How To Buy Property Through Vendor Finance
Are you interested in buying property through vendor finance? Here’s some tips on how to do it.
How do you buy property through vendor finance?
Hey! I am Ryan from OnProperty.com.au, helping you find positive cash flow property and one of my readers, Gordon, has asked me to explain how you go about buying property through vendor finance. So I wanted to talk about this a little bit. I have made a whole bunch of offers on properties through vendor finance. Some have been accepted. Most have been declined. I have never actually gone through with it and purchased a property through vendor finance, but I know a little bit about how to go about doing it.
Firstly, let me just touch on what vendor finance is if you do not know what we are talking about. So vendor finance is when you purchase a property – so a buyer purchases a property from the seller, but rather than the buyer going out and getting a bank loan and coming back and giving the seller a bulk amount of money for the property, or the bank giving the seller a bulk amount of money for the property; the buyer actually goes to the seller and says, “Hey look, I can give you a deposit for this property and I want you to loan me the rest.” So basically, the buyer creates a loan with the seller or vice versa.
They create a loan together. And so the buyer then needs to repay the seller just like they would repay a lender, so there are interest repayments on the vendor finance and generally in the future, there could potentially be a lump sum payoff if you can go and get a bank loan from a traditional lender. So that is what vendor financing is. Rather than the buyer going out and getting financing from the bank, the buyer gets the financing from the seller and pays them back over time.
This benefits the seller because generally they get a higher than average purchase price for their property or sale price for their property and they can charge a higher-then-average interest rate, meaning it is going to generate positive cash flow for them. It can benefit the buyer because it means you can get into the market where otherwise you may not be able to get a loan from a bank; so you can get into the market earlier. But you are likely going to pay more and need to pay a higher-than-average interest rate.
So let us say that despite the cons of purchasing a property with vendor finance being a higher purchase price and a higher-than-average interest rates, you still want to go ahead and you are still in exploring this option of potentially purchasing a property through vendor finance. How do you go about doing this?
Well, it is very difficult – I dare say impossible, to find a property online that is selling through vendor finance. I am just going to go online right now and have quick look. The best website to search this stuff from is called MyRealEstate.com.au. So let us go ahead and we are going to go to MyRealEstate.ocm.au. Now this is like the Google of real estate if you will, and you can put in search terms like vendor financing, owner financing, seller finance, all of these sorts of things, to search for property.
So let us just start by searching vendor finance. So that is now going to bring up a bunch of different properties here. We can see some land that is available. We can see a house here in Katherine in the Northern Territory. You can see that most of these houses are not spectacular, are not super exciting, and there is no guarantee that any of these will actually offer vendor finance. But if I go into it, I am going to search for vendor – now, this is just saying it has a motivated vendor. Look, this is one strategy you can use and sometimes it does bring up results.
Let us try owner finance and see if that gives us any results. This one is coming up again. Some land here, another property here. Generally, most people in Australia do not list their property for sale via vendor finance. Those pages could not be found, so we basically have not have any luck.
Here we go: “Owner will finance suitable buyers.” So a modern 4-bedroom home, available for outright sale or vendor finance through rent-to-own, whereby you pay a weekly rent amount plus a deposit to eventually qualify for a bank loan.
Now, rent-to-own is different from vendor finance, so I will not actually classify that as vendor finance because generally as an investor you want to create the vendor finance loan and then rent out the property. You do not want to live in it yourself, so rent-to-own is slightly different from vendor finance. So you are going to have a lot of difficulty finding these properties online; it may be impossible in order to do it.
So what you need to do if you want to find a property that you can purchase through vendor finance is you need to find a traditional property and you need to offer them vendor finance. Now, this is going to be difficult to get accepted. Most property sellers in Australia have never even heard of vendor finance. They do not know what it is. They do not know why they would do it. And generally, in markets where the property is going to sell in a short period of time, 30, 60, 90 days; people are not going to accept vendor finance.
The only way people are going to accept vendor finance is generally in 2 situations: one, you offer them more money, and they are greedy and they want that extra amount of money – we will talk about a bit later different vendor finance offers. But you could offer a lump sum in 2 years’ time or something; so more money and they know they are going to get a payout. So either more money or it is a property that this person just wants to get rid of for one reason or another. They cannot seem to sell it on the market. You come in, and the only way they can sell it is through vendor finance.
Now, both of these put you in a difficult situation because you are either paying more for the property or you are buying a property that no one else wants, which generally means it is not going to be the best property on the market. So vendor finance, you are going to be very limited. You need to be willing to go out there and to look at regular properties and then make serious vendor finance offers in the hopes that one will be accepted. Now, 99% of your offers will be rejected, so this is something you are seriously interested in. Know that this is going to be rejected.
Recently, it was a bit over the year ago. I was living in a unit on the Gold Coast, and the place next door to us came up for sale. We could not get a bank loan because I just went into business for myself so that was not really a possibility. We went and looked at it and we did a vendor finance offer on that property. Our vendor finance offer was politely rejected and we did not end up purchasing that property. We went really looking to buy at the time, it was right next door, we liked the area, and we knew the complex so we thought we had a step.
We were rejected. Most vendor finance offers will be rejected. I have had some accepted in the past on properties that were interstate or were far away that I did not end up going ahead with because the numbers did not just stack up. So, vendor finance, definitely a possibility. But know you are going to be rejected.
Now, how do you make a vendor finance offer?
I am not a solicitor, so I do not recommend that you take any of this as advice. I am going to t tell you what I have done in the past. And that is simply submitting an offer to the real estate agent with the explanation of what vendor finance terms you are after. So you say, “I am really interested in this property. I would like to make an offer. However, I need to purchase this property through vendor finance.” You may want to include an explanation about vendor finance in there. And you say, “I am willing to pay X amount for this property.
I will pay it back at X% of a loan period of X, and potentially with a balloon payment or a lump sum payment in X period of time.” So you might have a contract where you are going to pay full asking price for the property. You are going to pay a 7% interest rate, or you are going to pay interest only for 3 years. And then at the end of 3 years, you are going to pay them out in a lump sum. And so your hope is that in that 3-year period you can then source traditional financing to be able to pay out the loan.
So, when crafting your vendor finance offer, there are a lot of ways to do it. You could just say, “I am willing to offer X amount. It is going to be at this percentage. It is going to be a 25-year loan.” Or you could do what I just mentioned which is, “I am going to offer X amount at X%. It is going to be interest-only for a set period of time. And at the end of that period of time, there will be a balloon payment where we will pay you out for this property.” And so there are a bunch of different ways you can do it. But making an offer is very similar to making an offer for a regular property. You just need to specify what your vendor financing is.
So if you go ahead and search for vendor finance solicitor, the first one that comes up is vendorfinancelawyer.com.au. So I definitely suggest that you go ahead and you check out this website. They have a lot of articles on there that introduce you to vendor finance that talk about how it works. They have some questions and answers. They also talk about renting-to-own, and obviously as vendor finance lawyers, they can actually help you craft up a contract.
So if your vendor finance agreement is accepted, then you need to go to a solicitor or lawyer to get a contract drafted up that states the term of your vendor finance agreement. Generally, your name is not going to go on the title of the property until you have paid off the property in full. So the person who currently owns it will keep the title of the property until you have paid them off. You will have a contract that determines everything to do with vendor financing.
Yeah, you could probably do this yourself, but that would never be recommended. You should always go to a solicitor, always go to a lawyer to do it. Actually now that I think about it, legally you probably cannot do it yourself; not 100% sure. You have to actually speak to a lawyer to find out anyway. So you can check out vendorfinancelawyer.com.au, they have some great articles on there. Obviously they do a lot of vendor financing deals, so they should be able to help you out.
You could give them a call to ask for more information. And the benefit of going with someone like this is that because they are doing so many agreements, they will have a standard document that states all the vendor financing terms that they will just edit for your property. If you go to a solicitor who knows nothing about vendor financing, then they are going to have to draw up a contract from scratch and they are going to charge you for their time on that, so that can be really expensive.
If your offer does get accepted and you want to move ahead, find a solicitor who has experience in doing vendor financing deals, get them to help you draw up the contract and to create the contract so you can purchase a property via vendor finance. Often if you are going to live in the property, you will also be eligible to the first-home buyer’s grant.
Now this grant changes from state to state and from time to time. So as you are listening to this, it may or may not exist, but you can speak to your solicitor about that and make sure that you can get it; or you could speak to your accountant as well to find out. But from what I have heard people who purchased through vendor financing are still able to get the first-home buyer’s grant. That is something to keep in mind.
I hope that this has helped explain to you a bit about vendor financing, a bit about how you would go about purchasing a property through vendor finance, if that is something you are interested in.
I am Ryan from OnProperty.com.au. You can see all of my videos, all of my episodes over there. Just go over to OnProperty.com.au. And if you need help researching an area, then I do have a course that will show you how to research an area. So when you are out there making your vendor finance deals, you are only making them in the areas that are likely to grow, areas that look like good, solid areas to invest in. To check out that suburb research course, go to OnProperty.com.au/research. It is really helpful. I really recommend it. You do so much research online to find out about any area. Again, that is OnProperty.com.au/research.
So that is it for me today guys. Good luck if you do decide to go out there and source some vendor financing deals. I wish you the absolute best! Have a thick skin because most of your offers are going to be rejected. And until next time, stay positive!
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