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