The Keys to Vendor Finance for Real Estate in Australia
What is Vendor Finance?
How does Vendor Finance work for buyers and sellers of houses, home units, land and commercial buildings in Australia?
On this website you will find out all about Vendor Finance for Real Estate in Australia.
But first, why does vendor finance make sense? Click on my video explanation.
The greatest vendor finance transaction of all time
Why is every schoolchild in America told about a land purchase over 200 years ago?
What was it? It was the Louisiana purchase.
What made Napoleon’s France wealthy enough to re-build Paris and to equip an army to conquer Europe? It was the money from the Louisiana Sale.
It was a win-win, as vendor finance transactions should be. America purchased Louisiana which doubled its territory. France received more gold bars than it could spend.
But the back-story is just as interesting. It’s all about how Napoleon Bonaparte was not only a military genius, he was a financial genius.
Click on my video for the story of the greatest vendor finance transaction of all time.
Introduction to Vendor Finance in Australia
- What is Vendor Finance?
- How did Vendor Finance originate?
- How is it used today to buy and sell real estate in Australia?
Vendor Finance has been around a long time.
100 years ago, it was normal for vendors to offer easy payment terms when selling land in new subdivisions in Australia. Even land at Bondi Beach.
Payment terms are payment plans where the purchaser pays the purchase price to the vendor by instalments.
These days, banks and non-banks dominate the home loan market in Australia. The most popular home loan is a principal and interest loan repayable over 30 years. Except for the longer repayment period, today’s home loans look remarkably like the payment terms of 100 years ago.
But there’s still room for vendor finance in Australia for properties that are not run of the mill and for purchasers who are not run of the mill home buyers.
Vendor finance works well for a property in poor condition, or is not zoned residential, or is damaged by storms or fire, or is in a place where postcode limits apply to restrict the amount of the loan.
Vendor finance works well for purchasers who can afford regular repayments sufficient for a bank loan, but don’t have enough deposit or are self-employed. They use Vendor Finance as a stepping-stone on the path to home ownership.
Click on my video - Introduction to Vendor Finance in Australia.
Four kinds of Vendor Finance
Four kinds of Vendor Finance are used in Australia.
- Delayed Completion
- Carry-Back Loans
- Instalment Contracts
- Rent to Own
Think of each kind of Vendor Finance as the cake selection in a cake shop. Find out which you like best and use it.
On this home page, you will find both a written introduction and an explainer video to each kind of Vendor Finance.
Choose the kind you like best and click the link to the written commentary which will take you to the tab which contains the full explanation.
Let’s start with the first kind of Vendor Finance -
1. All about Delayed Completion
- What is Delayed Completion?
- How does a purchaser use Delayed Completion to buy a property?
- Why does Delayed Completion appeal to a vendor?
Time is more valuable than Money when it comes to buying and selling real estate.
Delayed Completion is the Vendor Finance strategy which gives a purchaser time to find funds to pay the purchase price or obtain approvals.
Delayed Completion makes sense for a vendor because it gives them a good price and they need time to find a new home or build a new home.
Delayed Completion makes sense for a purchaser because it gives them time to sell their own home or raise funds from other sources, or to obtain a loan to pay the purchase price.
The Delayed Completion period will end with a simultaneous settlement of the purchase and sale.
Delayed completion is used for commercial property, to give a purchaser time to obtain planning approval or to find a tenant.
Click on my video - All About Delayed Completion.
2. All about Carry-Back Loans
- What is a Carry-Back Loan?
- How does a vendor use a Carry-Back Loan (a vendor loan) to sell a property?
- Why is a purchaser prepared to pay more with a Carry-Back Loan?
A Carry-Back Loan is a vendor loan used to sell a property.
A good example is where the purchaser has a 10% deposit, but the bank requires a higher deposit of 20% or even 35%. If the bank requires 20%, and the purchaser has only a 10% deposit, there is a shortfall of 10%.
The vendor steps in with a Carry-Back Loan for the shortfall of 10%.
The Carry-Back Loan could be for a term of 6 months, 12 months, 24 months or longer after settlement. It might be more or less than 10%.
A Carry-Back Loan is secured on the title by a second mortgage or a caveat.
A Carry-Back Loan is used by vendors of regional properties, high rise apartments, damaged properties and commercial properties.
Click on my video - All About Carry-Back Loans (Vendor Loans).
3. All about Instalment Contracts
- What is an Instalment Contract?
- How does a vendor benefit when a purchaser pays the purchase price by instalments?
Instalment Contracts are like buying a cake one slice at a time.
The purchaser pays the purchase price, one instalment at a time. The purchaser pays the instalments just like a home loan, except that the purchaser pays the vendor, not a bank.
When a home is sold using an Instalment Contract, the purchaser usually pays a deposit of 5% of the price and pays the balance purchase price of 95% by instalments of principal and interest over 30 years. That means 360 monthly payments.
It looks and works like a home loan, with one important difference. With Vendor Finance, the title to the property remains in the name of the vendor until the Instalment Contract is paid out. The title is the vendor’s security for payment.
With a home loan, title to the property is transferred into the name of the purchaser, and the lender’s security is a mortgage registered over the title.
Because the purchaser is in occupation under the Instalment Contract, the purchaser is responsible to pay the outgoings - Council and Water Rates, Strata Levies, Insurance premiums, and looks after maintenance and repairs.
Although an Instalment Contract can continue for 30 years, it is normally paid out earlier. A purchaser will refinance with a home loan in a 5 to 10 year time frame when they have built up enough equity, because a home loan is cheaper. Or they pay out the Vendor Finance loan when they sell and move on.
Click on my video - All About Instalment Contracts.
4. All about Rent to Own
- What is Rent to Own / Rent to Buy?
- How does it work for a vendor to offer Rent to Own?
- How does a purchaser use Rent to Own to reach the goal of owning a house?
Rent to Own helps a purchaser reach the goal of owning a house, while they are renting the house.
Rent to Own means that the purchaser rents the house, and at the same time, pays extra to build up a deposit to own the house. The time frame is usually 2 to 5 years.
The purchaser is pre-qualified by a mortgage broker. The pre-qualification will determine if the payments are affordable and also if the purchaser is likely to qualify for a home loan when the time comes to pay the price to own the house.
In a typical Rent to Own, the aim is that the purchaser will build up a 20% equity in the property to qualify for a home loan at the end of the term. The equity can be built up by the extra payments, by renovations to add value and by general increases in property values.
Rent to Own is a good way for the self-employed to gain a foothold in the property market because they need 20% equity to qualify for a home loan because their income is not wages.
If there is insufficient equity at the end of the rental term of 2 to 5 years, a Carry-Back Loan can be used to bridge the gap between the deposit built up and the home loan available.
Click on my video - All About Rent to Own.