david hornby

**Some
properties are sold on unusual terms and conditions and therefore,
must be converted to normal terms and conditions before such sales
can be used as evidence of market value. The ONLY test that is
required to determine whether or not the sale price is on normal
terms and conditions is whether or not the mortgage (usually offered
by was of vendor finance) has an interest rate that is normal or
typical for that kind of property. No other term or condition of the
finance agreement is relevant because of opportunity cost
arguments - Fed Comm of Land Tax v Duncan (1915)19 CLR 55.**

**IF
THE INTEREST RATE HIGHER THAN NORMAL**

**If
the offered interest rate is higher than normal, the sale will be
less than market value and the adjusted price (ECP) will be higher
than the sale price.**

**IF
THE INTEREST RATE IS NORMAL**

**If
the interest rate is normal, the sale is equal to market value and a
cash transaction. Therefore, no adjustment is required:**

**If
cash is given on the spot or if cash is not given for (say) 3 or 6
months but interest is given that is the regular current
interest those are the same thing, because in both cases alike
the vendor has the use and benefit of his money. If he were to sell
on credit without interest, that would not be equivalent to cash.
Isaacs J in Fed Comm of Land Tax v Duncan (1915)19 CLR 551.**

**IF
INTEREST RATE BELOW NORMAL**

**This,
is the more common occurrence with vendor finance. The sale price
will be above market value and the adjusted price will be below the
sale price. It can be seen from this that a government or bank policy
of lending at low Interest rates (concessional rates) does not work
as the price paid for the land or land and building, will increase
and no advantage is gained by the intending purchaser.**

**EXAMPLE**

**A
block of land is sold for $100 000 by way of vendor finance at an
interest rate of 10% pa for a term of 100 years. Determine the
equivalent cash price (ECP), if the normal interest rate is 15% pa.**

**STEP
1**

**Determine
the annual repayments (PMT):**

**PVPMT
= (1 0.3855)/(10/100) = 6.145**

**PMT(100000)
= 100000/6.145 = $16273 pa**

**STEP
2 **

**Determine
the present value of the repayments at 15% pa:**

**PVPMT = (1
0.0247)/0.15 = 5.019**

**PVPMT
(16273) = 16273 * 5.019 = $81674 say $81 700.**

**Therefore,
the effective sale price at normal terms and conditions is $81 674
compared with the nominal sale price of $100 000 that is, $18 326
above market value. **

**The
effective value or equivalent cash price can be used as
evidence of market value.**

**USING
THE FINANCIAL CALCULATOR FOR MORTGAGE CALCULATIONS**

**STEP
1**

**CLEAR
ALL REGISTERS**

**<2nd
F><CA> CA will flash in the window**

**STEP
2**

**DETERMINE
MORTGAGE REPAYMENTS**

**Enter
period eg 20 years 20 n**

**Enter
interest rate eg 12%pa 12 i**

**Enter
present value (principal) **

**borrowed
for example 400 000: 400 000 PV**

**<COMP><
PMT> 53 551.5**

**Therefore,
the repayments are $53 552pa.**

**MORTGAGEE'S
INTEREST**

**The
mortgagee's interest after say, 5 years is the present value of:**

**$53
552 pa for (20 – 5) 15 years at 12%pa:**

**INPUTS**

**15
n 12 i 53552 PMT <COMP>< PV> $ 364735**

**MORTGAGOR'S
INTEREST**

**The
mortgagor's interest is the residue after the property is sold and
the mortgagee is paid out:**

**$400
000 364 735 = $35 265**