Vendor finance is when a purchaser acquires the funds to purchase a property not from a bank or standard lender but from the vendor/seller itself. There are three main types of vendor finance in Australia.
The first is the Standard Instalment Plan type of vendor finance. This works by an investor/vendor purchasing/owning the property and then the purchaser comes to an agreement with the investor/vendor on the purchase price (usually at a higher than market value). The purchaser then pays the vendor in instalments over several years or until such time as they can qualify for a loan with a bank or refinance. The big risk with this option is that the property is not in the purchaser’s name and if the vendor does not pay his mortgage there is a chance of losing the property as well as all monies paid to the vendor.
The second is the Rent to Own/Buy type of vendor finance. This works by a vendor renting a property to a purchaser (usually at a higher than market value rent) and after a specified amount of time the purchaser has the option to purchase the property at a set price. If a purchaser does not have the means to secure a traditional home loan but wants to purchase the specific property, this option can secure the property until such time that the purchaser can obtain a traditional home loan.
The third is the Financed Deposit type of vendor finance. This works in addition to a traditional loan. A purchaser would obtain a standard loan of 80% from a bank or lender and the other 20% would come from the vendor. Payments are then made by the purchaser to both the vendor loan and to the bank loan. The goal for the purchasers in this circumstance is to refinance the bank loan within a few years and payout the vendor loan with the new refinance.
Although vendor finance can be a positive if you don’t have genuine savings, are self-employed or have a bad credit history, like most things there are risks in taking a vendor financed option which includes paying higher than market value, the higher interest rate on repayments, does not build equity as quick and penalties for missed repayments can be harsh like voiding the agreement entirely.
Most vendor finance is offered by corporations and there is still a criterion required to satisfy the eligibility requirements. Most criteria are a certain percentage of price for deposit payment (around 2% generally), be able to afford the repayments and most corporations want the property to be in a major city where the return is guaranteed.
For the above reasons and others, it is critical that purchasers have independent legal advice if they are considering entering into any type of vendor finance arrangement.
If you are thinking of entering into a Vendor Finance agreement as the Vendor or borrower, Coutts can assist to ensure that you are protected and draft the agreement between the parties.
Please note the above advice is general only and is specific to the individual Contract in question.
For further clarification on the above, please feel free to phone me to discuss.
ABOUT CHRISTINE JOHNSEN:
Christine is a licensed conveyancer and Justice of the Peace at Coutts’ Narellan office. She is highly efficient and is able to assist clients with matters concerning; the sale and purchase of residential and commercial property, retirement village contracts, put & call options and family transfers.
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This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.