07/06/2023
Seven reasons why vendor finance is popular in Australia
Vendor finance (‘seller finance’) makes it easy for sellers (‘vendors’) to sell and buyers (‘purchasers’) to buy homes and investment properties in Australia.
These are the seven reasons why -
Vendor finance gives home buyers a home payment plan
Home buyers can choose a home payment plan that suits them best, instead of a standard home finance package.
Imagine buying a new car and being told that it only comes only in one standard colour - black. While black appeals to some car buyers, it does appeal to all.
Standard home finance is the colour black – the loans are more or less the same no matter which lender it is. This suits many home buyers, but not all.
With vendor finance, sellers and buyers can choose a home payment plan that suits them best – they can choose any colour of the rainbow.
Vendor finance helps home buyers who are not yet ‘bank finance ready’
Many home buyers are not yet ‘bank finance ready’. It could be because -
The buyer has not held a steady job for long enough; or
The buyer works for themselves; or
The buyer does not have enough money saved to pay the stamp duty and loan expenses on top of the deposit; or
The bank values the house they want to buy at lower than the price they have agreed; or
The buyer has a black mark against their name on their credit file.
Vendor finance helps sellers sells houses if the bank loan falls short
Instead of a seller having to cross their fingers and hope that the buyer will be able to borrow enough money from the bank to pay the price, they can say “We are willing to lend you the shortfall.” “We will be happy to accept payment later on for whatever the bank does not lend you now.”
Vendor finance attracts investors because it gives time to pay the price
Many investors look for opportunities to minimise their cash outlay. It could be that they want to hold back some money to renovate the property. They ask for vendor finance - extra time to pay the agreed price. The investor - buyer then uses the extra time to install a new kitchen, re-tile the bathroom, polish the floors, paint the house and landscape the garden. The investor-buyer minimises their cash outlay because they can borrow more money on the renovated house than they could if it was still in a run-down condition.
Vendor finance works very well for selling properties in regional Australia
Many banks have postcode blacklists of places where they will not lend – such as towns with less than 10,000 inhabitants. Their lending guidelines also restrict loans on vacant land, on acreage, on shops, on workshops and on farms. For instance, they might lend 90% of the price on a city property but only 65% of the price on a country property.
Sellers in the country who wait for a cash buyer may be waiting a long while - until the cows come home! Sellers who offer vendor finance will sell their rural properties more quickly because they attract more buyers.
Vendor finance works well for selling factory units and businesses
Small business in Australia is treated badly by the banks because banks prefer to lend home loans, not small business loans. And when the banks do lend money for small businesses, they ask for a mortgage over the business owner’s home, as well as the business property (if it is owned) and business assets.
For this reason, small business owners wanting to sell factory units and businesses often find that offering some form of vendor finance is the best way to sell.
The paperwork for vendor finance is standard, with three twists
Property Lawyers and Conveyancers use Contracts for the Sale and Purchase of Land to transact real estate. Sometimes these are supplemented by Options and Mortgages. Vendor Finance uses these same standard documents, with three twists:
Delayed settlement – instead of between 30 and 60 days, settlement is delayed for a longer period;
Deposit / Price is paid by instalments – regular payments are made to build up a 10% deposit, not just one lump sum payment. Regular payments can also be made to pay the price;
Move in straight away – the buyer moves in and starts the payments when they sign the paperwork, instead of waiting for settlement to take place.
Note – in a vendor finance sale, the legal title to the property remains in the seller’s name – the title does nor transfer into the buyer’s name until the price has been paid in full.
