This is the situation:
– We listed our IP for sale in May 08. As it is in an area that has been hit hard by the market slow down, all the agents we spoke to said we would have a hard time selling it.
– We listed at $330k; 2 weeks later we accepted an offer of $315k which we were happy with, given the above!
– The buyer had pre-approval, but thanks to his bank tightening their lending criteria in the interim, he was unable to get finance based on his 5% deposit – they will only approve at 10%.We are thinking of lending the buyer the difference. The reason is that since his offer fell through 2 months ago no one has even looked at the property – so to sell it is clear we'd have to materially reduce the asking price. His offer was a good one and our logic is that even if he didnt pay us back, we'd still net more than we would get if we reduced the asking price to get a sale to someone else.
What does everyone think? Has anyone else done this before? Are we missing anything vital? How should we structure this loan?
Many thanks!!
if you are not desperate for the money, you can even lend him half the purchase price for a certain amount of time and get the interest payments on top, at nine percent its not a bad deal … i'd say either way get a lawyer to set up a contract but its not unusual at all …Craig Turnbull has written about deals like that in unlimited cashflow …when times are tough its a great way to sell and make money
Thanks for the response. I'm guessing the vendor finance would be unsecured (as the bank would want the property as security?)? How risky is this?
Hi Chelley
We have done this repeatedely on deals and no the Vendor Finance is certainly not unsecured.
All that happens is that you would register your mortgage after the Bank priority and accept that in the event of default they would get paid out first.However if the purchaser ever tries to sell the property down the track he cannot get clear title to the property until such time as your debt is repaid. Depending on the laon amount you could do it over say a 5 year period and charge him say 8.5% principal & interest.
Whilst their is inherant risk in every transaction if the loan is secured then at least it is not as risky as it could be.
Richard Taylor | Australia's leading private lender
How is such a sale structured? Is this legal in WA?
Thanks!
Legal in every State.
Get your Solicitor merely to draw up the Contract that you are prepared to accept an amount of purchase price less 5% on settlement with the 5% balance to be repaid over X Number of Years with payments of principal & interest and charged at Y interest rate per annum.
Hardest part will be getting the purchasers financier to buy it but if they do then you are away.
Richard Taylor | Australia's leading private lender
Thanks. Your comment re the purchaser's financier concerns me – they have obviously made their lending criteria much stricter than it was, and I imagine this may mean they would also not look kindly on vendor's finance. Does anyone have experience of banks who do/dont like vendor's finance? Also, is it possible to leave it off the offer document altogether – ie I just lend the vendor the 5% in a separate agreement, which he presents to the bank as part of his deposit, much like anyone who borrows off family or friends to buy a house would?
Chelley – I think what you propose to do is very generous do but I am not sure if it is technically legal.
If the financer found out that you were providing the deposit, wouldn't it would null and void the loan?
No not at all.
It is perfectly legal for a Vendor to provide part of the deposit as long as it is clearly disclosed to the financier.
The purchasers Bank will lend against the purchase price or valuation whichever is the lower so if they were concerned that the purchase price was not necessarily genuine they would down value the property.
Richard Taylor | Australia's leading private lender
No not at all.
It is perfectly legal for a Vendor to provide part of the deposit as long as it is clearly disclosed to the financier.
The purchasers Bank will lend against the purchase price or valuation whichever is the lower so if they were concerned that the purchase price was not necessarily genuine they would down value the property.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:It is perfectly legal for a Vendor to provide part of the deposit as long as it is clearly disclosed to the financier.But doesn't the financer use the deposit to offset any potential depriciation in the mortgage loan? Isn't that why banks are chasing deposits now – because the value of property is decreasing and the deposit acts as a kind of surety for the bank/lendor?
But doesn't the financer use the deposit to offset any potential depriciation in the mortgage loan? Isn't that why banks are chasing deposits now – because the value of property is decreasing and the deposit acts as a kind of surety for the bank/lendor?
Not at all. 100% finance is still alive and well.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Not at all. 100% finance is still alive and well.Madness – like Sparta:)
Consider this though, if a vendor offers 5% of the value of a house to secure a sale then the lendor would have to assume that the house is worth 5% less than the agreed price (provided that the valuation isn't less still). The lendor could then ask for a 5% deposit on the new price, correct?
Perhaps some of the lendors (finally) are considerring the buyers and do not want them to over-extend themselves – silly, I know, to think that a financial instituation may actually be considerring the stability of the purchase (which would, of course, determine the long term stability of the loan). If only that had been practiced for the last 10 years some vendors might be in a less of a pickle that they are now.
Chelley, where is the house?
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