“The bank has turned us down!” Disappointed wannabe home owner Art Acquirer said to partner Sheila Shopper. “Oh no, not again. It means we will keep having to pay $450 a week rent and I’m getting sick of it. Will we ever be able to own our own home?” Vendor Finance
At times, bank finance can be hard to get. Art and Sheila’s situation is not uncommon. Do Art and Sheila have other options? Yes, they do. One option is to seek vendor finance rather than bank finance. Very simply the Seller of a property lends the money for the purchase of a house to the Buyer.
This method of finance is not new. I have used it myself back in the 70’s of last century. I still remember the seller’s name – Jock Manuel. Jock took a look at what my wife and I wanted to do with the land (plant trees and run sheep). As we both had jobs and could pay him back within 2 years he said he was happy to give us a go. We had $500 and Jock “left in” $9,500 (yes, 4 ha of land only cost $10,000 last century). Happily, we kept up the payments and were lucky enough to sell the land 2 years later for a profit.
The vendor, in effect, replaces the bank as the source of finance to purchase the property, hence the term “vendor finance”.
Currently you may be able to borrow funds from a bank on a first mortgage at around 5%.
HOT TIP: – You may be able to negotiate with a vendor to “leave money in” at a figure below the bank rate. Let’s say the vendor leaves in money at 4% on a first mortgage – you, the purchaser, are immediately 1% better off! Why would the vendor do this? Simply because currently, the bank rates for deposit are often only at 3% so the vendor is also 1% better off! This is a true win win. The purchaser and the vendor are in effect cutting out the banks margins by dealing directly with each other.
Another advantage of this arrangement is that you, as the buyer, will often have a personal relationship with the vendor which can be way better than that offered by a bank. Most banks operate on a “tick the box” set of facts. Because of this, banks can be impersonal and may not cater for your special circumstances.
The mortgage for “vendor finance” should be noted on your sale and purchase agreement as a special clause entitled “Vendor Finance and Settlement Date”. It is recommended that the parties seek the advice of their legal representatives before entering into this type of agreement.
Back to Sheila and Art. How do they find out if a seller will lend them the money to purchase their own place? The answer is simple: – call a real estate company. A good reputable realtor will know which of their clients will leave money in the property.
When asking a seller to give you a go, you need to be aware that because the vendor is giving you a chance that the bank wouldn’t, the sellers may be less negotiable on the asking price. Art and Sheila could own property North of Auckland using the vendor finance method right now. Sellers (vendors) who are wishing to “move on” and are highly motivated will often be pleased to help Art and Sheila become the new owners of their property.
The other option is for Art and Sheila to sign up with a company under a buyers agency contract. This option will ensure that they get a wide choice of property to look at and the salesperson will be acting for them as buyers and will not be acting on behalf of the seller. Look for the goodGround information memorandum on Buyers Agency.
If you want to purchase your own property anywhere north of Auckland, in areas like Waipu, Maungaturoto, Ruakaka, Whangarei or anywhere in Northland, and like the idea of Vendor Finance, contact us here or phone 09 432 1077.
Vendor Finance. The Seller lends money to the Buyer – Comment by Martin Albrecht, Principal of goodground Real Estate