Hi All,
This question is regarding a no money down strategy. Please consider the following example:
Say the bank gives me 300k loan. If I went with 95% LVR I must pay 15k deposit & LMI. The higher the LVR the lower the deposit but then the LMI increases dramatically. Now, I read that if you can convince the buyer to take out a second mortgage on the 20% (i.e. 60k) you end up with a LVR of 80% with the lender and don't have to pay deposit/LMI.
As you can see, I don't understand that process very well. Can somebody explain it to me?
(Just in case you're wandering, I'd like to do the above and then flip the property using vendor finance (wrap)).
Thanks,
Emil
I'm a little confused, are you buying or selling a property using vendor finance?
From what I gather you are asking is if you take out the 80% loan and then the borrower takes another loan backed onto the same title for 20% as well as the 80% you are lending them. Is this what you are asking
Oops, perhaps I should clarify.
I'd like to buy with this approach and then sell to wrapee. But forget the selling for now. Let's concentrate on me being the buyer of a property. I want to buy it with no money down.So from what I hear, what I described seems to be possible i.e. the vendor does a "deposit vendor financing" on me for the 20%. He takes out a second mortgage (from what I hear at a much higher interest rate) and I'm the one that pays it.
So I end up with a loan of 240k to my regular lender at regular interest rate and another one of 60k to the vendor with higher interest rate.
Then, if I sell the whole thing for about 320-330k at 2% higher interest rate that that I'm paying for the 240k I'd still be around 100-150$ pw ahead.
Cheers,
EmilThat is how it works. Usually the vendor doesn't go and physically go and get another mortgage, they just "lend" you 20% of their property, which you pay them back at a higher rate. Usually vendors who don't need the money immediately are the ones that are more open to doing this.
Sometimes the vendor does want some sort of deposit, say 10% or something, with the 2nd mortgage being taken out of the balance. But all that is negotiable with the vendor. I hope it works for you!
Kelly
Hey Kelly,
Thanks for the confirmation. Have you or do you know anybody who has done this successfully?One question I still have (i.e. the vendor will have it): What happens if I as the buyer default? I mean the bank is the first to get their money and then, the vendor gets his from what's left? What if I go bankrupt? (of course I don't intend to but these are all questions to which I must have an answer when negotiating with a vendor).
Is there any site/book/publication where I can read more about this i.e. details, documents etc.?
Cheers,
EmilHi Emil,
Rick Otten has lot's of publications and courses on this!
In saying that, the concept is very simple, the vendor accepts 80% of the purchase price during settlement say within 6 weeks, the remaining 20% is owed to them, the title of the property transferes at settlement and they take out a second mortgage against the title for the money owning. Interest payable on the 20% is negotiable so is the term of the loan and the repayments.
The risks are that the vendor may not ever get the 20% if you go bankrupt only if there is sufficient funds left over after the first mortgage is paid out. They would only do this deal if they are making a sufficient profit on the property on the 80% that they are taking and viewing anything else as an added bonus.
I have sold properties on this concept (mainly for clients), but have never purchased them. I would suspect that the majority of vendors (or their agents) would not have a clue on what you are talking about so you would need to spend some time on your marketing skills and "vendor education" so that you could swing the odds in your favour!
All the best!
Hi Xenia,
Thanks for clarifying.So the vendor can take out a second mortgage on a title that is not on his name but on mine?
How does that work?
How much more interest do they pay for that?
What is usual in these cases, do I just cover the vendor's second mortgage payments? How do they make sure that I pay regularly?Cheers,
EmilEmil
I am not sure you have your head around the concept yet.
Vendor would usually take out a second mortgage as this is the safest way to protect their money, but you may be able to talk them into not doing this.
Just think of it as having 2 loans.
The bank has the first mortgage on your title and the former owner will have the second one. Keep in mind when you buy a property (settle) the vendor needs to pay his/her loan off.
What you pay the vendor in interest is up to your negotiating skills. I know a developer who is selling properties this way where he will lend the purchaser 15% (and pay their stamp duty) and he is not charging any interest. Others charge something like 10-15% pa.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hey Terry,
Thanks for the answer.I'm currently looking at the possibility to get a personal loan to cover the deposit. I'm currently in the process of creating wrap scenarios which I'll discuss with my mortgage broker. I'll then see what finance options I have available. By the end of next week I'll have applied hopefully.
In any case, that 2nd mortgage thing, as you say, is going to be hard to explain to any vendor.
Could you tell me more about that developer you know? Is he in QLD? How exactly do the deals work that he offers?
Cheers,
Emili would like the name of that developer as well if i could. for i am also looking to do a 20% vendor finance as well.
and about that 2nd mortgage, i was under the impression that it is a loan between your self and the vendor for the amount and that you negoitate the terms of repayment, interest rate and payment options. e.g you borrow 10% of the purchased property at a rate of 8% over a period of 3 years to be paid back weekly/monthly or lumpsum. i may be conpletly wrong as i am only just starting to look into this as well, if i am wrong please tell me.
Just to butt in here, is this how it works?
House: $100.00
Bank will lend 80% of the value of the house.
So now you have to make up for the short-fall of 20%.
You go to the vendor/sellor, and you tell them "look, i only have $80 bucks, i don't have the deposit. However, i am going to rent your property to my client here which will generate an extra 10 a month. I will pay you $5 per month for the next 6 months. Will you accept this?"
Its a win/win situation, because the vendor gets $110.00 for his house (as opposed to $100) and you can buy it no money down.
Is this how the scenario works?
I guess the question is… what if the vendor owns the bank $85.00? The proceeds from the sale will not be able to cover the liable amount.
hey there,
yes that is how i grasp it as well and as you pointed out it is not always a option with every house you look at. but it is still a good option nonetheless, and there is nothing wrong with trying to save your own money and as the saying goes "you will never know what is possible until you ask the question"I think it's more like
(to the vendor) "I have 80 bucks, will you loan me the other 20? I'll pay the 20 back to you over x years at x.x interest rate, deal?"
The main problem with this strategy is that it only works with vendors who aren't under pressure to sell. If they were, they most likely need the money soon, and won't be interested in vendor financing. It's pretty hard to get a vendor to agree to something like this if there's other buyers offering the asking price on standard terms. So, you either have to find a property that no one else is interested in (which there's probably a good reason for) or offer an inflated price.
If you can make it work good luck to you, personally I would rather have my finance ready to go so that when I find a good property, I can make an unconditional offer very quickly and get a good price. To each his own.
Furthermore if you really don't even have the money to put down 5% and purchase costs, is it wise to take on a few hundred thousand dollars of debt that requires servicing? You would want it be a pretty special deal to take on that risk if you ask me….
We bought a house several years ago that was beyond our ability to borrow, but we needed it for a business purpose and it was perfectly suited to this purpose, so what the hell?
We had good cashflow for the loan repayments, but not enough deposit to use a normal loan. This was before all the LoDocs etc had hit the market in a big way.
Through our M.B we were able to do a Vendor finance over 5 years for part of the funds and we put in some deposit of our own from our PPoR sale. The Vendor was not needing the money, but was having trouble selling the house due to the price range, so was receptable to this deal.
The deal was;
$100k Vendor finance @ 10% interest only over 5 years (interest rates at the time were around 8.5%, when the balance of the Vendor Finance loan needed to be repaid, or sooner by agreement. The Vendor simply left his equity in the house and we paid him interest on it, so there was no other loan except our Bank loan.
We put in $100k of our own money and the Bank supplied the rest on a standard 5 year I.O loan, which then reverted to P.I.We sold the property after 3 years and cashed everyone out. It worked well for all concerned.
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