This is a really interesting deal and shows what can be achieved with some creative thinking and a willing and motivated seller.
The seller had bought his apartment in 2008 just before the GFC and still some time before the Greek crash of 2011. This meant he was one of the many Greeks who bought on bubble valuations with loans granted by the Greek banks with little or no checks. Sound familiar?
How to make money on this contract?
So the seller who we’ll call G, could no longer afford to keep paying the mortgage on the property. He thought the property, which was in a nice middle class suburb of Athens, not far from the beach, was valued at around €250,000. His bank debt was €170,000 and his total debts were approx €260,000. When we met G at the apartment we talked through why he was selling, what his situation was, his plans for the future, etc.
He had decided to relocate where the work was – the Greek Islands. He didn’t want to rent out his flat and he told us he was one of the many borrowers who took advantage of the Kipseli Law (read more here) to force his lender to reduce his monthly payments (so called forbearance). He had originally been paying over €1,000 per month, interest and repayment but the bank had allowed him to pay a token interest of €350 a month for several years. But the Government was warning that the Kipseli Law that protects homes from repossession was about to be repealed, so G was getting nervous. He knew his lender would jump at the chance to increase his monthly payments to €1,000 again.
The Deal Broken Down
We agreed to the following terms:
- We would pay the €260,000 without haggling (remember the property was worth around €250,000 – today
- We would get the paperwork together with the lawyers, with all the terms agreed
- He could move out when he wanted to (he asked for a couple of months to get prepared for his move to the Islands)
- Between now and the time we complete on the sale we would ‘babysit’ his monthly payments. We would pay him and he would then pay his lenders, and show us the payment proof each month.
- Then ‘at some point further down the road’ we would complete on the sale and his debts would be wiped out
Seller didn’t quite get it, so the deal was renegotiated (and the deal got better)
This seemed to be a straightforward transaction but something got lost in translation. G thought we were going to give him the whole €260,000 to pay to his bank. What? No, that wasn’t the agreement.
We called G and explained to him ‘look you have no equity in the property, we’ll agree to take on the responsibility and we’ll babysit those payments for you. The bank gets paid, you get rid of your debts, everyone’s happy.
That means you can move on with your life and we will complete the sale ‘further down the line’.
But he still didn’t get it. You can’t do that in Greece, he said. Well we know all the people who said we can’t do it in Texas in the 90s, in UK and Australia in the 2000s.
But Greece is really an alien culture so we needed some backup.
What to do to rescue this deal? (which by the way has not cost us a penny yet)
This is where having a smart local lawyer who understands why and what we invest in comes into play. We got G to go and see our lawyer because he seemed to be convinced that these crazy foreign guys ‘didn’t understand how things work in Greece.’
Our lawyer stepped in to help
Of course our lawyer knows exactly what we do and why and understands like we do that the profit is not always in the price you pay but is often hidden in the terms you agree.
A few days later the lawyer called us and said that he’d met with G and he’d been extremely agitated and nervous.
After talking with G for a while the lawyer finally got to understand why.
Hidden tax debts to the Greek IRS
Aside from the €170,000 he owed to his bank (and that they wanted to reset back to the old payment level of €1,000 per month) the balance was owed to the Greek IRS!
We thought maybe that was a lost deal. We called G and told him we understood and that this wasn’t necessarily an issue. He asked if we could pay him the €90,000 euros to give to the IRS. We said we wouldn’t be prepared to do that on a property we didn’t actually own yet, but what if the IRS would cut a deal? Turns out the IRS was in the process of being forced by the Greek Government to cut such deals. Citizens owing money to the State (usually taxes) could ask to pay in instalments. 120 of them!
Even better, the interest component of those tax debts (which was usually around 40% of the total owed) would be cut by between 50-80%.
A ‘free’ loan from the Greek Government
So in theory, for every payment we could make on G’s behalf to the IRS would cut the price we’d have to pay for the property. If we could get the €90,000 euros down to say €50,000 payable over 120 months, we’d have a cash discount and a ‘free’ loan from the Greek Government.
(This is what you can look forward to from a Government ready to bribe voters in an election year).
Even if the bank reset G’s monthly payments to the original €1,000 half of that was capital repayment because of the age of the mortgage. We worked out that we could offer the bank around €600 per month and we’d have to pay another €420 odd to the IRS.
That’s a total of €1,020 per month payable with 75% of that coming off the purchase price. The flat would rent for €700 per month leaving us with a negative balance of €320 a month.
Oh, and the flat came fully furnished and with a brand new 56″ flat screen TV.
Breakdown of the profits in this deal
For €320 a month we’d get to control and eventually own, a property in a great neighbourhood worth around €250,000 in today’s depressed market, hold it for say five years and wait until the market moved.
Here are some example numbers.
|Debt on Paper||€260,000|
|IRS debt on paper||€90,000|
|IRS debt after deal||€50,000|
|Total amount to pay||€210,000|
|Monthly IRS monthly||€750|
|Monthly Bank Payment||€600 *50/50 repaymnt/interest|
|Total monthly payment||€1,020|
|Shortfall payable by us||€320|
|Sell in 5 years||60 months|
|Total paid by us||€19,200|
|Market rise % each year||5%|
|Balance to pay IRS||€25,000|
|Balance to pay Bank||€152,000|
|Profit = Sale Price – Remaining |
Debts – Total monthly top up
ROI of over 600%
So let’s look at what kind of ROI this is because it’s pretty mindblowing.
(Let’s forget both rental increases and bank rate increases to keep it simple).
It will cost us €19,200 to top up the monthly payments over the 60 months. If the values follow the numbers – 5% pa capital growth and we make €119,832 at the end of the five years that’s an ROI of 624.10%
Even annualised that’s 124.08% per annum. Of course the market may not rise 5% per annum. It may only rise 2%, but it could rise 10% also. This is what Nick Taleb the famed author of Antifragile calls ‘optionality’.
Your downside is limited. In this case the downside is the €19,200 we pay to top up the payments.
But the upside is unlimited.
It’s possible for prices to double in five years. Of course, it’s possible they won’t but there is no upper limit to this model when you control a property with this type of creative contract.