# Selling on contract



## JackB (5 Sep 2006)

What are the rules in selling on a contract for profit?
Does the developer allow this?
I have an opportunity of buying off plan and making a considerable ammount.. even after CGT it will be worth it but dont know how the developer might feel..
Thanks, JB


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## mf1 (5 Sep 2006)

Check your own contract - in general there is a prohibition in the Contract preventing you from doing this. Developers don't like it - if there is a profit to be made, they want to make it.  

Given the current uneasy climate why do you think there is a definite profit to be made?

mf


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## redo (5 Sep 2006)

No offence Jack, 

But I hope you make a loss.


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## liteweight (5 Sep 2006)

redo said:


> No offence Jack,
> 
> But I hope you make a loss.



Not nice. This forum is for people who need questions answered not judgement passed!


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## liteweight (5 Sep 2006)

JackB said:


> What are the rules in selling on a contract for profit?
> Does the developer allow this?
> I have an opportunity of buying off plan and making a considerable ammount.. even after CGT it will be worth it but dont know how the developer might feel..
> Thanks, JB



The developer has to agree to insert a clause in his contract which allows you to do this. Otherwise you may have to complete the sale, which would include stamp duty, if you are not a FTB plus legal fees etc.  

If you are a FTB you should be aware that you would lose this status if forced to complete the sale. I'm not sure where you stand with regard to FTB status if you 'flip' the contract.

If the developer does allow you to 'flip', you will have legal fees and capital gains tax.


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## JackB (6 Sep 2006)

Redo.. Before, I would have thought the same but when the opportunity comes along to make possibly 400k-500k, you would probably do the same.
As I am recently a FTB I would not do it to the average Joe like myself. These are luxury homes being built on Irelands Coastline with prices expected to rise by 500k in two years. I have a chance to buy now off plan.. Is this not known as an "Investment?"
I kicked myself for not buying years ago.. I dont want to regret it again..

Good info Lightweight, but it the property was to rise in value by 500k, I would pay 20% (100k) CGT of which legal fees etc would come out of the 100k if thats right?? Can I negotiate the contract as to be able to "Flip" if I choose, or do developers generally put this clause into their contracts not allowing you to "Flip" the contract?
After all, a two year investment of my 200k deposit means im taking the risk if anything negative were to happen the property market..

Thanks guys for your replies..
Jack


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## money man (6 Sep 2006)

Jack B, I think you should buy it. sounds like a great way to make a few hundred thousand. I mite buy a few myself and then when they go up 500k i will make a million. I dont know why i didnt think of this before though. i feel a bit silly now.


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## liteweight (6 Sep 2006)

The only people I know who've done it negotiated the deal through the estate agent. I've never done it myself. As far as I know, the developer has his solicitor put an extra clause in saying that you can flip but there's usually a time limit on it....he won't wait for his money forever! 

The advantage of not completing the sale (apart from the others already discussed) is that if the property is under 125sq.mts. it can still be exempt from stamp duty for an owner occupier.  I think there is a reduction on stamp duty for owner occupiers of new builds anyway even if it's over that size. That means you can spread the net wider when looking for potential purchasers.

Capital gain is based on the selling price, less purchase price+allowable expenses, less 1270 allowance. 

If I were to do it, it would be of paramount importance that my solicitor realised what my intentions were and that he/she go over the contract with a fine tooth comb! Providing, of course, that you can get the developer to agree. 200K at the start of a build may well look good to him.


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## redo (6 Sep 2006)

JackB said:


> Redo.. Before, I would have thought the same but when the opportunity comes along to make possibly 400k-500k, you would probably do the same.
> As I am recently a FTB I would not do it to the average Joe like myself. These are luxury homes being built on Irelands Coastline with prices expected to rise by 500k in two years. I have a chance to buy now off plan.. Is this not known as an "Investment?"
> I kicked myself for not buying years ago.. I dont want to regret it again..
> 
> ...



No hard feelings Jack.  You may get a better return on your 200k betting that the property market will increase with the bookies


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## JackB (6 Sep 2006)

Money Man, maybe you should..

In a nutshell.. This week, it was predicted the market will grow by 13% this year and 7% the following.. 
As I have a chance to invest, I believe 200k of an investment over 18 months on an exclusive developement of only 22 homes which are being sold off plan for between 2.9m and 3.2m is worth taking.. Even if they were to go up by 13% over 18 months it will be a risk well worth taking..
Liteweight, thank you for your replies.. appreciated..

Jack


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## whathome (6 Sep 2006)

JackB said:


> This week, it was predicted the market will grow by 13% this year and 7% the following..


 
Do you know who predicted this?
Do you know what their business is?
Do you know why they might have said this?

You can flip a contract with permission from the builder.

You should only do this if you are ok with the possibility of loosing 200k....and possibly more if you are forced to complete the purchase.


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## tosullivan (6 Sep 2006)

somebody I work with has tried this and if you are in direct competition with the developer and they have units still to sell, you might have a problem getting their consent...


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## sheena1 (6 Sep 2006)

You should speak to your solicitor about signing the contracts in trust. I know of a few people who have done this successfully with the consent of the builder.


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## sheena1 (6 Sep 2006)

redo said:


> No offence Jack,
> 
> But I hope you make a loss.


 

Sour grapes anyone??


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## whathome (6 Sep 2006)

Also consider that the government might act to make it difficult to profit from selling new build contracts.

Noel Ahern spoke recently on speculation in the property market; he said:

“There are people buying houses and apartments off the plans and never taking the keys but selling on the contract. I don’t think those people are giving any added value to the whole issue. I personally would like to see those people *taxed out of existence*. "

[broken link removed]


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## bearishbull (6 Sep 2006)

This is a wind up right?


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## Persius (7 Sep 2006)

JackB said:


> In a nutshell.. This week, it was predicted the market will grow by 13% this year and 7% the following..
> As I have a chance to invest, I believe 200k of an investment over 18 months on an exclusive developement of only 22 homes which are being sold off plan for between 2.9m and 3.2m is worth taking.. Even if they were to go up by 13% over 18 months it will be a risk well worth taking..
> Liteweight, thank you for your replies.. appreciated..
> 
> Jack


 
Firstly, these are _predictions_. I believe Dan McL in BoI has predicted 3% growth for 2007. I believe he's a good track record. You can find loads of different predictions from people of various knowledge levels and various vested interest in seeing their own predictions coming true.

Secondly these are for _average_ growth. Prices for some properties could grow by more, prices for other properties could grow by less, or even decline, and you still get the predicted average growth.

Thirdly it is now September. Of the 13% growth predicted for 2006, I'd say most of it has already happened. So you are probably looking at 4% growth for the remainder of the year.

You may indeed be on to a winner, but I'd be worrying about a lot more than just the form of the contract. Whatever you do, get a good solicitor.


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## JackB (7 Sep 2006)

Thanks guys.. You've been a great help!!

Jack


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## Maine (7 Sep 2006)

JackB said:


> Thanks guys.. You've been a great help!!
> 
> Jack


 
Fair dues to anyone taking this scale of punt. It is impressive given no intention of completing. 

Banks would prob need an income of 350k a year to give the mortgage and stamp duty itself is north of 300k if had to buy.


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## redo (8 Sep 2006)

People deserve what they get.


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## Tobesure (10 Sep 2006)

That looks like the true position there SPC. Good advice too I should think.


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## liteweight (10 Sep 2006)

SPC100 said:


> IIf your want to take this bet on this property, I would advise informing your solicitor and looking to pay 200,000 euros now, and sign some form of *conditional* contracts to complete. Hence limiting your risk to 200k.
> 
> Not sure how likely you are to get this agreed by vendor though.



This is exactly what is usually agreed when it's such a large amount. One can definitely be forced into completing the sale if this is not in place. I've heard lately that developers are no longer agreeing to flippers requirements and that the practice has all but died out. So much for Noel Ahearne going after the speculators. Typical, locking the stable door after the horse has bolted!


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## redo (27 Mar 2007)

Any progress on the house purchase JackB?

Would like to know things panned out?


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## BrenG (27 Mar 2007)

That man is now in Bermuda spending his €500K profit.


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## Luternau (27 Mar 2007)

JackB said:


> What are the rules in selling on a contract for profit?
> I have an opportunity of buying off plan and making a considerable ammount.. even after CGT it will be worth it....



There would also be VAT due on the higher price charged. The threshold for charging VAT on property transactions is zero. Property is still new (for tax) until first conveyed. So the flipper has to return 13.5% of their mark-up. Why? 
Hypothetical example; A flipper selling on for say €3m, something he bought for €2.5m, while at the same time the builder is trying to offload a similar unit for 3m. Cost to build /cost of goods sold is the same in both cases-therefore the amount of VAT returned to the exchequer should be the same. Both are new properties.
Why should a flipper be entitled to a VAT exemption on his €500k mark up, when the builder has to pay VAT on the full sales price?

CGT is not the correct tax in this scenario. A builder must return income tax on their profit for sales (annually) -same applies for the flipper-Income Tax at their marginal rate, which in this case would be 42%.
Whether a flipper realises it or not, if they do not close the purchase themselves and then re-sell the property as second-hand, they are in the property development business as far as tax is concerned. However if they so this frequently, Revenue can decide that they are doing this as part of a profession and also regard them as property developers.


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## liteweight (27 Mar 2007)

I don't think it's as simple as that. The builder would have included the VAT already in his 3m price tag. Vat was also included in the price tag to the flipper. The problem is that the flipper only pays over 10% deposit. The ordinary man in the street is not usually registered for vat, so when the builder OR the flipper sell on, it makes no difference as he can't claim the vat back anyway.

The problem really only arises when the builder or the flipper decide to sell to someone who is vat registered. They want to claim the vat back, but who charged them vat in the first place? The builder is only selling on 90% of his contract and the flipper 10%. In an ideal world, the flipper would be registered, claim the vat back on his 10% and charge vat to the new buyer.....I'm lost now!


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## Luternau (27 Mar 2007)

According to Revenue the following is the case;

-VAT is due on the assignors(flippers) mark up
-The treshold for VAT resistration for property transactions is Zero. This implies that the flipper must register for VAT and then return 13.5 of their mark up to the VAT man. 
In this hypotetical case 500,000 mark up /1.135*0.135 =59,471 leaving 440,528 profit which is chargable to income tax (less allowable expenses)

In relation to the sale to a VAT reg purchaser that wishes to get a VAT refund, the purchaser will get a refund from the REV based on the builders return of VAT on the original sales price, and upun supplying details of the actual price paid to the flipper, the REV will investigate for VAT avoidance. 

Additionally, the new purchaser has to pay stamp duty arrising from the benefit that accrued from the assigned contract (under the stamp duties consolidation act 199x). 

So for flippers its not just a simple matter of selling at a higher price and walking into the sunset. The best approach is to close and then resell-but its not attractive as the profits are not the same. Make you ask the question whether flipping is really worth the bother-even in the rapidly rising market that existed in Ireland up to 2006.


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## liteweight (28 Mar 2007)

Thanks for that Luternau. I doubt too many flippers are registered for VAT. It hardly seems worth it. Are you saying that the new purchaser would have to pay stamp duty even if it's a new build etc.? One more question...are Rev. definitely saying the flipper is liable for income tax rather than capital gains?


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## Skyscout (18 Apr 2007)

> Additionally, the new purchaser has to pay stamp duty arrising from the benefit that accrued from the assigned contract (under the stamp duties consolidation act 199x).


 

Hi all!.... in plain English does this mean that SD is charged on the original buliding contracts price (less VAT) or that price plus the flipper's markup.

Hi Luternau - Got my solicitor to speak to the actual builder's solicitor and turns out that my transaction was an assignment of contract but the price was blanked out!!! The flipper literally bought the entire apartment block so they have to try to find out some way of apportioning value to the units we bought!.


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## Luternau (19 Apr 2007)

Skyscout said:


> Hi all!.... in plain English does this mean that SD is charged on the original buliding contracts price (less VAT) or that price plus the flipper's markup.



SD is also due on the mark up-but according to the Rev, (Stamp Duty Consolidation Act) on the mark up at a lower rate than the property rate. On the up side this may mean that you stay in a lower SD bracket. 


Skyscout said:


> Hi Luternau - Got my solicitor to speak to the actual builder's solicitor and turns out that my transaction was an assignment of contract but the price was blanked out!!! The flipper literally bought the entire apartment block so they have to try to find out some way of apportioning value to the units we bought!.


The original lease will have to say a price that the properties were originally sold for. There is a price per apartment, bearing in mind that the flipper did not pay a price for the common areas -however deep the price is buried. I can only see that this is buried for tax reasons-its harder to determine profit that way.

It sounds so like the situation that I encountered and if so , you will have to work hard to get the invoice in your name , and as for getting it for the mark up-I still have not got mine. The key point here is that you paid xxxx for an apartment, the flipper will say that they did not sell you the apartment, just their interest in it for a premium above the builders price of y. 
They will say that the interest premium is not vatable, however you can rightly say that the flipper did not advertise 'contracts for sale' for x, they offered 'apartments for sale' for x. , and then only explained to you otherwise afterwards. To complete the circle, either way the property was bought by you for the higher amount-irrespective of how convoluted the purchase process was. 
I am wondering if this is the same people, but maybe a different developlent? Could you PM the location or builder?


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## POD1 (22 Apr 2007)

Redo.. I think you should go back to the dark corner of your own mind  with the earlier insults. This is a property forum so if you cant read the word "flip" without the anger boiling up inside I would advise you to read something else.

People flip properties in every market in the world it is a fundamental vechicle for investors to generate cashflow in a growing market.  It is not a license to print money thoughas some people seem to think and carries large risks also. 
Usually it is just part of an investment property strategy 
eg:3 buy to lets, 2 flips, 1 building project, 2 overseas.

However anybody can do it. In northern reland i think flipping is ok in principle at the minute I would be much slower in the South.

Like the last poster the property you are proposing sounds like the realm of a very rich investor. Unless you are very rich and I mean very ,stay away I would think  but if you have the money to follow through then fine. 

Some points:

1)Yes it can be done .. any decent solicitor will know how to do it. Avoid stamp duty it is passed to the new buyer.

2)you basically create 2 contracts and have whats called a subsale.
3)You need to be  in a position to close on the property even if the buyer falls through or else you lose your entire deposit and legal fees.
4)You need to make sure the person purchasing from you has their finance organised as you will only have 2 weeks to complete the purchase once property is complete. 

A good tip here is to ask the purchaser to use the same solicitor as yourself . not illegal but can speed up entire process.and also ensure the money will be there. The most important things here is a good fastacting solicitor and a serious buyer with access to funds.

5)Legal fees will be large enough as you will have to pay to buy and sell essentially. Do a deal with solicitor beforehand.

6)Estate agant also needs to be paid.. up to % again do deal 1% normally 2%

Below is an example of typical full costs and potential profits based on a 180000 euro investment property in Co.Cork. This is a real example:

Property is off plan 12 months to completion Price:180000K

Deposit paid and dcontracts signed 18000k (10%)

Property on market 6 months before completion
Price 210000K

Potential profit 30000K gross

sold so 30000 profit
-           2500 solicitors fees total
-           2500 estate agents fees (deal done at 1.2% including vat)
-           5000 CGT

Total profit  20000K nett 

IMPORTANT:This was based on prices rising approx 15% in 1 year oviously if it only rose 10% the profits would only have been 18K gross before costs  resaulting a halfing of the nett profit to around 10K

Therefore is very important you only do this in a strong growing market.. I would suggest 13% min. Of course you should always be able to turn this into a buy to let to ride out any dips or problems in the short/medium term.

Finally ,if property rices go down then losses must be based on full purchase price .. so Redo I hope you can now see there is a little more to it than profiteering .. its calling doing business properly. 

I totally agree with you when you say people deserve what they get.Perhaps not in the same way that you meant it though.


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## POD1 (22 Apr 2007)

I did have a rather long 2 month negotiation with the builder to remove the clause which was preventing me to flip. tho=rough my solicitor .. my funds were with my solicitor at this stage .. in the end I advised the builder I would not complete purchase unless the clause was removed at that stage he agreed.


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## Luternau (22 Apr 2007)

POD1
I would say it is much more complex from a tax point of view than outlined.
Sub sale is not VAT exempt-REV state that the threshold for VAT in property is zero. VAT due on mark up.
It is questionalble that CGT applies in all cases-REV can take the view that you are doing this as a profession and levy income tax
Stamp duty issues arrise for the mark up.
Simplest way is to close sale, pay SD, and then sell on as second hand-thought the profits are considerably less in doing it this way. The other way seems to border on tax avoidance-note I am not saying evasion, jsut using various rules to avoid tax, which the REV can decide to label abuse of tax laws.


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## POD1 (22 Apr 2007)

Perhaps I am using the wrong terminology. sub sale/assigned etc.

However I am assured that the tax accessmwent here is ok in principle at least.. I really dont know much about the ends and outs technically but believe the basics are right..

I will be making return on this soon so will know for sure then. I beieve this is the way most flippng to be carried in this country... my figures are rough but give an overall indication of the type of money to be made.


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## Luternau (22 Apr 2007)

POD1 said:


> ... I am assured that the tax accessmwent here is ok in principle at least.. I really dont know much about the ends and outs technically but believe the basics are right....I will be making return on this soon so will know for sure then.



I wish you well in your tax affairs but the question as to CGT or Income Tax on you profit still hangs.
Seems a bit risky to determining your position in Tax law after the fact-maybe I am ok maybe I am not.  You entered onto a contract that specified that you could sell your interest in the property...that seems like someone engaged in business activity (Income Tax) and not someone selling assets they actually own (CGT).


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## POD1 (23 Apr 2007)

Take your point there.

Will look into that as deal is just completing . Obviously, 

Of course there may be other ways to reduce tax liablility here I presume.. could I make an contribution to pension etc, shares .. any advice?

If I have to pay higher tax then obviously it will reduce nett profit by around 5K.. still I think the overall post shows someone considering this type of project the basics.

Thanks for pointing this out to me.


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