Vendor Financing

So I've thought about an interesting way of how I could make Vendor Financing work.

Let's say the following occurs :
I find someone who's got a house valued at $800K, who's willing to sell it to me at a Rent to Buy Arrangement within the next 10 years at $800K.

Market Rent : $460
Rent charged as a result of Rent to Buy : $500

Anything I contribute today, or tomorrow or anytime in the next 10 years on top of the $500 pw Rent will come off the final purchase price of $800K prior to 2027.

So I was looking to take on the property and sublet it out for Market Rent of $460p/w, paying an additional $40p/w, taking out the option to buy the property prior to 2027 for $800K.

Is my creative mind just too smart for it's own good or am I missing something? Why wouldn't I take this deal up if the holding costs are only $40p/w + council bills.

 

1) is it legal in the state you want to do it in? (eg not South Australia)

2) Why would another party want to enter such an arrangement? Its rare that win win situations are created. Or they plain avoid it if they don't understand it.

 

I do not know how these ideas work, but personally I would not put any money into anything or give to anyone unless it was mine or had some control, what are you going to do if it breads down, go to court when you have 30k into it ? do you know how much a court case will cost ?

 

a property should double in value 10 years so you are asking for someone to give you $800,000 in exchange for $40 per week? - or $20,800 over the 10 years.

 

How do you protect yourself even if this was the case ? And what are the tax complications ? And what if govt changes tax setup during this period ?

 

Actually, Vendor Finance is legal in South Australia if structured correctly and the contract drawn up correctly. I have had two separate lawyers create vendor finance contracts for me in South Australia. One thing I've learnt over the years is that almost anything can be done if two parties agree.

 

Sure, but the contract isnt enforceable

 

ok, if you say so

 

Flaw is that only an idiot seller will wait 10 years for current market value for an extra 2k a year. A seller wants cash now.

 

The Land and Business (Sale and Conveyancing) Act 1994 section 6 says so.

Instalment contracts, rent to own, wraps are not enforceable and monies paid under them are recoverable.

You can certainly sell to someone willing under vendor finance, but you cannot contract outside their rights under the act.

 

Vendor financing being illegal in SA has been well established for as long as I can remember (at least 20 years).

Even if it weren't, there's no way I would ever recommend anyone enter into this type of arrangement, especially if you're the one purchasing the property. The most likely outcome is that you'll pay above market rent for several years and not be able to buy the property and have nothing at all to show for it.

A few years ago I sat down with a couple who had tried to purchase a property under vendor finance terms. They'd may extra payments to the vendor for several years by transferring funds to the vendors account. They'd been told that they had $40,000 as their contribution.

The vendor had simply taken the money and did not keep appropriate paperwork to show any kind of loan ledger with the purchaser. There was no evidence of savings or equity at all, other than they'd paid above market 'rent'.

No lender would recognise their extra contributions as savings, furthermore the valuation was at their purchase price. In essence they had nothing to show for it. The purchaser was relying on the vendor to do the right thing, keep trust accounts and appropriate paperwork. Instead the vendor pocketed the money and kept no paperwork at all.

I don't know what the end result was and presumably the purchaser would have been able to sue and recover their money, but that's not a cheap exercise and it doesn't probably get you the house.

 

I think we should distinguish between the 3 forms of vendor finance

1. Lending the deposit to the purchaser
This involves transferring title now and receiving part payment up front and part later. This is what Geoff did I think.

2. Instalment contract
This is where someone pays you off over a period of time. They can take possession of the property but title won't transfer until the final payment received.

3. Lease Options
This is where the prospective purchaser rents the property, often paying above market rents, with either the part of the rent coming off the eventual purchase price or the purchase price being discounted somehow at the point the renter wants to buy.

 

I've seen problems in all three flavours.

Vendor finance requires either a great deal of trust, or very solid and fair contracts along with checks and balances. I've seen it done well, but more often I've seen it where one party takes advantage and seriously hurts the other.

 

Well, I have actually done all 3 myself. I probably would never again though.

 

from a vendors perspective option 2-3 look pretty safe, have i got that right?
id be interested to hear some of your experiences where things went wrong..

 

What sort of vendor financing are you thinking about? It's a fairly broad topic.

 

from what i understand if your selling it can be used to boost your cash flow. which could be very advantages with banking the way it is right now..

or used as a banking alternative if your wanting to make a purchase, again not a bad thing in today's climate.

i'm not sure if that narrows things down. but despite a lot of people advising against this practice, i imagined it could be a good tool if used right. i'm just wondering is there a way to stet up a vendor financing where no one gets taken advantage of, and what safeguards would be required.

 

To boost your cash flow:

At best lenders will treat it like a business. They'll want to see two years tax returns showing a profit and they'll ignore capital gains. Worst case they'll refuse to use the income for servicing purposes.


To avoid using the bank:

Most of these types of arrangement come with some sort of expectation that at some future point you'll get out of the VF and refinance with a regular bank. Quite often it's very difficult to get the finance to exit the arrangement. Insufficient equity, bad credit, bad servicing, etc.


A lot of people end up walking away from VF agreements, loosing money in the process.