With bank lending criteria becoming tighter and tighter, it is becoming increasingly common for Buyer’s to request vendor finance from a Seller. This is especially the case when buying a development site where banks will lend at a lower loan to value ration than a traditional residential loan.
What is Vendor Finance?
Vendor finance, as the name suggests, is a financing structure where the Buyer pays a portion of the purchase price on settlement and the balance is treated as a loan to be repaid to the Seller at a later date. The property is transferred to the Buyer after the first payment and the Seller would often take a mortgage over the property to secure repayment of the vendor finance amount.
Why use Vendor Finance?
Vendor finance can be an attractive option to Buyers as it allows you to settle on a property without paying all of the purchase price.
Some of the reasons you might consider a vendor finance arrangement when buying a property:
- It can allow you to buy a property that you would not have otherwise been able to buy.
- The deposit required may be smaller or non-existent. The vendor finance is usually a ‘top up’ amount in addition to your traditional mortgage to fill the gap between your deposit and the amount your traditional lender is providing.
Although there are many benefits for a Buyer, you would often pay top of market prices for the property where vendor finance is being provided. If you don’t pay top of market prices, property owners will generally move on and sell the property to someone on more usual terms.
How to protect yourself as Seller
Proper legal documentation
Offering vendor finance to a purchaser when selling your property is not something that should be done without serious consideration and ensuring your legal rights are protected. Properly documenting the transaction is the best way to minimise the risk of not being repaid the vendor finance amount.
The different documents involved are generally as follows:
- sale contract
- loan agreement (including a personal guarantee)
- mortgage
- general security agreement
- deed of priority (where the loan is secured by a second mortgage)
McAndrew Law have extensive experience in drafting and negotiating all of these documents.
Buyer due diligence
In addition to ensuring you have the right legal documents, you should also carry out due diligence on the Buyer to ensure they have the capacity to repay the loan when it falls due. S
Some questions to ask the Buyer include:
- What assets of value are held by the guarantor in their personal name?
- How is the Buyer funding the loan repayment when it falls due?
- What is the loan to value ratio for the first mortgage?
- Is the Buyer contributing any equity or is it 100% debt funded?
- If it will be a second mortgage, who if the proposed first mortgagee?
- Will there be a deed of priority with the first mortgagee? This is something the Seller should generally insist on.
Your lawyer can also assist you with carrying out due diligence on the Buyer.
Vendor Finance example
Want to see how vendor finance works in the real world? Here’s an example:
Purchase Price – $500,000
Vendor finance amount – $100,000 secured by a second ranking mortgage
Vendor finance terms – Repayable 12 months after settlement
Based on the above example, the Buyer would pay $400,000 to the Seller on settlement and the Buyer would provide the Seller with a second mortgage to be registered over the property. In 12 months time, the Buyer would then be required to pay the balance $100,000 to the Seller.
If the Buyer fails to make the $100,000 repayment, the Seller would then have the right to enforce their security, including selling the property after the proper legal process has been followed.
Based on an 80% loan to value ration, the deposit required would be $100,000 (20% of the purchase price). Using the vendor finance, the Buyer may be able to buy the property without a deposit at all.
Want to know more?
McAndrew Law are experts in assisting Buyers and Sellers with vendor finance transactions. If you would like to know more or you’re ready to begin your next vendor finance deal, get in touch so that we can ensure your rights are protected.
We look forward to hearing from you – 07 3266 8555 or mail@mcandrewlaw.com.au.
