Recently, I’ve been providing advice to new client. He and a friend are looking to lend a total of $350k to a builder who is offering to pay interest of 20% p.a. and repay within 6 months.
It just smells like one of those deals that are too good to be true.
It is possible that the deal being offered is just a really good one, but alarm bells are ringing, despite getting a second mortgage over the land and some personal and company guarantees. Originally, the only security on offer was some units in the unit trust which owns the land, so at least we’ve managed to procure additional security, but possible the proposed guarantors might not have any asset backing. To date, the only assets I’ve seen are:
- the land, which will have a first mortgage to the main lender, who is also charging an outrageous interest rate and establishment fee; and
- related party loans.
If this deal goes bad and the default interest chews up all the equity in the land, there will be nothing left from which to recover the loan money.
After helping the client to understand the financial statements and advising on the possible pitfalls, I think the client has rightly been put off.
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