Trying to get out of a bad vendor finance deal

Someone I know has verbally agreed to a vendor finance deal with her brother.

The terms are $550k (roughly market value) to be paid over 12 years, with interest. As far as I understand it, you should receive a premium for agreeing to vendor finance, not the market price or less.

It was a house she inherited just a few months ago.

The house is in Brisbane, where all indications are that there will be healthy CG over the coming years.

No contracts have been signed yet but a lot of leg work has gone into this, so she feels ...I suppose you could call it "socially" obligated to see it through.

What do you guys think?

 

It's her family.... Let them sort it out between themselves

 

Well, she's asking us for advice...

 

How much 'leg work' has gone into this other than agreeing to sell it at today's price plus interest?

• Why is she doing this?
  
• Has probate been granted?
  
• Have they sought legal advice? Are they going to?
  
• What documentation is being prepared?
  
• Will the buyer be registered on title (by caveat) or not?
  
• Is the interest rate favourable ie current rate of interest +2% or higher or just the same as the bank rate?
• Is there current debt on the property? Is it mortgaged or fully owned?
• There won't be much cgt - the date of the contract of sale will govern the price paid not the settlement date.
• Interest received will be income and the vendor liable for income tax
• Have they commissioned a valuation for stamp duty?
• Why are they going VF rather than the relative buying it through traditional sources?

 

• Why is she doing this? She needs the money. After inheriting the property she now doesn't qualify for the pension.
  
• Has probate been granted? Yes
  
• Have they sought legal advice? Are they going to? Yes, but the lawyer just made sure the i's were dotted and the t's were crossed. She should have consulted a good broker, accountant, advisor instead
  
• What documentation is being prepared? Unsure
  
• Will the buyer be registered on title (by caveat) or not? Yes this is a full sale / transfer
  
• Is the interest rate favourable ie current rate of interest +2% or higher or just the same as the bank rate? Same as bank rate - this is the part that got me...a vendor finance deal should be compensated by either a higher sale price or higher interest rates, or both.
• Is there current debt on the property? Is it mortgaged or fully owned? Fully owned
• There won't be much cgt - the date of the contract of sale will govern the price paid not the settlement date. The thinking here is that there will solid to excellent CG in Brisbane over the coming years, so CGT would need to be considered if she pulls out. Ideally she would make it her PPOR or find some other way to minimise CG, sell in a few years in the traditional way. That way she gets more money, as well as getting it all up front (the compounding interest on this alone makes this the better strategy, regardless of CG!).
• Interest received will be income and the vendor liable for income tax Yup definitely. Good point. I completely forgot about this...
• Have they commissioned a valuation for stamp duty? I don't think so.
• Why are they going VF rather than the relative buying it through traditional sources? No idea. One thing that's been on my mind is the brother is old I think, probably in the 60's? If he's drawing this money from a LOC, when it comes to refinancing it he may find it increasingly difficult as he gets older. The worst outcome here would be if he has the title AND the funds dry up before the contract ends...

 

What is the $ value she puts on her and her brothers relationship (as well as people who will be affected by this).

Its a loaded question, but i think you know where I am going with this.

 

1. She loses out on the pension vs she is getting more income & repayment of principal etc through the interest repayments
2. Noted
3. Probably still should see these anyway
4. Possibly the contract of sale - depends how far they've gone
5. Noted
6. Why would she need to be getting a higher rate when she hasn't actually borrowed?
7. No debt - noted
8. She's whinging about lost future capital gains but if she holds she won't get the pension - tell her to make up her mind: sell/sell on market or hold
9. Easily missed
10. The purchaser should get a val to show it is not a means to avoid paying full stamp duty
11. Does the brother have income? Has he sought traditional finance? If he runs out of finance, sister repossess the house/sells the house as mortgagee in possession (& split the proceeds)

 

Regarding #6, isn't part of VF that you'd get either a higher sale price and / or higher interest rate? The vendor should receive some sort of benefit to offset the slow trickle of equity?

Regarding #11, I have no idea. Even if she decides to sell now that should really be the right path to take. As I said the compounding interest on the full 550k alone would make it a far more desirable option.

 

Sounds messy - get legal advice from a different lawyer.

 

Oh boy, I just looked up the classification...it's an LMR site. Wow.

 

What is an LMR?

 

I think this is in the category of not offering opinions... It makes you the scapegoat when things go south!

I would be treading very carefully! Offering super basic thoughts but not pushing or deciding either way.

 

Low-to-Medium density zoning

 

Oh. I thought that it was zoned for a lift motor room.

 

Yeah good question but I'm not sure. I also just found out it's selling for 450k, not 550k. Comparable sales in the street (3/1/2) in the last few months are about 750k (MP3), 650k (LMR), and another for 1.1m. 450k...I don't think a valuation was ever conducted.

 

Sorry if this is a dumb question.

So she inherited the house. Does her and her brother own it together?

And yes from my understanding vendor finance would have a higher interest, higher than market value $ and would also require a small deposit in the start

 

No I think the mother had like half a dozen houses so each child got at least one.

 

Damn. Lucky her. So doesn't she own it now?

 

No this whole sale / vendor financing thing is still a work in progress. I don't think she signs on the dotted line for a little while yet.

 

Sounds like she is being bent over more and more by the minute. Time for the friend to take a chill pill and get out of there as quickly as - why would she be financing the sale at below market (unless you haven't been told that the brother is redeveloping the site, putting 5 units on and transferring 2 back to the sister. Oh, and she still loses the pension.