Vendor Finance Q & A
Question - Where do I find a Rent to Own House?
Hi there. I am after a house to rent to own. Can you help
A Rent to Own houses are advertised on the internet - try
googling Rent to Own, Rent to Buy, No Bank Finance, Don't
Rent Buy, Deposit finance available, Vendor Finance, Seller
But your choice of houses will be limited, because not many
houses are advertised for sale with vendor finance.
As Rent to Own is a method of building up a deposit, you
can adopt a Do-it-Yourself model. That is,
- Go to a loan calculator and work out what loan, and
loan repayments you can afford based on your income and
expenses, so that know what kind of home you can afford;
- work out the difference between the loan repayments
and your current rent, and add $70 per week to cover
council and water rates;
- Start putting aside the difference in a savings
account until you have enough of a deposit - usually a
deposit of 10% of the price will do.
And by the way, no new car loans and pay out your credit
cards - they destroy your borrowing ability.
And check your credit file is clear - go to mycreditfile
on Veda Advantage and order a copy. You can either order a
free copy or pay for a copy with additional information such
as your credit score.
Question - How do we reach our goal of buying our first
Hello We're looking to buy our first home. Banks won't
look at us as hubby's on DSP pension and I'm on carer and
family tax until return to work hopefully 2017. Back to
cooking :) Just wondering if you could help and what price
range houses to look at ?
I agree - it's important to set a goal of
buying your first home.
To reach the goal, you need two ingredients –
- to save up a deposit of at least 5% of the price of
- you need to have steady work, because home lenders
do not help people without a steady wage.
To find out how much loan you can afford, you use a mortgage
calculator (found on lenders and finance brokers websites).
When you know how much you can borrow, add the deposit, and
the answer is the price of the house you can afford.
Where vendor financiers help, is that they help people
with a low deposit who banks don't touch. They also help
overcome credit blemishes.
Question: Is it possible to vendor finance land?
We are trying to sell our block of land and have been
approached to possibly offer Vendor Finance for the sale of
the land, paid in weekly instalments over 2 years.
I was wanting to find out more information about this
process, the costs incurred by us in setting it up to ensure
we are covered with the right contract and anything else we
Look forward to hearing from you.
Selling with vendor finance is like slicing up a French
bread stick into slices, and eating one slice at a time.
So if the price for the land is $24,000, and there are
weekly payments, then the purchaser pays 104 weekly
instalments of $250. (there are 52 weeks in a year times 2 =
You will see that there is no interest included in the
payment of $250 per week. I find that it's best to avoid
interest. It's like eating the bread slices without putting
butter on them.
Of course if an instalment is late, then interest should
be charged for late payment.
The title to the land passes to the purchaser when the
last instalment is paid. This means that the property stays
in the owner’s name while the Contract continues.
The purchaser can pay out the Contract early.
The purchaser is responsible to reimburse the owner for
rates and charges on the property - the rate notices will
continue to issue in your name as owner.
Follow up Question
Thanks very much for this Tony.
It seems like a pretty straight forward process.
What happens if half way through the buyer decides they
can't pay it off anymore?
Do they own equity in the land? Would we be required to
pay them the money they have paid toward the land? Or would
this come off any eventual sale?
If the buyer decides they cannot continue to pay it off
anymore, then you terminate the Contract. You keep 10% of
the price and refund some of the rest, depending on what
price you receive when you resell. If you lose money on the
re-sale, you can keep the loss in excess of 10%. If not, you
keep 10% only.
There are no refunds for rates and charges reimbursed to
The purchaser has equity in the land when they enter into
the Contract, but their equitable interest is extinguished
when you terminate the Contract. While the Contract
continues, they can protect their equitable interest by
registering a Caveat.
One final point – some people will say you need a licence
for vendor finance. The licence requirement applies if you
are ‘carrying on a business’. A one-off or two-off sale of
property you have owned for some time using vendor finance
is not ‘carrying on a business’.
Question - A Prospective Buyer is asking me for Vendor
Finance. What do I do next?
We're building a small house in a country town, on its own
title, which is now at lock-up. We have been approached by a
prospective buyer requesting to buy with vendor finance. I
have read (most) of your site information and would
appreciate your advice and possible assistance in setting up
You need to get a clear idea of why the buyer is asking to
use vendor finance, and their situation and circumstances.
There are two alternatives.
Is it because they can get a bank loan but don't have enough
deposit? If so, you can offer carry-back finance. This type
of vendor finance is a loan to cover the shortfall between
the bank loan and the cash they have available. This works
best if the bank loan is 80% of the price, the cash
available is about 10%, leaving the shortfall as the 10% of
the price plus stamp duty. Your security is an unregistered
2nd mortgage with a registered caveat upon the title. The
title transfers to the buyer in exchange for the proceeds of
the bank loan.
Or, is it because they can't get a bank loan at the moment,
but have at least 3% of the price to pay you as a deposit?
If so, you can offer either Rent to Own or Instalment
Finance. This is where the buyer pays the price by
instalments just like they would pay a bank loan if they had
a bank loan. Your security is that the title remains in your
name, and if the buyer defaults, you can terminate the
contract and take back the house.
Whichever alternative you choose, the purchaser will need to
be assessed by a mortgage broker for creditworthiness, so
that you have the comfort that they will be able to make the
How secure is a buyer in an instalment contract or a rent to
Buyers often ask - what happens if the owner defaults on the
mortgage whilst an instalment contract or rent to own is
current, can that buyer lose his money? Does he have
The buyer understands that the bank would have first bite as
they have 1st mortgage, so the question is - what security
does the buyer have?
The same answer applies regardless of whether we are talking
about Instalment Contracts or Rent to Own.
So long as the buyer makes the payments, the bank loan will
be paid, because the buyer's payments are made into the bank
account from which the bank loan payments are debited. There
will be no default on the mortgage if the bank loan is paid.
The buyer should always secure their rights under the
Instalment Contract by registering what is known as a Caveat
upon the title to the property. A Caveat will protect the
buyer by giving the buyer rights to the property immediately
after the bank's mortgage.
Question - Flips and stamp duty
In the near future I will be requiring your services.
However I would like to ask when using the exchange of
Contract in Real Estate transactions here in NSW. What are
the provisions with Stamp Duty does it apply to the full
sale price? I would like to start using this type of
strategy of making quick cash. Who can I contact to find out
more information and what forms if needed, will I need.
Hope to hear from you soon.
Stamp Duty is payable on Contracts for Sale of Land,
calculated at the purchase price, as from the date of
exchange of Contracts.
Therefore if you purchase the traditional way, using a
Contract for Sale and sell the traditional way, using a
Contract for Sale, then you will pay stamp duty on the first
Contract for Sale and the purchaser will pay stamp duty on
the second Contract for Sale, on the price.
The way to get around the payment of stamp duty on the first
Contract for Sale is not to enter into a Contract for Sale.
Instead, you enter into an Option to Purchase from the Owner
- i.e. an option to enter into the Contract for Sale. Stamp
Duty is payable on Options on the option fee paid, rather
than on the price, and so the stamp duty payable is minimal.
To on-sell the property, you enter into a Sale Option,
rather than a Contract for Sale, and nominate the purchaser
to enter into a Contract for Sale directly with the Owner.
Because there is only one Contract entered into, then only
one lot of stamp duty is payable, and that stamp duty is
payable by your Purchaser.
Question - Can vendor finance be paid out early?
Can vendor finance be paid out early legally if vendor and
Yes, vendor finance can be paid out early. At any time in
fact, just like a Bank Loan can be paid out early. Often
there are early repayment fees, if repayment is made not
long after the vendor finance was entered into.
Question - I have a tenant who wants to buy the house
which has been for sale, but has not sold. How do I set it
I own a property in *****, NSW, which is currently rented.
The tenant is keen to buy the property but can't get
I'm keen to sell the property, which has a mortgage of about
180k (floating) and is worth 230-240k.
Can you please advise us the best option for me to sell it
within one to two years time to the tenant?
The property is currently managed by a real estate agency,
through which I try to sell the property recently without
success. Do I have to pay commission on sale amount if I
make a rent to sell agreement? I’m planning to stop the
rental management by the real estate agency soon and manage
Your advice is much appreciated.
Your proposal to sell the property to the tenant fits the
Rent to Own vendor finance arrangement perfectly!
If you can agree on the following ground rules with your
tenant, then I can prepare the legal documentation -
1. Why can't the tenant get finance? If it is insufficient
deposit, then the tenant will need to put aside extra money
each week to build up a deposit. If it is poor credit
history, then the tenant will need to agree to be 'on their
best behaviour' for 2 years to clean up their credit
2. To obtain bank finance, the tenant needs to build up the
deposit money to usually 10% of the price by a combination
of up-front money - a minimum of $5,000 paid to you (often
it is $10,000), and ongoing payments of $150 to $200 per
week (depending on how much needs to be built up).
3. The price of the house is set higher than today's value,
to take into account increases in values over time. In your
case, if you set it at 10% higher than today's value, then
it will work out well if it is a 2 year arrangement.
4. The rent will need to be agreed and fixed for the term of
the arrangement. Again, it will need to be higher than
current market rent, in this case 15% higher is the
5. The weekly payments are therefore the total of rent and
ongoing payments. They can be paid to the agent, or via a
direct debit system called ezidebit.com.au. If paid to the
agent, the agent should reduce their commission from 7.7% to
4.4% because the amount payable is higher than the rent.
6. Whether you are liable to pay agents commission on the
sales agency agreement if you enter into a Rent to Own
arrangement depends on: (a) whether the sales agency
agreement covers an option to sell, in addition to a
Contract for Sale; (b) whether the sale agency agreement has
expired; (c) whether you have terminated the sales agency
agreement after it has expired; or (d) if you come to an
arrangement with the agent to continue to manage the
property during the lease option period (this is the best
7. When you have the information, you should complete my
Instruction Sheet - Lease Option. You will see that I call
the up-front money "up-front option fee" and the ongoing
payments "ongoing option fees" in the Instruction Sheet.
Please also provide a copy of your current Residential
8. For further detailed information, go to the Rent to Own
tab on the website.