Cordato Partners: Vendor Finance Answers

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 Finance.
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 home?

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 ?

Answer

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 home, and
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 should know.
Look forward to hearing from you.

Answer

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 = 104 weeks)

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?

Answer

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 you.

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 a contract.

Answer

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 payments.

Question - How secure is a buyer in an instalment contract or a rent to own?

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 security?

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?

Answer

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. Thank You.

Hope to hear from you soon.

Answer

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 buyer agree?

Answer

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 up?

I own a property in *****, NSW, which is currently rented. The tenant is keen to buy the property but can't get finance.

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 it myself.

Your advice is much appreciated.

Answer

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 history.

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 appropriate figure.

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 alternative!).

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 Tenancy Agreement.

8. For further detailed information, go to the Rent to Own tab on the website.