Vendor finance

Hi i imam

My wife and I started our real estate Vendor Finance business in 2003.  Happily for us, I was able to give up my job early in 2009 and we are now both enjoying working in our Vendor Finance business full time.

We'd suggest the main pitfall is believing that it's some form of get rich quick scheme.  Happily it's becoming more regulated by the new National Credit Code and this is helping to improve its image.

A few web resources that may help in your search for information about vendor finance in residential real estate are:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/strategies/lease-options
http://www.jvpropertypartners.com.au/index.php?option=com_content&view=article&id=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/   The Vendor Finance Association of Australia
http://www.vendorfinanceinstitute.com.au

Cheers,  Paul

Hi Imam

As you can see from the first two links I listed above, the two main Vendor Finance (VF) strategies are Instalment Contracts and Lease/Options.  While we've done many Lease/Options, we feel our clients receive greater security when buying with an Instalment Contract (the government regards it as a real sale as they pay the FHOG to our eligible Instalment Contract buyers).

I'll therefore answer your questions as they relate to Instalment Contracts.

Could i sell the property any time to pay the vendor finance off?  Yes you can sell the property at any time, as long as you can pay out the balance of your VF loan at the time of the sale.

Is Interest rates charge in VF is higher than the going rates?  As traditional lenders have varying interest rates, so do Vendor Financiers.  As a wild guess, they'd probably average out to about 1.5% above traditional home loan rates.  However this increased interest rate is usually only used by Vendor Financiers who want to encourage their clients to move to a traditional loan somewhere in the first 5 years of their loan.  Some Vendor Financiers want their loan to run over the long term and will pretty much mirror traditional lenders interest rates for the term of the Instalment Contract.

Loan terms.  Anywhere from 5 years (with a balloon payment at the end of the 5 year term) to 30 years.  All our Instalment Contracts are 30 years.

Property rights,would I be able to refinance the property in order to use equity etc & pay the vendor off.  As the Vendor Financier often has their own mortgage on the property, this refinancing you mentioned normally isn't available.  Before you pay out the VF loan you have "equitable title" on the property.  After you pay out the VF loan the actual title transfers to you.

Cheers,  Paul

As as buyer I think your biggest risk is that the vendor still retains title and will have the property mortgaged. If they don't pay their loan, or other loans, or are sued for something totally unrelated, then the bank could take repossession of the property.

Lodging a caveat will prevent them dealing further with that property and may help you take priority over other potential creditors.

Making sure that the payments are going to pay the loan on the property will help, but it doesn't cover a situation where there are others with competing interests in the property.

Exchanging contracts does give a buyer an equitable interes in the property, but there could be others with equitable interests too – such as spouses (or even mistresses) under the Family Law Act, creditors etc. There are rules for determining priority – which are complex. But generally first registered takes priority over later, registered over non registered etc.

Having a caveat can help get priorty over similar claims. There is a case, Black v Garnot, where someone exchanged contracts on a property. One the day of settlement the conveyancing solicitor did a title search about 10am, then someone lodged a writ which was recorded about 11am, with settlement due at 2pm. The end result was that the buyer could not register the transfer because someone had lodged a claim before them and therefore took priority. The property was sold and the proceeds used to pay the judgment of the creditor who lodged the writ. If the purchaser had lodged a caveat they would have taken priority – but they didn't. This is why now all solicitors should advise that a caveat be lodged after exchange and before settlement, just in case. Anyway, this just shows what can go wrong.

I am not sure, but maybe a second unregistered mortgage would take priority over someone lodging a caveat, depending on their claim.

Thanks for the great list of links! I checked them out and they were very informative