Hi Jenni

I guess it's worth looking at the risks involved, as compared to buying with a traditional home loan'

1/ You pay well above market rent which goes towards a deposit for the home.  Most people understand that you pay more per month to buy a home than you do to rent it.  As you say, with a Rent To Buy, you do pay a higher monthly rent but some of this rent is often credited towards your deposit.

2/ If you default you can loose your deposit.  If you default on a home loan you get no money back, have the home repossessed, your Credit Report shows a huge default for years and, if the mortgagee auction doesn't raise enough money, the lenders mortgage insurer may come after you and bankrupt you.  With a default under a RTB you give the house back and walk away with a clean credit record (as a RTB isn't a credit contract and can't be entered onto your Credit Report).

3/ If at the end of the rental term you can't get a loan to buy the house, again you can loose your deposit.  As mentioned above, with an RTB part of your rent is often credited towards your deposit, if you end up buying the property.  Most vendor financiers these days build in multiple extensions into their legal paperwork but, if after years on an RTB, a tenant/buyer has been unable to get themselves into a position to get home loan, is it unfair that the RTB provider sticks with the original agreement in the legal paperwork?

4/ Money you pay towards the deposit doesn't get put into a trust account, so there is risk of not being able to recover the money.  When a RTB purchaser enters into a RTB arrangement, the legal paperwork clearly says that any rent that is credited towards the deposit, will only be available as a credit towards the deposit if the tenant/buyer actually buys the property, i.e. the legal paperwork makes it very clear that this crediting of funds can only be used for the purpose of paying some of the deposit, if the tenant/buyer actually buys.

5/ what happens if the owner defaults on the loan.  RTB paperwork these days, often has provisions for the rent and on-going option fee to be paid directly into the seller's underlying loan. Thus helping to ensure that the seller doesn't go into default in the underlying loan.  In this area, a vendor finance Instalment Contract does give a vendor finance buyer greater security.

6/ You don't own the house while renting, and are bound by the tenancy laws.  Yes this is correct but a lot of people don't mind being tenants knowing that some of their rent is going towards owning their own home.

7/ Contracts can be complex and you need a good solicitor.  Absolutely, we insist that all our tenant/buyers get independent legal advice.

Cheers,  Paul

In all States a vendor finance Instalment Contract is based on that State's standard Contract for the Sale of Land (NSW name), usually with an Instalment Payment Schedule added, along with National Credit Code Disclosure Statement.

There are specialist vendor finance solicitors in Australia and I suggest you get an example from one of these solicitors.  Many of them supply examples so you can become familiar with there content.  May I suggest however that you never try to establish one of these Contracts without good legal advice for you and independent legal advice for your buyer.  A list of vendor finance specialist solicitors is available at:  http://www.vendorfinancelawyer.com.au/vendor_finance_specialists.htm

Exactly what paperwork you need when you're establishing an Instalment Contract depends on whether you are acting as the seller of a property you own or if you are helping someone else sell there property with an Instalment Contract.  If you are selling as the owner of the property, you are regarded as the Credit Provider.  If you are helping someone sell their property with an Instalment Contract you are acting as an Intermediary to the Credit Provider (and possibly providing Credit Assistance to the potential buyer).

As I mentioned, where you stand in the transaction establishes what documentation you have to supply to the buyer.  To make it a lot easier to get your head around how to gather information from your potential buyers and how to verify that information, we've made up two small packs for vendor financiers, i.e. our Application Guide and Qualification Pack.  They're available at the VFI website mentioned in my signature below.

One great qualifying tool is the Genworth Servicing Estimator.  It can be found at:

http://www.genworth.com.au/lender-centre/tools-and-resources/servicing-estimator-australia/

Cheers,  Paul

Hi Roberto

Some of your questions can be answered by knowing the difference between types of Agent Listing Agreements used.

In NSW an Exclusive Listing entitles the Agent to get paid their commission if you speak to the Agent or the Vendor about the property during the term of the Listing Agreement.  Even if you come back after the 'Exclusive' has expired and buy the property, the Agent will be entitled to their commission.  This is why most Agents try to insist that all sellers sign Exclusive Listing Agreements

In comparison, in NSW, if a vendor signs a Sole Agency Listing Agreement, the Agent has to 'physically introduce' the buyer to the property, during the term of the Agreement, to be entitled to their commission.

Cheers,  Paul

Hi Jenny

The difficulty in answering your questions simply is there are a number of vendor finance techniques in the market place.  The 3 most common are; the Instalment Contract (often mistakenly just called 'vendor finance'), the Lease/Option (usually called a Rent To Own) and Deposit Finance.  There is even a new set of legal paperwork being launched over the next week but three's enough for now.

what is the going vendor-finance interest rate for P&I?  It very much depends on the vendor financier and the technique being used.  Let's take our average interest rate on an Instalment Contract we're offering at the moment.  Like some traditional lenders, we start with a 'honeymoon rate of about 6.4% and then gradually rise to 8.14% at the beginning of year four.  The rate then stays consistent for the remainder of the 30 years, going up and down in 'lock step' with the Vendor's underlying loan, e.g. Reserve Bank movements.  Under ASIC's Responsible Lending requirements we have to check our buyers' serviceability at the higher rate.

On average, our buyers stay with us for approximately 5 years and then refinance into a traditional home loan.

Does the purchaser pay the stamp duty, transfer of land etc…during the rent-to-own period?  For Instalment Contracts and Deposit Finance, yes Stamp Duty is payable soon after exchange of contracts, except in Victoria, where Stamp Duty is not charged until Title transfers.  For Lease/Options (Rent To Own), Stamp duty is not payable until the Option is exercised (except in Victoria where Stamp Duty is payable when a Lease and an Option are used together on the same property).  Different State laws don't make it easy 

How long is the rent period usually?  We write our Instalment Contracts up for 30 years as ASIC is not fond of lumbering consumers with 'balloon' payments.  Lease/Options tend to be offered for 2 to 5 years.  The challenge with all shorter term vendor finance arrangements, is you have to be in a position to buy traditionally when the term of the Lease and the Option run out.  Therefore, as a buyer, the longer you can negotiate the term of the Lease/Option the better.  If we use the Lease/Option strategy, we offer a roll-over to an Instalment Contract if, at the end of the term of the Lease/Option, the buyer is still unable to get a traditional loan.

Can the purchaser on-sell the property during the rent-to-own period?  For a Lease/Option, not normally but you may be able to negotiate with the Vendor to assign your interest in the Lease and the Option, if you bring a strong candidate to the table.  With an Instalment Contract yes you can sell the property.  Of course, as with a traditional loan, you need to be able to pay out your loan to the Vendor.

is the property price negotiable?  Not normally.  I see buying with vendor finance as like buying at a local convenience store.  You know that you can buy two litres of milk for $2 at the supermarket but, when the supermarket's shut, you have to pay $4.20 at the convenience store.  Luckily the price differential with vendor finance is much less than this but you do normally pay a premium price.

Can the vendor alter the repayment term at any time during the rent-to-own period?  Not unless both parties agree.

Will the vendor produce a statement of P&I reduction prior to the agreement to indicate how much the loan is reduced over so many years?  If you ask, I'm sure they would but it is all carefully laid out in the Instalment Contract or Lease and Option.  In an Instalment Contract, like a traditional 30 year home loan, you will pay off the total debt if you make all your 360 monthly repayments.  With a Lease/Option we send a statement to our buyers every six months showing a record of their last six months of payments and the amount of 'price credit' (sometimes called 'rent credit') they have accrued since the Lease/Option began.  There are specialist companies like Vendor Finance Management Pty Ltd (VFM), that operate with statutory trust accounts that many vendor financiers use to administer their vendor finance transactions.  (Disclosure – I am a part owner of VFM).

I generally see the advertising price for vendor finance home for sale at 10% (or more) higher than its true value.  Yes, as mentioned above, you do normally pay a premium for a property that comes with finance included.

On top of the higher initial price, the ongoing interest rate is sky rocketing.  Yes our clients do pay a higher interest rate than that section of the community that can get a traditional loan but the aim is for them to refinance across to a traditional loan as soon as they can.  A lot of them see us as a stepping stone back into the traditional lending system.

One vendor quoted around 7%, but when I sat down and did the figure, it turned out to be almost 10%.  There are many more vendor financiers out there in the marketplace these days.  I suggest you shop around.  Thanks.

Cheers,  Paul

Hi elives

We have been working in the residential real estate vendor finance market place since 2003 and you may be interested in a blog post I've posted called '10 Mistakes to Avoid with Vendor Finance'. It's at:

https://vendorfinanceinstitute.com.au/10-mistakes-to-avoid-with-vendor-finance/

The Vendor Finance Association is a great place to meet vendor financiers. Dates and details of meetings are available at: http://vendorfinance.asn.au/meetings-and-memberships/

If you decide to do a VF course, there are numerous educators to choose from. Some that spring to mind are:

Sean Summerville – http://www.thepropertyking.com.au/

Rick Otton – http://www.rickotton.com/

Dave & Julie Siacci – https://vendorfinanceinstitute.com.au/siacci-system-of-vendor-finance-1997/

Paul Zalitis – http://www.aussiewrapper.com/

It is worthwhile researching all these educators and choosing one that suits your style.

Some other research locations are:

https://www.propertyinvesting.com/strategies/wraps

https://www.propertyinvesting.com/strategies/lease-options

https://vendorfinanceinstitute.com.au/about-vendor-finance/

http://www.vendorfinancelawyer.com.au/

Cheers, Paul

Hi Elives

You are referring to Chapter 11, i.e. pages 101 through 104 and the reference to the strategies section.  Please not that every transaction mentioned in this chapter is Commercial.  Residential properties are mentioned but residential home loans are not.  However there is a reference to the 'debt bit'.

This chapter then refers you to the 'strategies section'. All these strategies may allow you to 'baby sit' the loan (as you call it) but none of them allow you to 'transfer the loan into my name for $1'.

Cheers,  Paul

Hi again Melissa & Paul

We;ve found that flyer drops are a bit of a blunderbuss marketing technique.  They go into every residential property and then the filtering starts, i.e. first up, a large percentage aren't interested in selling.  Then most of the sellers are selling their family home to move to another family home and, while they my ring you, they can't go forward with a vendor finance sale as they need all the money now, to move to their new home.

I'd suggest you research how to market to Landlords.  With the change in capital gain returns in the recent past there are a lot of frustrated, negatively geared landlords out there.  And they're not that hard to find

Cheers, Paul

Hi

You mentioned you're now interested in getting into property investing.  If you are unable the sell the property traditionally for the price you want, then selling the property with Vendor Finance may be a way to get this property to produce positive cash flow for you.

A general overview of how this could be done is available at  http://www.negative2positive.com.au  It's our site in which we promote or services in this area but it also has a lot of information about how it's done.

If you were to consider getting this property to produce positive cash flow for you by selling with vendor finance, the 2 year fixed interest rate would become a non issue.  This is because you would also lock the vendor finance buyers into 2 years fixed interest.

Cheers,  Paul

A thank you gift for being great tenants, with no mention of anything else, should overcome the challenge foreseen by your property manager.

Cheers,  Paul