Vendor finance

Hi Elives

There are 3 basic strategies mentioned din the Strategies section:

• Instalment Contract – this gives you what is called 'equitable title' and in most cases, the vendor's underlying loan will stay in place.  You would have to negotiate with the vendor regarding moving the loan to Interest Only and it's not always guaranteed that the traditional lender will allow a move to I/O.
• Deposit Finance – this gives you full title as you get a traditional first mortgage and the vendor loans you what the bank won't give you.
• Lease/Option (Rent To Buy) – here you get a Lease to get possession of the property and a Call Option that gives you the right, but not the obligation, to buy the property for a fixed price for a fixed term.  Added to this, there are often 'price credits' (also known as 'rent credits') involved.  In most cases, the vendor's underlying loan will stay in place.  You would have to negotiate with the vendor regarding moving the loan to Interest Only.

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 Jenny

There is no standard VF interest rate it all depends on your circumstances and what returns you are looking for.

I did one in my SMSF last week at 6.5% (which was a percentage over the Cash rate which i normally work off)  but in saying that the on sale price was higher than 10% above my initial purchase price.

I guess it depends if you are looking to buy a property thru VF or sell one.

Cheers

Yours in Finance

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

Who regulates the Vendor Finance market?  I meant in the case of one vendor quoted the interest rate close to 7%, but I calculated it to be almost 10% (9.90% to be exact). This is on top of the quoted price of the property which was probably around 15% to 18% above its true value. Is there any regulatory body to ensure integrity in the industry?

What I meant was if I were to buy a property through the Vendor Finance channel and if I later had a dispute, who could I turn to?  With my bank, if they incorrectly calculated the interest or fees they charged me, I know I could go to the Banking Ombudsman as a last resort.  But who do I go to with vendor finance deals? Thanks.

Regards,

Jenny