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Home › Sell Property › Vendor Finance: The Pros and Cons
Vendor finance can help sellers sell quickly and for the right price, while offering buyers an alternate way into home ownership. It is much riskier than traditional options, so it pays to be well informed before entering into a vendor finance agreement.
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Vendor finance allows buyers to purchase a property when they do not qualify for a traditional home loan. The seller organises the finance for them and effectively loans the buyer the money to buy their home.
The three types of vendor finance are:
This type of vendor finance arrangement involves a loan contract between the seller and the buyer. Essentially, the seller must still meet their home loan obligations with the bank but the buyer is the person paying the mortgage installments.
The buyer pays a premium interest rate which creates profit for the seller.
Typically, the property title remains with the seller until the buyer pays the final installment or refinances the property. The contract duration is usually 25 to 30 years but most buyers refinance within 2 to 5 years.
In this arrangement, the seller loans the buyer the deposit (20%) and the buyer gets a traditional home loan from a bank for the remainder of the property price (80%).
The buyer will have two home loans: one through the bank and one through the vendor. Their aim is to refinance the vendor loan within 2 to 5 years.
With this finance arrangement, the buyer rents the property from the seller at higher than market rent. In return, the buyer has the option to pay a set price for the property at a later date.
The property title is not registered in the buyer’s name until the set price has been fully repaid or the mortgage is refinanced into the buyer’s name.
Sellers can benefit in two ways by offering a vendor finance option to buyers:
It’s especially beneficial to sellers in a buyers market that is flooded with similar properties because it provides opportunity to buyers that are excluded from traditional cash sales, differentiating your property from others.
Vendor finance is aimed at low income earners, self-employed workers and those with a bad credit history. However, you must still satisfy the following criteria to qualify:
Buyers should be in a good position to take on a loan and should have a good reason for any bad credit history. Sellers should still do due diligence to find a quality buyer.
Vendor finance has pros for both the seller and the buyer.
Although vendor finance is an option for some buyers and sellers, it does carry significant risk.
One of the biggest cons is that vendor finance doesn’t adhere to the same rules as other credit arrangements and is not covered by typical consumer protections.
Sellers can make vendor finance safer by:
Even with these measures, many vendor finance arrangements fail, sometimes leading to significant loss for vendors.
Buyers can reduce the risk involved in these types of private agreements by:
Buyer Beware Although vendor finance is an option to get you into home ownership, it carries significant risk. Many buyers have been financially ruined when vendor finance agreements have failed.
Buyer Beware
Although vendor finance is an option to get you into home ownership, it carries significant risk. Many buyers have been financially ruined when vendor finance agreements have failed.
Every vendor finance agreement is different, as they are privately negotiated. Here are some terms that are typically included:
Vendor finance incurs the same costs that traditional home loans do, with some added extras:
Sellers often favour buyers who are able to refinance quickly, which can lead to much better terms.
Yes, it is currently legal in most of Australia, but this may change in the future.
In 2019, the Parliament passed a bill officially banning vendor finance schemes, including rent-to-buy, from the Victorian housing market.
Vendor finance is illegal in South Australia.
All other states allow vendor finance agreements. However, due to their risky nature, more states may follow suit and ban these schemes.
In their report, the Consumer Action Law Centre states:
The legal status of these schemes is extremely complex and it is often unclear which laws apply. Vulnerable buyers, and some vendors, can suffer significant detriment yet have limited avenues for redress.
Due to the level of risk associated with vendor finance, it is a good idea for sellers and buyers to exhaust all other options before entering into a vendor finance arrangement.
When faced with few offers on your property, it can be tempting to sell using vendor finance. However, there are other options that carry far less risk. You could:
These options may cost you time and money but are far less risky than offering vendor finance. Plus, you get cash in your pocket up front when the buyer organises their own finance.
Many potential buyers lack a deposit when they start looking for a home. This doesn’t mean you can’t get a home loan, and resorting to vendor finance may hurt in the long run. Here are some options that might work for you if you have lower savings or no deposit:
If you’re considering vendor finance or want to discuss other options for selling or buying a home, speaking to an agent is a great place to start. An experienced agent can help you find an option that’s right for you. Compare your local agents today.
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