Welcome to vendorfinancelawyer.com.au

• Instalment Sales (Instalment Finance, Instalment Contracts, Terms Contracts);
  
• Rent to Own (Rent 2 Own, Rent/Purchase, Rent to Buy, Rent-Buy, or Rent now, Buy later, Lease Options); and
  
• Deposit Finance (Carry-Back Finance, First or Second Vendor Mortgages, or Seller Loans).

All three basic vendor finance strategies can be used throughout Australia and New Zealand, but in South Australia their use is restricted.

So if you are looking to break the shackles of selling real estate solely on price, if you want to escape the auction straightjacket, and if you want to achieve a better financial outcome both for a seller and a buyer, welcome to vendor finance!

Is vendor finance new, or is it a sleeper?

Vendor finance is not new. It has been used for a very long time for the sale of real estate in Australia. But its popularity goes through cycles - there are times when it is very popular, and other times when it is hardly used.

Question - At what times is vendor finance popular?
Answer - When the banking system is rationing loans for homebuyers and investors.

Question – Does vendor finance work better at times where there are lots of properties on the market, and buyers are hard to find?
Answer – Yes. it works better when everyone else is advertising real estate on price like motor vehicles For Sale $X - Make us an offer! And when they are dropping the price to meet the market. At these times, vendor finance stands out because it is advertising on terms For sale on affordable terms to attract buyers who do not have enough deposit or bank finance to pay for a property advertised at any price.

Allow me to give an example of a time when vendor finance was popular because bank credit was tight and home loans were hard to get –

    >>  In the 1950s, 1960s and the early 1970s, the banks rationed home loans. These were the hoops that homebuyers had to go through to own their own home then

1. Buy the land from the subdivider using a terms contract, where they paid the subdivider for the land by price instalments over 3 years (reason? – banks did not lend for the purchase of housing land), and pay out the terms contract; and
   
2. Build the new home using loan funds provided by a bank secured by first mortgage over the land that they had paid off;
   
   or
   
3. Buy an existing home using a 20% deposit saved, borrowing with bank funding/ life insurer funding/ credit union funding/ building society funding / private funding for up to 65% of the price, and borrowing another 15% from a finance company at an interest rate of up to 5% pa above the bank rate from companies such as ASL, CAGA, ESANDA, FCA, Custom Credit and IAC (because the maximum the banks would lend was 65%).

This changed when deregulation of the financial markets from the 1960s onwards led to the banks loosening their lending policies and becoming the dominant players in the residential lending market. This dominance by the banking system has continued until the present day.

But clouds are forming which will affect this dominance by the banks of the home lending market and which are resulting already in a steady revival of vendor finance for homes.

One cloud is the Basel II implementation in Australia of tighter financial controls for the banking system, resulting in less home loan money being available. Another cloud is that the wholesale lending market is not providing banks the cheap and easy funding that it provided before the GFC (the 2008 Global Financial Crisis) to make 95% of value loans or low doc loans any longer.

There is another reason why vendor finance is experiencing a revival which is that other sources of housing finance, namely the non-bank and low doc lenders which had a 20% share of new home loans have not made more than a trickle of home loans since their securitised funding dried up with the GFC in mid 2008. Remember Bluestone, Pepper, Wizard Home Loans, Seiza, Challenger, GE Money and Liberty?

Learn more about the history of vendor financing in the Introduction to Vendor Financing for Real Estate in Australia tab.

How does vendor finance work?
By satisfying both sellers and buyers!

What are sellers looking for?
To sell a property quickly and easily, for a good price.

What are purchasers looking for?
To escape the rental market and buy their own home on affordable terms.

The vendor / seller / owner financier’s solution:
Instead of your needing a bank loan to purchase my home, I will be the bank and finance you myself and provide you with a home of your own on affordable terms!

Vendor financiers provide a service which matches and betters what the banking system provides because it tailored to meet the circumstances of both the seller and the buyer.

Vendor financiers provide a personal service which focuses on the buyer’s capability to make regular payments, rather than the banker’s ‘tick the boxes’ approach. Vendor financiers willingly “step in where bankers fear to tread”, by accepting buyers who are self-employed, or with low deposits, or with “black marks” on their credit file (meaning minor blemishes, not bankruptcy).

Vendor financiers tell buyers that they are “the bridge to the banking system”. That is, they encourage buyers to obtain mainstream bank finance in a 2 to 5 year time frame, as soon as the buyer establishes a good track record of making payments (“creditworthiness”), and perhaps builds equity in the home by making home improvements (“sweat equity”).

Vendor financiers are willing to accept the risk of a less than bank-perfect buyer because they personally assess the buyer’s commitment and capability to buy, and because they balance the risk they take with an attractive positive cashflow return from the property.

Recently, vendor finance has become popular in Australia not only as a way of selling properties at a good price, but also as an attractive real estate investment strategy. If we accept that a real estate investment with a superior rate of return and a locked-in capital gain is an attractive strategy, then vendor finance can deliver on this strategy!

Vendor finance can enhance the return from a property in the region of 3%, over and above the net percentage rental return from a property. As such, it may turn a negatively geared investment property (a return of 4%) into a positively geared property (a return of 7%), or make a newly purchased property cashflow positive from day one!

Note – the way to calculate percentage return on a property is - take the net income (money received less maintenance, repairs and outgoings) over a year calculated as a percentage of purchase price or value.

There are joint venture partners who are experts in vendor finance who can assist investors and owners to turn negative gearing into positive gearing! Contact me and I will introduce you to them all around Australia and New Zealand, or visit these Links

Can you tell me a little more about the three vendor finance strategies?

Instalment Sales are where the owner (the seller or the vendor) sells the property under a Contract for Sale and finances the sale themselves, instead of the buyer needing to look for bank finance.

This form of vendor finance is advertised as –
Buy my Home, $X per week, No Banks!

Instalment Finance has the look, smell and feel of a bank loan. The term is usually 25 or 30 years, the repayments are principal and interest, and the purchaser can pay out the finance at any time by refinancing or by selling the property. The interest rate is generally 2% pa above the bank rate, and will rise and fall in line with rises and falls in the bank rate. The payments are made weekly / fortnightly / monthly by direct debit or paymaster’s authority.

The difference between instalment finance and bank finance is that because the finance is provided by the owner, the owner retains ownership (the title to the property) until the instalment finance is refinanced or until the property is sold by the purchaser. Solicitors will recommend to a purchaser to lodge a caveat on the title to protect their interest. If a Bank lends money, it needs to take out a mortgage over the property as security for its loan because the Bank does not own the property.

The purchaser using instalment finance has all the advantages and obligations of an owner. The advantages are that the purchaser can move in immediately the Contract is entered into, and is able to make improvements to the property to build up their equity. The obligations are to pay for all maintenance and repairs, and also to reimburse the owner for outgoings such as Council Rates, Water Rates, Strata Levies and Building Insurance Premiums.

Inevitably, purchasers will find it advantageous to refinance after 2 or 3 years with a mainstream bank (or non – bank financier) because the bank loan payments are cheaper than the instalment finance payments. This is encouraged as soon as purchasers have 10% or more equity in the home – in some States refinancing is a requirement at this point.

This form of vendor finance is also known as a ‘WRAP’ or ‘WRAPPING’, because the payment terms the owner provides mirror the terms of the owner’s own mortgage, and because the owner is permitted to maintain their own mortgage over the property.

Deposits are usually paid in cash, but sometimes are part credited by “sweat equity” where a purchaser will renovate the house and receive a pre-agreed credit for the value of work carried out. Often these properties are advertised as “handyman’s specials”.

The documentation consists of a Standard Contract for Sale which is ‘supercharged’ with an Instalment Payment Schedule and a Licence to Occupy Schedule, and a National Consumer Credit Code Disclosure Statement. Lawyers call it an executory contract, which means that the legal obligations are governed by a contract where completion (that is, full payment of price) takes place in the future. Instalment Contracts cannot be used in South Australia.

Learn more about Instalment Contracts in the Instalment Contracts tab.

Rent to Own is where the purchaser rents for a bit, and then chooses either to buy or to walk away.

This form of vendor finance is advertised as –
Rent to Own, Rent 2 Own, Rent to Buy, Rent now, Buy later $X per week

It is “try before you buy” because the purchaser is not committed to buy.

Rent to Own has the look, smell and feel of a rental, but with some attractions for both landlord and tenant -

• The first attraction is that the property is rented usually for 2 years, sometimes with extensions for up to 5 years in total. This is in contrast to a standard residential lease which is usually for 6 months, and no more than 12 months in duration.
  
• The second attraction is that the rent is fixed for the term of the lease (sometimes, annual CPI increases are inserted).
  
• The third attraction is that the purchaser pays extra money above the rent, and the extra money is paid in recognition of the opportunity that the owner has given the tenant/purchaser to purchase the home, at the price within the agreed time frame. From the owner’s perspective, the extra money creates the situation where the income from the property can be cashflow positive.
  
• The fourth attraction is that the purchase price of the property is fixed up front – there is no formula for increasing the price. Also, the extra money is credited against the purchase price.
  
• The fifth attraction is that the purchaser can improve the property, to making more pleasant to live in, and to make it easier to obtain the finance to purchase the property at the end of the agreed period.

The documentation for the rental or lease is a standard Residential Tenancy Agreement, while the documentation to give the right to purchase is a Sale Option. The Option documentation is structured so that extra money paid is credited against the price payable under the Contract for Sale that will come into existence if the Option is exercised. Together the documents are known as Lease Options. The payments that are credited under the Option are called price credits. Lawyers call the Option a Call Option which means that the tenant/purchaser can call upon the owner to issue a Contract for Sale, but the owner cannot force the tenant/purchaser to purchase the property. In South Australia, Lease Options are limited to a term of 6 months.

Expert vendor financiers, use two sets of Lease Options – one set to purchase properties – what are known as ‘buy options’; which they combine with another set to sell the property – what are known as ‘sell options’, to assemble what they call back – to – back Lease Options which are commonly known as ‘Sandwich Lease Option’.

Learn more about Rent to Own in the Rent to Own tab.

Deposit Finance is when a vendor finances a deposit, or a shortfall between the amount of loan that an outside lender will advance, the cash deposit available, and the purchase price of a property.

This form of vendor finance is advertised as -
Deposit Finance available t.a.p. (t.a.p. = to approved purchasers).

For example, a lender might approve a loan of 80% of the price, the purchaser might have 5% deposit, and so the second mortgage carry-back finance will be 15% of the price. It is called a second mortgage, because it ranks second in line to the first mortgage that the 80% lender takes over the title to the property. It is called a second mortgage carry-back because the vendor carries it back, which is to say, finances that part of the price.

The Deposit Finance is usually put into place for a fixed term of 2 to 5 years, is usually interest only at the same interest rate charged by the external financier, payable monthly, and the interest rate payable is usually fixed. At the end of the fixed term, the Deposit Finance is usually paid out from savings or refinancing, as a lump sum payment.

The documentation for Deposit Finance consists of a Residential Loan Offer, which is compliant with the National Consumer Credit Code, plus a Mortgage and a Caveat. Either the Mortgage is registered as a second mortgage over the title to the property, or the Mortgage is left unregistered and a Caveat is registered over the title to the property.

Learn more about Deposit Finance in the Deposit Finance tab.

What should I do if I have a property to sell with vendor finance, or if I would like to use vendor finance strategies for investment?

Can we suggest these alternatives?

1. If you don’t have enough expertise, why not marry together your property or your potential property investment with someone who has the skill and expertise, to form what is known as a Joint Venture? It is popular for experienced vendor financiers to team up with investors to be joint venture partners in a vendor finance transaction. The investor purchases the property in their name, the vendor financier is the ‘transaction engineer’ who organises everything, and they share the positive cashflow profits equally.
   
   If you would like the names and contact details of an experienced joint venture partner near where the property is situated, or is to be purchased, use the Contact Us tab or the Links tab on this website and we will provide you with names and contact details.
   
   Learn more about Joint Ventures in the Joint Ventures tab.
   
2. If you have an outline of a vendor finance transaction, and want it documented in New South Wales, contact Cordato Partners. We are a vendor finance specialist law firm.
   
   If you want to document a vendor finance strategy anywhere else in Australia or in New Zealand, look at the Lawyers and Solicitors tab to find the contact details of a solicitor or lawyer close to you.
   
   We also act on all types of property transactions - Purchases of property, Sales of property, Leases, Options, Joint Ventures, Mortgages and Subdivisions.
   
   We would be only too pleased to assist you in vendor finance documentation for your property. We prepare vendor finance documents, namely Instalment Contracts, Lease Options and Second Mortgage Carry-Backs. We act for clients who have successfully completed more than 2,500 vendor finance transactions in NSW. We have a several conveyancing assistants, and have the spare capacity to do your work.
   
3. We advise upon the best structure for your property investment. Is it to be as an individual, as a joint venture, in a company name, in a trust, in a super fund?
   
   Learn more about Investment Structures in the Investment Structures tab.
   
4. To learn more about vendor finance, visit the websites of the Vendor Finance Association (the VFA) and the vendor finance educators and mentors (use Google). Read How to Buy a House for a $1 by Rick Otton, and Money Secrets of the Rich by John R Burley. 
   

© Copyright 2011 Cordato Partners