Vendor finance, whats the deal ?

[Odin]

One of they ways (as I understand it) to invest in property without having a lot of equity is to get vendor to leave finance in the house. So if the property is 200K and the investor only has 20K deposit then vendor can leave 20K in the house and the investor will take that on as a loan at maybe 10%. The bank will be happy as there is 20% (total 40K) deposit and the loan will then be 160K.

So my questions are.

1. Is my understanding correct ?
2. How does one go about suggesting vendor finance to people that aren't familiar with it and may be a bit apprehensive ?
3. With a vendor finance loan does the normal interest rate tax deductions still apply.

Any further information regarding vendor finance would be great.

Thanks

[speights boy]

Vendor finance can work well, often when the vendor has no or a small mortgage and the property has been on the market a while.

However when you say " the bank will be happy "....not necessarily.

Although the bank will only be leading 80% ( in yr example), you DO NOT have a 20% deposit.
You have 10 % deposit and a 10% second mortgage.

The bank will take the extra debt into account in their calculations as to your ability to service the total debt, and so may turn down your application on that basis.

If you have enough income however, then as I say , it can work well.
A lawyer can provide a loan agreement and have the mortgage registered against the property.

SB

[CJ]

The vendor finance is normally repaid quickly - 1-5 years. The banks wont like the fact you are paying someone else back before them as it effects your cashflow.

Anyone with actual experience?

[Winston001]

Vendor finance is a way for the Vendor to get a high (unrealistic) sale price. Leaving money in is a very good tactic to draw in a buyer.

There is nothing magic about Vendor finance - its just a loan.

[Green Fish]

Quite right: it's just another loan. The tax consequences are identical.

The loan from the vendor is usually secured by a second mortgage.

[Odin]

Thanks for you input.

As a second mortgage over the property the security will be less as the bank will want theirs first. So what interest rates would be standard /normal for a vendor loan ?

[Green Fish]

Most finance companies lend on second mortgage, so their rates will give you the market rates. Maybe 11-12%?

Vendors, however, are often prepared to provide finance at a lower rate in order to attract buyers. It's really a matter for negotiation.

[CJ]

Vendors, however, are often prepared to provide finance at a lower rate in order to attract buyers. It's really a matter for negotiation.

It is all just part of the negotiation. If they want more in sale price, they can ask for less in interest and vice versa.

ie
$100k vendor finance at 10% repayable in 1 year, or
$55k vendor finance at 100% repayable in 1 year, or
$110k vendor finance at 0% repayable in 1 year.

In all cases (excuse my maths if wrong) the vendor gets $110k in one years time.

[Green Fish]

Exactly (although I haven't actually done the maths). The vendor will look at your offer in the way you have described it. "Do we leave money in to get a buyer? How much do we leave in? Maybe the property will be more attractive if we offered the money at a low interest rate?"

[roseneath_rat]

Most bank lenders require a "first and only" mortgage on the property, which will effectively prevent the 2nd mortgage. Given that the solicitor acting on the purchase also acts in the interests of the mortgagee it is unlikely that you will be able to have a second mortgage on the title without the bank consenting to it.

[mortgage broker]

There is limited number of first mortgages which we can do where as second makes up the difference (up to 95%). It is still possible but with Sovereign leaving this space we only have as couple of options. Your cashflow would have to be good.

[roseneath_rat]

2nd mortgages are still an option, but must be consented to by the 1st mortgagee. The problem comes with the level of priority sum sought by the 1st mortgagee... eg- $300K purchase, $240K 1st mortgage, priority sum registered at 1.75x loan amount or $420K. 2nd mortgage unlikely to like this very much.

[NZGEMS]

I had someone want to buy one of my properties recently with me leaving some money in as vendor finance, the bank wouldn't release the loan unless he paid up in full. My risk as a seller was if he went belly up that I would be down the creek without a paddle.

He ended up fronting up with the whole lot so deal still happened. It was a bargain anyway.

[Orkibi]

I'm Working on VF deal at the moment for a client who have low deposit.

I only target vendors with Small or no mortgage on the property and never offer to pay Interest, just a deposit or capitalized interest as worse case.

Vendor finance is a way for the Vendor to get a high (unrealistic) sale Price

Some try but we aim for a price which reflect market price or up 10% lower. then its a Win Win.

The "rules" are: shorter VF lower price, Longer VF higher price.

Then give the vendor the right for caveat or First mortgage, and buyer keep the option to repay without penalty.

[Green Fish]

The vendor will never get a first mortgage. The bank gets that.

A caveat is completely worthless as a security. It's nothing more than a warning. The only priority obtained by lodging a caveat is against other unregistered interests. The bank, with its registered first mortgage, can do as it pleases, whatever by the contrary opinions of the caveators.