Hi all, Has anyone here been involved with vendor finance? Basically a situation where lets suppose I am selling a house in an area with higher-than-average unemployment for $300k, where the bank is only giving the buyer $200k. Lets suppose I fund the remaining $110k to the seller at an interest rate of 5% to be repaid over a period of time. Has anyone been involved with this, how have they gone about it, has it worked out well, and is it easy to draw up a contract from a seller's perspective and re-use this type of contract template for future sales? Cheers
Yes I have I think you mean the bank is lending them $200k? but if the bank new they were borrowing the rest it is unlikely that their loan would be approved. best to leave that to the lawyers. I am a lawyer but wouldn't even give it a try as it is not my area.
Will probably be a little messy on the lending side...essentially the buyer is borrowing 100% of the cost ? If this is the case, it probably won't even meet the banks lending criteria since the client can't show any deposit. I assume you're going 2nd Mortgage?
There are a number of lenders who will still do a loan where the deposit Is being borrowed as long as the borrower can show they can service both mortgages. We do a lot of this sort of funding thru our AFLS / ACL.
Hi Tony - basically for the sake of the example, the buyer is borrowing 66% from the bank and 33% from me, so I guess yes they are borrowing full price of the property. But we could tweak the example and maybe the buyer puts in a $10k deposit but basically I just wanted to know more about how vendor financing works, where I am essentially acting as the 'bank' to the buyer for a smallish loan.
Thanks David - is it common for the seller's contract to include a vendor finance option? Just seeing how hard (or easy) it would be to put it into the contract. And I assume only P&I payments would be allowed when it comes to vendor finance?
Terry has hit the nail on the head if the bank is only willing to lend $200k then they're not going to want to lend that $200k once the hear about the additional $100k liability.
2 issues a) servicing. If they could borrow more they may not need you so that might mean servicing is an issue b) nothing to lose. Lenders don't like it when there is no 'hurt money' in it as the borrower has nothing to lose if things go bad But it is possible for them to get finance. You can put it in the contract of sale or have a separate agreement. You would basically be lending them money and this could under the security of a legal or an equitable mortgage/unsecured.
What I'm getting at is..what are the chances the bank will even allow you to go second mortgage, or would the bank even lend when there will be a Vendor finance loan against the security.
@PropDir - a more traditional Rent to Buy may be more suitable ie a higher strike price, rent paid gets offset against the strike price, caveat & option to buy when they qualify for finance for the outstanding amount.
