACT Government has a scheme called Home Buyer Concession, which offers concessions on transfer duty for dwellings with a dutiable value of up to $422,000 and vacant land with a dutiable value of up to $233,300. There is an income test for eligibility, which starts at $120,000 and increases to $136,650 according to the number of children in the household. First-home buyers can also apply to defer payment of their duty for up to five years.

Details are at revenue.act.gov.au.

QUEENSLAND

First-home buyers can apply for transfer duty concession. The concession is weighted in favour of properties with lower values. A duty rate of 1 per cent applies for homes worth up to $350,000. Buyers can expect a saving of about $8750 on a purchase of up to $500,000. Details at osr.qld.gov.au.

WESTERN AUSTRALIA

First-home buyers in the west can also apply for duty concessions. The arrangements are relatively generous. There is no rate of duty on a home with a value of up to $500,000.

Details at http://www.dtf.wa.gov.au.

SOUTH AUSTRALIA

In 2008 the SA Government replaced a duty concession scheme with a First Home Bonus Grant. Buyers who qualify for FHOG can apply for the bonus. The additional payment is $4000 on dwellings with a market value of up to $400,000. The value of the grant is reduced by 48 cents for every $100 of value in excess of $400,000; the grant is reduced to zero when the value of the dwelling reaches $450,000.

Details at revenuesa.sa.gov.au.

STATES AND TERRITORIES

Each has different eligibility rules covering occupancy and how concessions will be applied if the home is a joint purchase.

PD

As a parent you have an important role to play in teaching your kids about money. This can be a challenge as you may feel torn between giving them what you can but at the same time wanting them to be responsible with money. The best place to start is with you. By being better with money yourself you are teaching your kids to be better with their money.

Where did you learn your money attitudes and habits from? Our parents usually influence how we deal with money – even if we decide not to do what they did! You can set a good example for your kids by following some good, basic money management habits yourself, and reinforcing the lessons your kids are taught in school.

Get into the habit and take control of your money!

Write down what comes in and where your money goes each fortnight.

Are you spending more than you earn? Which items in your budget would you

describe as essentials and which would you describe as extras? Is there any

room to make changes?

Setting goals gives you something to work towards with any savings you have

found from your budget plan. Make your goals realistic. No matter how big or

small the goal is, the key is to work out how much you need to save and how

long it will take to get there. Talk to your kids about the family’s goals and help

them to identify their own goals too.

The secret to successful saving is to start now, no matter how small the

amount is. And don’t forget to look at your super. Superannuation is a

form of saving for your retirement and the sooner you take charge of

it the better off you will be. One of the consultants at PDFinancial Group can help you determine how much you need in retirement and explain some options.

Pocket money is often the subject of much debate among parents. You might find that the kids raise it with you before you’ve decided which way to go.

Think about your values and what you want to achieve with pocket money, decide on your approach, and explain your reasons to the kids. Pocket money can teach children the basics of budgeting. It can help children to learn about prioritizing their spending, which is the key to successful budgeting. They have a finite amount of money which they have to manage. It can also be used to introduce the idea of saving. Here are a few thoughts to help you manage the pocket money issue:

Decide on your goals for what you want to achieve with giving pocket money.

Be clear about what you expect your kids to do with the money. For example, do they need to use it for their canteen lunch at school? (Is it to be used for treats of their choice?)

Decide if you will pay a regular amount each week or whether you will only pay if certain jobs are done, like setting the table or making their bed.

Start early - talk to your children about money and help them to establish some good habits from an early age.

Show kids the value of money by explaining what $2 can buy.

Let them watch you pay for things – allow your child to hand over the money or press the OK button on the EFTPOS machine.

If you are giving pocket money, give a combination of notes and coins. This helps to familiarise kids with the different denominations and can assist in teaching them how to allocate money.

Teach kids how to compare prices and shop around. Use things that they like as examples.

Include your kids in conversations about the family budget and bills. (depending on how old they are of course)

Show older children what bills look like and how you plan to pay them. This is especially good for teenagers, considering the amount of money they spend on mobile phone bills!

Get your kids into the savings habit by helping them start a savings account. A good saver is HSBC saver with a high interest rate.

Assist them to identify their goals and how they are going to reach them. Be realistic – make sure they can reach their goals.

To make it fun, encourage small children to draw pictures of what they want to save for. This, along with any tricks you have picked up along the way should set your kids up to have good savings habits.

Paul Davies

We’ve all seen and read the ads for Industry Super. The guy that goes up the escalator vs the guy who goes down, representing their investments due to commissions being paid. Now I have always said there is value in Industry Funds, depending on what value you place on Super.

One side is that you save ‘a small amount’ of fees on your super with industry funds, but the other side is that nobody monitors your super, gives advice on where your money is supposed to be invested, and generally, there is nobody to talk about salary sacrifice, government co-contributions, etc.

An adviser, or financial planner can always help with these scenarios, but of course there is a fee involved. We don’t live in a benevolent society, and you get what you pay for. Most would understand this. Well, this week uncovered the under the table commissions paid to a fund manager by an industry fund. Sure, it’s not paying a trail commission from your account to an adviser, but instead it’s paid $1 Million to a firm to provide service on a SunSuper investment.

Where does that money come from? The SunSuper accounts. The member accounts! It comes directly from the interest returns of the members.

Please CLICK HERE for the full article. I would love to get your opinion on what you think.

PD

The ATO will target sales representatives, sales and marketing managers, truck drivers and electricians this year. If you fit into these categories, what can you do to help your situation if they come along for an audit (apart form locking your door and putting the hose on them).

Don’t put your records through a shredder just yet! Many people bin their records in July each year, but the ATO may still need those documents for quite a while. The best bet is to keep them for at least 5 years for individuals, and 7 for a company structure.

Things like depreciation records and dividend reinvestment information may need to be kept until a number of years after the asset is sold, so CGT can be calculated properly. These are the things that should be kept for an audit are:

* Payments received, including salary, pensions, share dividends or bank interest.
* Expenses related to income received, such as work-related expenses or repairs made to a rental property.
* Buying or selling assets such as shares or a rental property paperwork.
* Tax-deductible gifts or donation receipts.
* Medical expense receipts.

Car expenses are one of the most common tax deductions, and the ATO says record keeping is vital. If you travel at all for work, make sure you keep a log book. Even if you don’t completely fill it in ALL the time, it doesn’t really matter. As long as you’ve got one. Especially if you have recently bought a new car.

Do you have any other things that the ATO has given you a hard time on this year? I would love to hear about it.

PD

An interesting story in News today about the promising property cycle in Australia. This is not just a property spruik, but contains some great ‘facts’ about why this is the case. Like I’ve been telling for quite a while, now is the time to invest for the long term. The wealthy of tomorrow are the ones who acted at this time in history, but ONLY if you are financially able to do it (and stick to the investment rules of location).

AUSTRALIA’’s property sector is about to catch a wave but homeowners and investors do not need to worry about a wipe-out.

While a bubble in the first home owner segment of the housing market is set to burst with the winding back of government grants in two months, industry experts say investors will fill the breach.

They don’t expect the property market to follow the big slumps felt in Britain and the US, where prices have fallen by more than 20 per cent.

In the US, in particular, the problem is too much supply and not enough demand.

“Fundamentally, America has 1.1 million properties in oversupply,” says Damon Nagel, the managing director of property investment  company Ironfish.

“In Australia, it’s more than 180,000 in undersupply. We can keep building for 18 months and only catch up to demand.”

But the buyers of property are expected to increasingly be investors, rather than owner occupiers, once the Federal Government First Home Owner Grant starts to wind down from September 30.

“I think you’ll find first home buyers next year will be like rocking horse droppings – few and far between,” Nagel says.

Professionals Real Estate Group agency principal Claudine Deneuve says buyer inquiries have risen as people realise interest rates are unlikely to fall further.

She’s expecting investors to return to the market as first home owner activity falls in coming months.

“House-price growth will be fairly moderate, with a much slower global economy,” Deneuve says.

“We have avoided the 30-40 per cent drops of the US and UK because our economy was in far better shape than our peers at the start of this historic global recession.

“If the global recession drags out too long, Australia’s economy may become at risk.”

A report released last month by forecaster BIS Shrapnel says conditions are ripe for a sustained recovery in residential property prices.

“Low interest rates, solid growth in rents and housing shortages are evident in most markets,” the report says.

But not everybody believes the outlook is for growth.

Morgan Stanley chief economist Gerard Minack says Australian residential property remains expensive “and will likely prove to be a poor medium-term investment”.

“Whether there are big price declines will depend on employment,” he says.

“In markets where employment and incomes have taken a big hit . . . we have seen big price declines.”

But some do not think prices will drop while houses are still in short supply.

“Demand stems from population growth,” .

“With 190,000 migrants coming into Australia, there’s a shortage of housing, and people need accommodation.”

Some industry names say now is a ‘‘once-in-a-generation opportunity” for investors.

“It’s probably a good time to buy in the right spot, but be careful,”.

PD

Yes, I know the title to this post may seem like an oxymoron. I read an article recently stating that 2% of businesses have been bankrupted by the Tax Office because of overdue tax bills. This shouldn’t be the case!

I see it alot with small businesses owing money to the tax department. Some thousands, some hundreds of thousands, and it gets me thinking sometimes, Why? I realise that cashflow is the all important thing that small business struggles with. I experience it myself, but I have the necessary strategies in place that enable me not to lose sleep over it. I have to admit it has taken a few hard lessons and seeing others learn them aswell, to actually put something in place.

If you have the capacity to borrow money to fund cashflow, such as factor finance and business loans, you need to make Tax payments part of the budget! Superannuation is another one you need to budget for incidentally.

It surprises me that so many business owners don’t put money aside for tax payment at the end of the quarter, or year when they come knocking.

Over the last few years, I’ve started two High Interest Savings accounts specifically for my tax payments. I use all the time available to me to pay the Tax Office. Don’t get me wrong, I dislike the ATO as much as anyone. The longer they can keep their grubby little hands off my money, the better.

This way, I get to earn as much interest as possible on the tax money I owe. And at the time they need the funds for payroll tax, GST, Capital gains, income tax, and whatever other tax they overzealous tax chiefs in the government can muster up, I actually have the funds to pay them!

This keeps them off my back and out of my business where they belong. You don’t need to be worrying about the Tax Office when running a business. you need to be concentrating on generating income and growing your asset!

All you need is a small amount, Eg; $1,000 for the first deposit. Then work out what your approximate tax was last year and reduce it to monthly amounts to be paid into the account by bPay or direct debit. I do it automatic transfer online each month. That way, I have all the control.

Apart from using it for the tax man, it can be used for many things such as a planned holiday, emergency fund, or just teaching your kids how to save. Set yourself a target, and then move some out into a more strategised investment such as shares or property investment.

Whatever ther reason, Australians need to start saving again, so the next time we have a recession, you will be in a much better position to take it on.

PD

Yesterday, I covered off how to actually pick a planner. Hopefully, when looking around, you will be lucky enough to find one local in your area. This post today is to cover off who you shouldn’t pick as a planner.

There are thousands of planners and advisers in the market today. The industry itself has a bad reputation for some reason, but I think it’s unfairly earned. Many years ago, the industry had many rogue traders, but were since traded out by the government through strict licensing regimes called Policy Statement 146 (PS146). This requires anyone advising on money and insurance to have the appropriate diplomas called ‘Diploma of Financial Planning’ which takes much study and complex tests to complete.

There are expetions to the rule in many cases, and I believe there is one when talking about this area. Banks! Yes, they are a bunch of Bankers.

Banks have been immune to many of the rules and regulations set on the financial services industry that has kept it clean for the past few years.

One of the rules is that ‘independent’ advisers MUST offer independent advice to clients from several financial institutions, making it unbiased of course. Bank employees are influenced by the banks products, limiting their choice in advice to you.

When choosing a planner, make sure you look into their product offering, which can be obtained by asking them for their Financial Services Guide (FSG), and that will give you an idea of what they can offer.

If you are in a small town and the only planner available is bank staff, then you may want to also ring another town or city and discuss over the phone so you can compare.

No more than 3 planners will be enough for you to get a feel of what is acceptable. And above all else, make sure you feel comfortable with the person, but remember, they are qualified and if you take their advice, FOLLOW IT. They don’t say it for nothing.
Good luck. I would love to hear any stories from you about success stories of visiting a financial planner. If you haven’t visited one and would like contact to one, please Contact Me and I will give you a list of some you can interview.
PD

What makes interest rates go up and down?

Interest rates, as we all know, are what determines the cost of our mortgages, loans and sometimes, credit cards. But what makes them go up and down? What is the determining factors that make those grey haired men in corporate government palaces change the amount I pay on my mortgage each month?

I’ll try to help you easily understand why this happens in this post.

The Federal Reserve can manipulate interest rates by buying
and selling bonds in the bond markets. During economic times the Fed wants to
stimulate the market, the Fed buys bonds on the open market, and pays for the
bonds with cash. If the Fed continues buy bonds, the market becomes flooded with
cash. This excess cash in turn makes money more available for people who want to
borrow. The result is interest rates will naturally come down as different
lenders compete for a limited pool of borrowers.

The interest rate to borrow this excess money begins a bidding battle between different lenders each competing for the loan funds (so they can then lend to borrowers like you and me). Just like the most of us, borrowers go for the lowest price.

Interest Rates and A Growing Economy

When the economy is growing, consumers gain confidence, as their confidence
grows people start spending money. What do they buy? Everything under the sun
but consumer goods are the term you will hear most often. People buy items like
cars, computers, appliances like stainless steel refrigerators, etc.

This is the cycle of inflation, which in turn leads to increased interest rates:
1)    As demand for products increase, or more people buy stuff they don’t need, companies can begin to charge more for their products.
2)    When people want more stuff, companies make more money.
3)    As companies begin to make more profits it is not long before workers begin asking for more benefits and more money in their paychecks.
4)    As companies meet worker demands, the company experiences increased cost and expenses
5)    Then inflation begins.

Inflation is the prime cause of interest rate movement. To slow down any inflation, the government (Federal Reserve) starts selling those bonds they were buying before. Considering that the market was awash with cash when they were buying bonds, what do you think happens when they start selling?

That’s right! Money floods OUT of the market, and it makes it harder for lenders to get hold of money, hence the increase in costs to borrow. This then slows down everyone’s mad spending and slows down the economy.

PD

To read more about bonds and how they work, see this post

I get many articles passed along my desk form a variety of different fund managers and insurance companies. This article is taken from a news release from Vanguard Investments that I’m sure you will find interesting as I did.

Lessons learned from a tough year

After a financial year that most investors would want to forget, a worthwhile exercise is to ask what has been learned.

Perhaps most crucially, investors have been unequivocally reminded during 2008-09 about why some of the most basic principles of sound investment practice make a lot of sense.

When the economy is strong and sharemarkets are rising, some of these straightforward principles are overlooked. And it can take a bear market and economic woes to bring them back into stark focus.

Here are just a few of the principles to be truly reinforced over the past 12 months:

Keep it simple. Many investors lost a lot of money in 2008-09 by being involved with complex investments that they could not really understand. If an investor can’t comprehend how an investment operates, the message often repeated by the likes of the Australian Securities & Investments Commission (ASIC) is clear: stay away from it.

Keep investment and personal debts under careful control. We have heard scores of extremely sad stories over the past year of older couples borrowing against the equity in their homes to invest in shares that were, in turn, heavily geared. This double-jeopardy approach to gearing truly exposed these investors to the full impact of the bear market. It provides an extreme lesson to all of us about the dangers of excessive debt.

Gearing works both ways. This ever-green lesson is linked to the previous point. The fallout from the bear market has been a telling reminder that while gearing can magnify gains in a rising market, it can do the opposite in a falling market.

Act your age. Many older and inexperienced investors were among the numerous investors who had become caught up with the euphoria of once-rising share prices and overlooked the need for the most-appropriate diversification of their overall investment portfolios. As good financial planners often remind their clients, the diversification of a portfolio should reflect an investor’s personal circumstances which include such factors as personal tolerance to risk, investment horizon, age, and expected years until retirement.
Look to the longer term. Particularly when the sharemarket becomes highly volatile, investors are vulnerable to over-reacting to day-to-day news and market commentary. Investors who concentrate on the longer term usually try to block out much of this daily “market noise”.

The 12 months ahead will set particular challenges for investors. Some cashed-up investors, who may be more optimistic about the prospects for share prices, may attempt to time their way back into the market – by trying to pick the best time to buy. Market timing is something that even seasoned investors rarely get right.

Financial planners often recommend that their clients “drip-feed” large amounts into the market progressively over an extended period rather than investing a large amount at one time. This is a form of dollar-cost-averaging.

Another challenge will be how investors react to the cutting back of the caps on concessional superannuation contributions – which include salary-sacrificed contributions as well as personally-deductible contributions by the self-employed and eligible investors without employer super support. The reduction in the caps may encourage some investors to increase their gearing of non-super investments without fully acknowledging the extra risks involved.

So, like I always say, make sure you know as much as you can about where your money is invested and research, research, research.

PD