Making an Offer via Seller Financing

[mattinvestor]

I've been doing alo of reading on the forums and of some property investing books.
i came across an interesting buying method in which you make an ofer to a seller to sell the house to you but not by an upfront cash payment. Rather you pay via an instalment not - in which you pay the seller directly in installments every month. A bank is not involved.

Has anyone used this kind of offer before? Any advice?

[eri]

i'd run from anyone with such a crackpot idea

unless i had an over-priced dog of a house i couldn't sell any other way

but maybe that's just me

[PatMat]

That sounds like 100% vendor finance.

The tricky part would be the equity sharing - when does the property becomes yours?
At the beginning? (risky for the vendor)
In the end? (risky for you)
Or slowly increasing your equity share through the process? (pay the lawyer after every instalment to update the title? probably not)
What about repairs and other expenses during the process?
What about on-selling the property before it's repaid?

Even if you were repaying $2000/month for a $300k house and paid no interest it'd take over 10 years - that's a long time with no clear ownership for the property in the meantime.

I wouldn't, neither as a vendor nor as a buyer.

[spaceman]

^ I wouldn't think it would be that tricky PatMat.....you'd just need the right paperwork done....same thing is done with banks and buyers all the time with normal mortgages it's just in this case the vendor is acting as the bank.

I also wouldn't, neither as a vendor or as a buyer.......risk is just too high over the long term for my liking.

Cheers
Spaceman

[Winston001]

The only reason for a vendor to do this is because the house won't sell. Either its hugely overpriced, or has serious problems lenders won't touch, or in a declining area (like Tokoroa, Mataura, Ohai etc) where nobody is interested in buying.

I have - with much reluctance - constructed a few of these long-term sale and purchases over the years and can say categorically they are fraught with problems. A $30k house still has rates, insurance, maintenance, possibly an existing bank mortgagee, bolshie neighbours who don't like the buyer etc. Plus you have legal conflicts with the Residential Tenancies Act.

And then the seller doesn't keep good payment records (changing banks is enough) so a row develops with the buyer claiming they are thousands in credit and the seller wanting to kick them out and keep the money.

Keep well away.

[Niall]

Hi Mattinvestor,

A recent example.

Purchased a property with $10k down. Purchaser agreed to pay vendor 5% interest quarterly in arrears. And pay the balance in full in 25 months.

Title passed to purchaser as normal on settlement. The vendor provided the mortgage, instead of a bank.

Purchaser gets a bank mortgage in to pay out the balance in month 25.

How long were you intending on having the vendor finance for?

All the best,

Niall

[eri]

interesting Nial

what would happen if the purchaser died

or otherwise couldn't get the bank mortgage

between settlement and the 25months?

[Niall]

interesting Nial

what would happen if the purchaser died

or otherwise couldn't get the bank mortgage

between settlement and the 25months?

Same thing that would happen with a bank mortgage. If payments are not made, the property goes to Mortgagee Sale.

All the best,

Niall

[mattinvestor]

Niall - interesting.
Well I was wondering if you could have the seller financing for at least 15-20 years. I read this as a strategy from one investor.

But i have read of your strategy, where the seller financing only occurs for 2-3 years and then switch to conventional bank financing. Why would you go with your method? What are the benefits of only haveing vendor financing for 2-3 years and then switching?

[patmat-co-nz]

Similar benefits to rent to buy (if done properly) I guess. For instance you want to pay for the property $400k but only have $40k deposit and bank isn't happy to lend you 90% (=$360k).

You wait three years with vendor's finance in and then, when the property is worth maybe $450k after those few years, you still only need $360k from the bank. But this time it's only 80% of the property value and the bank approves it.

[spaceman]

^ and if after 3 years the property is worth maybe $350k?????

Sure it can be done.....but like I said earlier risk is too high for my liking....It'd have to be a stellar deal for me to entertain it.

Cheers
Spaceman

[Niall]

Niall - interesting.
Well I was wondering if you could have the seller financing for at least 15-20 years. I read this as a strategy from one investor.

But i have read of your strategy, where the seller financing only occurs for 2-3 years and then switch to conventional bank financing. Why would you go with your method? What are the benefits of only haveing vendor financing for 2-3 years and then switching?

Purchaser unable to finance the purchase now but will be eligible for mortgage in about a year. Ended up agreeing a 25 month vendor finance as a buffer.

All the best,

Niall

[mattinvestor]

what generally would be the reason that someone would be able to finance later?

is it that the person expects that they will have increase in salary? or they would have saved more over that period of time?

[PatMat]

what generally would be the reason that someone would be able to finance later?

is it that the person expects that they will have increase in salary? or they would have saved more over that period of time?

There are many reasons - e.g. waiting for an old issue to disappear from a credit record, waiting for residency, etc. Or as mentioned before expecting the house price to raise therefore lowering the LVR to satisfy the bank. Any of these may take months to years.

[mattinvestor]

thanks alot patmat for the info...