Cashback Property: a gift or a loan and by whom to whom?

The Global Property Group, overseas property news and information, 20/01/08.
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Cashback Property: a gift or a loan and by whom to whom?
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Article

Article by: Mike Dunkerley mike.dunkerley@thegpg.com Published: 20/01/2008

Are property (especially overseas property) 'cash back' deals the way forward, who are they benefiting and why are they being offered in the first place?

If you buy an property for £100,000 in cash and the developer immediately gives you £10,000 'cash back' then you have in effect purchased the property for £90,000.

If you purchase the same property for £100,000 but this time you use a 100% mortgage and the developer gives you £10,000 'cash back' then, if you do not immediately apply the 'cash back' to paying down the mortgage, you have in effect, taken out a loan that you have to repay.

However, if the developer offers delayed 'cash back' after say two years, then you are in effect making a loan to the developer. They have the use of your money to finance their business for the next two years.

This delayed 'cash back' is starting to become more common because it is a cheap way of raising finance. In some countries with emerging property markets the financial infrastructure does not exist where upon the developers can raise money easily from banks. Therefore why not raise it from the customers? Indeed, in emerging overseas property markets there are usually a lot of very new entrepreneurs rushing into the market to meet the demand. These new companies may not have the necessary track record or commercial credentials to raise all the money they need from cautious bankers. A carefully crafted 'cash back' deal may be just the thing to get their development up and running.

It is easy to be cynical about such deals but they can work to everyone's mutual advantage if everyone is honest and the development is properly costed and run by a competent management team.

In effect you are being asked to pay upfront more than your property actually costs to build so that the developer has your surplus funds available to finance the building of your property and the next property too.

To assess if the 'cash back' proposition is viable then you have to try to imagine what your property is going to be worth two years in the future. The psychology of the situation is that the future value of the property that has been implanted in your mind will be at least the value you are being asked to pay upfront now. This may or may not be so. If you are an optimist you will probably think it will be, if you are a pessimist you will probably value it too low. The important thing is to be a realist.

A realist will check the value of the property, which will probably be 'off plan' at this stage, against newly built similar properties in the area. This will give a guide to how much extra you are being asked to pay towards the financing of the development's next phase. If it is say 20% then this should be the minimum starting point of the 'cash back' offer.

However, there are two more considerations. Firstly, you are providing interest free risk finance and that should be worth something. Secondly, by being an early buyer you are providing credibility and are helping get the project off the ground. It therefore might not be unreasonable to see a minimum 25% to 30% 'cash back' after two years.

If the developer is raising 40% more from you than a similar property is worth then a mouth watering 50% 'cash back' may be in order. These deals are starting to appear in many popular overseas property and domestic property markets.

Deals offering these or greater 'cash backs' are not necessarily unrealistic, especially if they are restricted to a limited number of purchases. It really comes down to the competency and honesty of the management team. In two years time they will have to find your and probably many other investors 'cash backs'. If they have not managed their cash flows properly and the money is not in the business then they can't pay it out. If they are a well run company and you have guaranteed fall back security you can be onto a good thing.

The problem is that most people are likely to be strongly attracted to the size of the 'cash back' and not check out the competency of the promoter or the realistic current and future values of the property. Caveat Emptor!

Author: Mike Dunkerley, Regional Director, The Global Property Group Limited.

Contact mike.dunkerley@thegpg.com for more information on this article or purchasing overseas property as investments or holiday homes.

Article Link: http://www.thegpg.com/overseas-property-news/property-news.cfm?id=4

Please contact the author at mike.dunkerley@thegpg.com for more information.

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