Vendor finance - not wraps, but part finance for a sale

Has anyone else here had any experience with doing a deal where part of the sale is done through a Vendor Finance loan, while the rest of the sale is financed by a normal Lender?
One of my work colleagues is rebuilding his (financial) life again, after helping out a family Member who eventually lost everything anyway, and left my work colleague with nothing as well.
He wants to buy again, and his family Member would be the tenant - the family Member is still broke and always will be due to older age.
This would be a win/win - but my friend has zero deposit to put down, has found a property which has been on the market for about a year.
I suggested possibly offering the Vendor the VF scenario to cover the deposit for a couple of years, and then refinance.
Having never heard of this strategy before, he is dead-scared of this, so any advice I could take back to him (other than my own) would probably help his mindset, and hopefully move forward.

 

It is basically the vendor lending the deposit. Banks won't like it because the borrower has no skin in the game. Hard to finance as a result

 

So between the vendor and the bank, you put no actual money into the purchase?
First, you want a vendor who does not need the money straight away - difficult as most want the proceeds for their next purchase.
Who gets the first mortgage? A second mortgage would be very undesirable.
Can’t see it happening.

 

A bank will not take a second mortgage in situations like this. This would generally involve the vendor taking an equitable mortgage over the property, often undisclosed to the bank.

 

Yes, that would be the plan - put no actual money down himself.
This property has been on the market (in QLD) for over a year, so it would seem the Vendor doesnt need the money in a hurry.
My friend is only after getting the deposit covered - and a for a short time - just to get the deal done, then look to refinance in a year or so, pay out the Vendor and continue on.
The rent will cover the outgoings if he can buy it slightly under asking, but he realises the Vendor needs to have a win as well.
His serviceability is strong, but after being cleaned out by the Family Member, has no significant savings. (he has a bit of savings, but wants to keep some working capital in case things go south in his day to day).

 

Thanks Terry.
I'll let him know about these options in your link.
He hasnt spoken to any Brokers yet - just an idea being floated at this stage.
Given what you say; is there any hope?

 

Hi Kelvin,

Is the situation that the house will be rented to the same family member that sent your colleague broke?

This sounds like a recipe for disaster. Will he be able to service the mortgage if the family member stops paying rent? If it’s a family member how willing are they to kick them out to get a paying tenant in?

Few other questions;
-How will your colleague fund the stamp duty and legals on the purchase? Even in vendor finance situations the buyer would need to pay these costs.
-If the buyer has very little assets it would be highly unlikely the vendor would accept a vendor finance arrangement - it would be very high risk. Even if they were willing to do it, you’d probably be looking at 10% or more as the interest rate to make it attractive for them to even entertain the idea. Or a much higher purchase price to compensate. I don’t think you’d be able to offer under asking and request vendor finance from the seller - there has to be something in it for them.
-If they have limited funds, it’s unlikely the property would be cashflow positive (as it would be 100% financed) - can they service a cash flow negative property? What about maintenance costs? Land tax? Council rates? These all need to be paid. Not to forget the loan repayments to the vendor/lender.
-what happens if the property value doesn’t increase or even declines over the next 12 months and he can’t refinance to a normal lender and gets stuck paying a higher interest rate to the vendor for an extended period?

Is the family member a parent or sibling of your colleague? This might influence the decision somewhat but from a financial standpoint it just sounds like your generous colleague is putting themselves in a precarious position for little benefit. I don’t see how it is a win/win at all for your colleague unfortunately.

I hope this is helpful for your colleague, I think there is a few more considerations in this situation to consider.

Cheers

 

I just noticed you were asking about vendor finance for the deposit not the whole purchase price, but I think most of my questions are still applicable.

 

Slim to none I would think. Not something that I would consider taking on as a broker.

 

Thanks for that input. Good tips.
Yes, the Family Member is his Mum and Dad, who are now on pension, own an RV and are renting in a caravan park, and will be forever.
They feel awful that they have put their son in his predicament, and have suggested they set up in the backyard and pay him rent instead of caravan park.
There is another tenanted house on the property (a 2 acre corner block), plus an enormous shed ideal for small business to rent as well, separate side entrance, possibly for someone else, or for storage, etc. Possible more rent.
Combined rent for both Parents and existing tenant is just positive, based on current full asking price with 100% loan.
He realises he couldn't offer low and get a Vendor Finance included - he wants a win-win.
But, the property has been at this price for a long time, so clearly not actually worth the money being asked in my opinion.

 

yes, sounds like this option is dead in arrival.
Thanks for the input, Terry.

 

Does your friend really want more financial dealings with the parents? If the investment requires it to be cf positive, and based on the parents paying rent on the backyard, what if something happens like the parents get sick or die? Can the yard be rented out in a normal market?

this might be where the desire to help will get your friend into more trouble. A lot of possible income streams but with it sounds like he cant handle any vacancies.

 

Despite what happened, he and Parents are still very close.
He may still choose to do nothing with them, I think, but the scenario was put forward by his Dad that they may as well be paying their own Son rent instead of a caravan park, and the Dad is one of those guys who would do things to add value around the property.
You are right too; the pare ts.might die, a d then his cash flow won't be attractive.
I cant see this sale scenario happening now, based on what I've read here.
Great discussion guys, thankyou all.

 

Being close doesnt always mean financial dealings with each other.

 

Interesting thread. I am not going to suggest that the OP or friend SHOULD do, and all the usual comments about risk aside...

I have heard about this being more common in previous decades and I know it was common in the USA in the previous cycles but I am curious about whether the strategy would even be viable in AU in the current market?

Terry would know better than most but do any other forum brokers know of lenders who would consider a standard 80% lend on a property if the vendor financed all or part of the deposit to the purchaser?

 

Last time I looked (about 2008), La Trobe was one of the few lenders that would consider this type of arrangement, through their private funding section. Even back then most lenders didn't want to touch this sort of arrangement.

Based on my experiences with vendor finance, I don't disagree with the lenders. Too many go very badly so I stay clear of them as well.

My hunch is that solicitors funds would be the place to look. Perhaps some mortgage managers that deal in the extreme non-conforming space.

 

It depends on the circumstances. They would where a purchaser had 20% deposit but didn't use it. Also with family - I have done loans where mum lent the deposit and son bought the property with basically 105% finance