IMPROVED METHOD OF FINANCING HOUSING

Technical Area

Of recent years, the extremely high cost of housing has made it difficult for many potential purchasers to buy their own home as the necessary deposit and loan payments have been increasing much more rapidly than earnings.

Background to the Invention

In this specification the word home will be taken to mean house.

There have been proposed certain arrangements whereby, particularly low income purchasers, could invest in their own home, but these have generally not been satisfactory and in one case, at least, a State Government-arranged scheme left purchasers in an absolutely invidious position of owing more on their homes than the value of the home and with no possibility of paying this off.

Outline of the Invention

The principal object of the invention is to provide a means whereby purchasing a home is not as onerous or restrictive as it has been and to permit home purchase by persons who would not otherwise meet the requirements of various lending authorities, or who would not be able to raise the required

deposit, or for other financial or circumstantial reasons decide to access benefits not normally derived through traditional methods of property purchasing.

As an ancillary an identical system can be applied satisfactorily to investors who wish to purchase homes and to superannuation funds which are looking at areas where funds can be invested with a high degree of security and a solid or high return.

The invention includes a method of home purchase whereby a purchaser pays for the cost of the home, but does not own the equity in the land and pays the land-owner a land tenure fee for consent to improve the land by constructing a building thereon.

In a particular form of the concept the home owner builds the home on the land to its own specifications with a builder approved by the land-owners and the land-owner will make available the land as a security for the home-owner's loan with the land-owner's approved lender.

The invention includes a system such as the above wherein the home-owner can, at any time, purchase the land at an agreed value from the land-owner and, if it is desired at any stage to sell the house and land, the capital gain made from such sale will be divided between the home-owner and the landowner on an equitable basis.

The arrangement between the purchaser and the land-owner is by way of a Land Tenure Agreement which defines establishment set-up and on-going fees, method of valuation for purchase of the land by the purchaser and the division of the capital gain.

In order that the invention may be more readily understood, there will be described by way of non limiting example the operation of the system in different circumstances.

Description of an Embodiment of the Invention

In a first embodiment of the invention, an example of an agreement between a home purchaser being a first entity with a land owner being a separate entity will be described.

Where a home is to be owner occupied, the potential home owner initially negotiates an arrangement with the land owner called a Land Tenure Agreement, under which the land owner is paid an Initial Land Tenure Fee of $25,000 or more or less for the use of the land for a specific time, for example only, seven years (renewable for a fee to 10 years) and an Annual Land Tenure Fee for use of the land which may be of the order of 2.5% (or more) of the value of the land.

The home owner then arranges with a builder (approved by the land-owner, in liaison with the land owner), who is to build a house on the land and makes arrangement to pay the nominated deposit required on such a house.

This deposit will be substantially less than the deposit for a purchaser who is buying a traditional land and house package as the deposit needs only to be the required deposit on the house.

The two circumstances are then such that under a normal purchase for a house valued at $250,000 on a block which is worth $250,000, the deposit is some $25,000 plus associated purchase costs as compared with $125,000 for a house and land package.

The purchaser under a conventional house and land loan arrangement would make loan payments for this of about $3,000 per month. Under the terms of the arrangement of the invention, however, the land continues to be owned by the land owner, and the house purchaser would pay some half to two-thirds of this which would include the payments on the actual loan itself and rent of the land.

Breaking this down to weekly loan payments, the conventional purchaser would pay some $650 (80% borrowed) to $740 (90% borrowed) per week, whereas under this invention the owner-occupier would pay some $420 per

week.

Thus, very simplistically, the person purchasing a house under this arrangement, pays very much less for the purchase, but does not have an interest in the land.

If the original agreement is for a period of ten years and there is a capital increase of the order of 7% per annum, which historically would be expected, then at the end of the ten years, the value of the house and land would be of the order of nearly $1,000,000, showing a capital gain of approximately $480,000 and if this capital gain was divided equitably between the householder and the land-holder, then the house owner would make a gain of approximately $240,000, on an initial deposit of about $28,000. This is nearly a 770% gain.

Under the same scenario, a person buying conventionally would have used an initial deposit of approximately $77,000 and a capital gain in this case would be the order of 523%.

It can thus be seen that there are significant benefits for the house owner, over alternative and conventional methods of home ownership.

The Land Tenure Agreement (LTA) between the house owner and land owner states that at any time during the life of the LTA, which would be up to ten years, the house owner can buy the land from the land owner at a predetermined, or determinable valuation or the arrangement could effectively be maintained for a further agreed period and renewal fee.

House-owners are, as mentioned in a good situation, as they have managed to get the house that they required at a very much more financially economical rate than would have been possible, had they entered into a traditional house and land package deal.

There can be circumstances where a home purchaser, for example, wants a home which is very much more expensive than could be afforded if a traditional house and land package is purchased, but this house could be purchased under the present arrangement very much more reasonably.

Under the scheme of the invention there would still be only the Land Rental payment on the land, and as such, the purchaser, for effectively the same price as purchasing a traditional house and land package of one value could have a house having a value equivalent to the total value of the house and land package on the land which is not owned.

The arrangement is also useful for investors who can have a house built on land which is owned by the land owner, and in turn, can lease the house out and with a substantially lower degree of negative-gearing than if they bought the traditional house and land package.

The investor would still be in a position where, as detailed above, after the period of the agreement there would be a substantial capital increase. The investor also benefits from being able to claim all depreciation on the house and receive 100% of the rent.

In this case, it must be appreciated that as the time goes by, there would be an expectation of an increase in the rents received and these could well be substantially greater than the increase in the outgoings associated with the property.

We have calculated that the after-tax rate of return for a geared investor over a period of ten years using the scheme, would be something over 20% compared with an equivalent return of something under 15 % after tax if the house and land package were purchased completely. Further to this, the investor is exempt from state land taxes which are paid by the land-owner. Additional benefits to investors are that they receive 100% of the rental income, 100% of the cash and non-cash related tax deductions, whilst only paying for the house or improvement to the land.

The scheme is also useful for superannuation funds who do not need to take a loan to purchase the house.

Under these circumstances the average internal rate of return is approximately 13% using the scheme of the invention as against approximately 10%, if the house and land were both purchased.

The description to date has described the benefits to the purchasers using the scheme of the invention. There must, of course, for the system to be viable, also be a benefit to the land-holder.

There is once-per-package fee at the start of each contract and this can include a Land Tenure fee, which is factored into the material previously described, of $25,000, at the present time adjustable annually.

There can also be a house-marketing fee negotiated individually with each land owner approved builder which is built into the house price and is obtained from the builder as part of negotiations to have the builder on the panel of builders.

At the commencement of the LTA there can be $25,000 or more as a deposit paid by the land owner , a wholesale land marketing fee which would be obtained from a land-developer, based on a 10% or more arbitrage, a 10%

margin on house value from the house builder there would be a non- refundable mortgage application fee, specifically if the mortgage is being obtained through the company which is also the land-holder of, say, $1 ,500, giving an up-front payment of some $76,500 or more to the land-owner.

As far as ongoing income is concerned, there can be the effective income from the Land Tenure Fee, which could be of the order of 2.5% or more or less of the land value, that is, of approximately $6,250 per year for land valued at $250,000, mortgage trails which are component of the mortgage interest which might be 0.5% of the value of the loan, and, if the property is let, then a rental management fee which would be part of the normal agency fee payable which could be $500 per year.

This provides an income of approximately $7,500 per year. Thus, whilst the purchasers get the benefits previously referred to, the company organising the arrangement is also in a beneficial situation and obtains a good return on its investment.

Whilst in this specification certain assumptions have been made, it is to be understood that the situation can vary widely, whilst giving purchasers the benefits of the concept and any such variations can be considered to be part of the invention.

In a second embodiment of the invention a residential land trust can operate in lieu of an individual land owner.

In this case the trust uses equity raised from investors and debt to finance the purchase of residential land. Property investors and potential home owners can then enter into a land tenure agreement with the trust in accordance with the invention as described. An example of this arrangement is appended and marked "Residential Land Trust"

Clearly many diverse arrangements can lie within the concept of the invention with the major difference in the concept compared to a traditional method of purchasing a house and land package being the separation of the land ownership from the house ownership by a separate entity.

The land owner then allows the separate entity to build a residential dwelling or other approved improvement on the land owner's property, sharing the capital growth of the overall package with the separate entity on an equitable basis.

APPENDIX

EXAMPLE OF A RESIDENTIAL LAND TRUST

1. How the Concept Works - introduction

Under the residential land trust (RLT) concept, the land owning Trust uses equity raised from inventors and debt to finance the purchase of residential land. The Trust then allows residential property investors or home owners to enter into a seven year purchase contract including, as special conditions, a Land Tenure Agreement ("LTA") to, first, construct a house on the land, and, seven years later, purchase the land. Under the LTA, the RLT consents to the home buyer building a dwelling on the land, with both parties sharing in the proceeds from capital growth (in proportion to the value of the land and house at the outset).

Effectively, the house buyer enters into a contract to purchase the house immediately and, seven years later, with the help of accrued capital gain, to purchase the land. Alternatively, the house and land may be sold.

The owner of the dwelling can occupy or rent the property and can build whatever they wish within the LTA guidelines. This scenario is possible because the RLT concept separates rights of ownership of the house from that of the land and so effectively creates two new securities where before only one existed.

In exchange for providing the land for use by the house owner and as security for the house purchase, the Trust will receive fees and income from the house owner. In this way, the Trust will own income-producing, appreciating, fully developed lots of residential land, diversified geographically within and between the States, initially, of NSW and QLD.

How the RLT concept works - step by step

The Trust buys the land

The Trust will acquire the land from a developer after intensive research and due diligence.

Land Tenure Agreement is signed

The house buyer signs a two stage purchase contract including as special conditions, a land tenure agreement which incorporates a comprehensive definition of the rights and obligations of both parties to ensure secure title and tenure to house buyers.

Provided the house buyer complies with all terms of the LTA, the house buyer is entitled to unfettered use of the house and land while the LTA is on foot.

The Trust Consents to Building on Land

RLT consents for the house buyer to build on their land and use the land as security to finance the house.

The House Buyer Enters a Contract with an Approved Builder

The house buyer (owner occupier, or investor, whether individual or super fund) enters a contract with a RLT-approved builder to build the house and RLT management arranges finance for the house subject to the purchaser qualifying for a loan.

House Owners Pay a Deposit and Annual Fees to the Trust

The deposit represents only a fraction of the deposit paid under a conventional house+land purchase while on-going running and interest costs are similar to what the house owner would otherwise pay as rent for an equivalent house. These annual expenses include a modest land rent paid to the Trust but exclude land tax which is paid by the Trust.

House Owners and Land Owners share capital gain

At the end of the seven year agreement or when the property is sold, the total capital gain is divided between land owner and house owner in proportion to their respective contributions to the cost of the house and the land at the outset, or the purchase contract is extended, for a fee, by up to three more years.

Features of the Concept

Separate Ownership of House and Land

Throughout the contract period, the Trust will own the land. The House Owner will own the house and is referred to in this document as "House Owner" or "House Buyer".

Higher proportion of returns from cash and up-front

Up-front fees and commissions generate solid income at the start of each contract. This has a profound effect on the risk profile because a higher proportion of returns come from cash income relative to the (less certain) capital gain and, because it is received up front, it provides serviceability of interest and capacity for paying management. No other scheme involving long term investment in residential property has been able to achieve this.

Affordability for House Buyer

Because the house buyer only has to pay for the house, monthly payments are much lower even with fees paid to the Trust so that the home ownership dream of a bigger home suddenly becomes financially possible for thousands.

Diverse opportunities for Better Lifestyle for many groups

The concept creates the opportunity for wealth and income from residential property for many groups beyond first home buyers. These include property investors, young professionals with substantial income growth potential over the medium term, pre-retirees planning for retirement living, dual income occupiers reverting to single income for family reasons with dual income to re-commence after the establishment of family, young professionals/families upgrading with earning potential increases likely in the future.

Flexibility at end of seven year agreement

At the end of the seven year LTA contract one of the following three outcomes occur the house owner buys the land from RLT. (the desired outcome), or • the house and land are sold and the house owner invests the capital gain proceeds in another new house and enters into another LTA, or the house and land are sold and the house owner walks away with his share of capital gain plus principal paid off on the house to that time, or

the purchase contract is extended, for a fee, for up to three more years.

Alignment of the house buyer and land owner interests

It is in the interests of both the house buyer and the Trust that the house buyer is capable of completing the purchase contract with the purchase of the land at the end of the first LTA period. Should the house buyer have any problem, the Trust management will proactively explore opportunities to arrange finance for qualified buyers.

Institutional investors can now invest in residential property

The Concept also solves the problem of how to invest in residential property and residential land in particular for fund managers who lack experience in residential and are not geared to managing hundreds of properties. The concept described creates a new asset class.