Welcome to vendorfinancelawyer.com.au
Welcome to the Cordato Partners Vendor Finance Website.
Cordato Partners Lawyers are proud to provide legal services for investors and owners who wish to provide finance for the sale of real estate.
Vendor Finance (seller finance or owner finance) has long been used in Australia for the sale of real estate.
Recently, it has become popular in Australia as an investment strategy. As an investment strategy, a property is purchased, then on-sold with vendor finance for a profit. The strategy can also be used to turn a negatively geared investment property into a positively geared property. This is called a positive cashflow.
Properties which are sold with Vendor Finance are attractive to purchasers who are unable or are unwilling to obtain finance from a financial institution. Vendor financiers willingly “step in where banks fear to tread”, accepting purchasers with low deposits and “black marks” on their credit files.
Vendor financiers often tell purchasers that they are “the bridge to the banking system”. That is, they encourage purchasers to obtain mainstream finance as soon as they establish a good track record of making payments and build equity.
Vendor financiers are willing to accept the risk of a less than perfect purchaser because they personally assess the purchaser’s commitment to purchase and balance the risk they take with an attractive positive cashflow return from the property. Evaluating this risk is an art as much as a science.
Vendor Finance takes three common forms, (i) Instalment Finance (or terms finance); (ii) Rent to Buy (or rent/purchase); and (ii) Second Mortgage Carry Back (also known as mortgage back)
Each form of Vendor Finance has its advantages and disadvantages.
- Instalment Finance is like standard residential mortgage finance but in this case the owner (the seller or the vendor) rather than a financial institution, finances the sale. Because it is a vendor finance transaction, the purchaser takes occupation immediately the Contract is entered into, and then makes the payments of the price payable under the Contract until the purchaser refinances (or sells) the property.
The instalments of the price, together with interest, are payable over a nominal term of 30 years. Inevitably, purchasers will refinance after 2 or 3 years with a mainstream bank (or non – bank) because the payment terms are more attractive than the owner finance.
This form of vendor finance is also known as ‘WRAPS’ or ‘WRAPPING’, because the payment terms provided mirror the terms of the owner’s own mortgage. The owner is permitted to maintain their own mortgage over the property, but must keep the amount below what the purchaser owes. As a consequence, title to the property does not pass until completion.
Deposits are usually paid in cash, but sometimes deposits are credited by “sweat equity” where a purchaser will renovate the house and receive a credit for the value of work carried out. Often these properties are sold as “handyman’s specials”. - Rent to Buy is the situation where the purchaser rents the property, for a fixed term of 2 to 5 years, while paying extra money for the deposit and having an option to buy the property at a fixed price. This form of vendor finance is known as “Rent to Own”, “Lease Option”, “rent/buy” or “rent/purchase scheme”. It is “try before you buy” because the purchaser is not committed to purchase unless they exercise the option to purchase. The lease is the standard Residential Tenancy Agreement, while the option is structured so that payments are credited against the deposit payable under the Contract for Sale that will come into existence if the option is exercised. The payments that are credited are called “rent credits”. In addition to rent credits, “sweat equity” (ie renovations) can be credited against the deposit.
Options are also used to purchase properties – what are known as ‘buy options’. They can be combined with ‘sell options’ in back – to – back strategies which are commonly known as ‘sandwiches’. - Second Mortgage Carry Backs are mortgages given by a vendor to finance a purchase, over and above the finance given to the purchaser by an external financial institution. The Second Mortgage Carry Back is usually repaid as a balloon payment between 2 and 5 years, with interest payable in the meantime.
All these forms of vendor finance are able to be documented legally throughout Australia (except Instalment Sales Finance in South Australia). Having said that, there are some differences between the States which need to be addressed when drawing up vendor finance documentation.
Joint Ventures It is popular for experienced vendor financiers to team up with investors to be a joint venture partner in a vendor finance transaction. The investor purchases the property in their name, and the vendor financier is the ‘transaction engineer’.
Cordato Partners is a vendor finance specialist law firm.
We prepare documents, namely Instalment Sales Contracts, Lease Options, Second Mortgages and Joint Ventures for vendor finance property transactions. We act for several hundred clients who have successfully completed vendor finance transactions in NSW. We would be only too pleased to assist you in vendor finance for your property.
Want to learn more? Click to the Articles in this website, the Qs and As and visit the websites of the Vendor Finance Association (the VFA) and educators.