JUNE 2012 |
www.opp.org.uk
On other occasions, the buyer and the seller might be of different nationalities, using different currencies, but different again from the currency used in the country where the property is located. For example, a German selling property in Turkey to and Englishman. Here there is a potential three way currency risk. The British pound could rise or fall against the Turkish lire and the Turkish lire could rise or fall against the euro. In this case it might make sense for the parties to agree the price in British pounds or euro (so eliminating one of the risks) and then agree how to deal with any money that needs to be transferred in Turkish lire. On yet other occasions, the seller might be so keen to sell that he will agree to the price being fi xed in your currency or the seller could be a developer who, for marketing purposes, prices in the currency of the buyer because it helps him to make sales if he does so.
3. The third basic option is to buy your foreign currency at the time when you agree to make the purchase. In some cases, you might be able to enter into a ‘forward purchase contract’ where you agree to to buy the currency from a currency dealer and pay a deposit to secure it but do not pay the rest of the price of the currency until you take delivery of it. This would, typically, be at the time when you paid for the property. Once again, this choice does not really eliminate the risk in the normal layman’s sense of the word. Instead, it crystallises and changes the risk. Instead of their being a chance that the price could rise or fall, the risk now
FOREX
is that the rate changes in such a way that, had you waited, you would have had to pay less. However, this choice does eliminate the uncertainty and that can be attractive for many people. Somehow, the risk that you might miss out on the chance to pay less seems less worrying than the risk that you might suddenly have to pay more – possibly a great deal more. There are many different detailed arrangements as to how you can pursue this option.
4. The fourth strategy is to guard against the risk. Once again, there are many ways in which this can be done. The right one will often depend on the size of the transaction. There may be ways of ensuring against the risk. There may be ways you can take out hedging contracts. They all share the same basic characteristic that you pay a certain amount of money now to guard against the danger of having to pay a lot more later. Using these types of contracts, you will always end up paying a bit more than you would have done if everything has gone in your favour. At it’s very simplest, such a contract could involve you buying half of the necessary currency at the time when you sign the contract and the other half at the time when you take delivery and pay the price. Whether your currency rises or falls in value in the interim, the overall cost to you will remain the same.
5. The fi nal option, which is not really a currency option, is to take as big a mortgage as possible when buying the property – even if you don’t
need it. The debt and the value of the house are in the same currency and so in balance. This then only exposes you to risk in connection with your down payment. In the days when down payments could be as little as 10%. Today it is going to be a lot more but the same principle applies.. How does an understanding of foreign exchange help you sell property?
Often, your buyers (or sellers) will be very worried about this issue and helping them understand it can remove the fear and facilitate the sale. What you need is an overall understanding of the issues involved and the ability to explain them clearly to the buyer or seller. With this in mind, you might want to see the OPP online training course on foreign exchange.
“There is no point in getting a good exchange rate from a company that fails to deliver your money”
This will be available to OPP Connect subscribers in August or September. You need to avoid, at all costs, giving the buyer or seller detailed advice about what is available or, even more importantly, advice about what they should do in their particular circumstances. Giving such advice is heavily regulated in most countries including the US and everywhere in the European union. If you give it you not only run the risk of being sued if it all goes wrong but also the risk of heavy fi nes or imprisonment. If buyers or sellers feel that they need some outside advice to make these decisions you should refer them for independent fi nancial advice from someone who is authorised to give it. How to do this will be covered in the training course. So is it better to say nothing? As usual, it is not that simple. If, for example, you are working as a ‘buyers agent’, failure to alert the buyer or seller to this risk and give them any appropriate information could be seen as negligent or in breach of your contract. Again, you need to be clear about your position. You might want to see the OPP online training session on “The Estate Agent’s Legal Responsibilities”, which should also be available in late summer 2012. How does all of this help you run your business better?
There are four main ways. I have already mentioned the fi rst: making more sales.
Changing | FX rates alter by the second, which can impact any potential purchase
The second is that you will have exactly the same issues to face when dealing with your own fi nances. You will probably have commission due to you calculated in other currencies. All of the same strategies can be used. The third opportunity for gain is the
WHY IT MATTERS | 57
possibility of receiving an introducer’s fee or introductory commission for introducing a buyer or seller needing proper advice about how to deal with their potential foreign exchange problem to a fi nancial advisor able to assist them. Please note that foreign exchange brokers are, in general, not permitted or authorised to give that advice. In my experience, relatively few buyers or sellers will want such advice but those that do will normally be buyers dealing with large transactions and, of course, an introductory commission is likely to be greater in such large cases. The payment of commissions of this kind is not permitted in certain jurisdictions. Your fourth potential strategy is that you can make money by introducing people who need foreign exchange services to banks or, more probably, brokers . They will, usually, pay some form of introducer’s commission. The amounts they pay vary quite dramatically from company to company depending upon the amount of money you are moving through them. This takes us, fairly neatly, to what is, probably, the most important question. Who is best at dealing with your client’s money?
This is not a simple question to
answer. It is not just a case of who gives the best rates. There is no point in getting a good exchange rate from a company that is ineffi cient and fails to deliver your money. Worse still, it could go bust whilst it had your money and leave you as a simple creditor claiming what can be recovered by the liquidator. So, fi rst and foremost, you need a reliable company where your or you client’s \money is protected. The next variable is the amount of the commission that the dealer pays to you when you pass money through him. The more he pays, the worse the exchange rate is likely to be. Remember that, basically, all of these transactions are calculated by reference to the same international inter-bank rates. What varies from bank to bank and dealer to dealer is the margin that they apply on top of those rates. However, there are genuine and substantial differences in the rates offered by different banks and different dealers. Because this is an international business (subject to your having the right amount of protection and complying with the necessary money laundering regulations), it doesn’t really matter whether your dealer is based in London, New York, Tokyo or Istanbul. In my experience, the banks generally give a rate that is signifi cantly worse than the rates given by specialist foreign exchange brokers but the rates offered by such brokers themselves vary signifi cantly. See next month’s OPP FX column for a blind testing of the rates offered by a number of banks and brokers around the world. Be prepared for some surprises.
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