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Thanks for your input and insights in regard to vendor finance. It appears you are fulfilling a vital role within the industry and offer a valuable service to both property buyers and investors.

I’m glad I could add to your article and clarify the legal position.
With respect to whether we get many defaults and what the position is:

We do get a few – one couple gave us back their house because they separated, another buyer’s income dropped so he had to give the house back-but we don’t get a lot of defaults in proportion to the number we have sold this way.

What happens is they give us the house back and it’s a clean break. Because the sale didn’t settle they don’t get a black mark on their credit report and they don’t owe any money like people who get foreclosed on by banks can.

From our investor’s point of view they still have the original mortgage to pay and we pay half of that until we re-sell the house on vendor finance (if that’s what they want to do). It’s their choice of course-their property- but currently these investors have opted for us to re-sell them on a wrap for them Then when we get a deposit from the new buyers of $12k that covers the mortgage payments made in the interim with the rest being split between us. So no-one is out of pocket. So it is a low risk investment for our investors-is that a bad thing?!

Our buyers are not likely to default. Many of our buyers have just had a simple telco default which puts a black mark on their credit report. We check them out properly, get payslips, credit reports,rent ledgers,etc. They don’t necessarily have a record of bad financial management, and we wouldn’t take them on if they did. Some just haven’t saved enough deposit. We are helping them buy their own home.

It has happened that our homebuyers have bought houses that have gone down in value since because of the slump in property values,in 2003 and thereabouts.However, they’ve hung in there. They wanted to buy a home and they are living in it and happy to be so. They are not thinking like investors-it’s their home. Value fluctuations are all part of the mind-set of investors. These people are just home owners. There is no reactive thought (as there is with investors) to go into a tail spin about property prices going up or down. We all know that property goes in cycles and it will go up again.

It is also suggested to them to look for the worse house in the best street so that they can add value to them.

In fact we now have investors who are negatively geared coming to us asking us to wrap their houses for them-to turn their money-eating houses into money producing houses which we are happy to do.

Of course as Rodney correctly points out investors can vendor finance their houses themselves. However they need to understand what they are doing and know how to market them. It’s our expertise that is valuable.

We are not a 3rd party finance company as such by the way. We just help property investors who want positive cashflow to get that and we help homebuyers who can’t get bank loans get into their own homes. It’s as simple as that.

Tamar

PS There are quite a lot of “wrappers” in business.

For sellers, you have the option to find a buyer and loan them the money to purchase the property. You don’t need to physically give them any money as you own the asset so all they are doing is making a monthly loan repayment to you. You don’t need these 3rd party finance companies to be involved, this is a straight arrangement between you and the purchasers/borrower.

In the current market where properties are not moving and people who would like to purchase a property can’t secure finance from a bank then this is one alternative option available.

I disagree with your statement “To cover this risk these companies charge a premium on the property value and the higher interest rate.” Is there really any risk for them?

They are receiving a monthly loan repayment on the principal at an interest rate greater than the market. They still own the asset so if the vendor defaults on the loan the lender keeps the asset and any payments made by the vendor. There is no risk at all here for the borrower as they have the house as collateral.

The only risk would be if the house wasn’t valued anywhere near what they sold it for. But this will never be the case as they sell it 20% more than market value!

I strongly agree with what you said after this “Like all businesses they are only trying to make a buck!”.

ps. The site is looking great!

But a point worth considering is that companies like this do provide a valuable service. They provide a means for people with bad credit ratings to purchase a property. No bank is prepared to lend these people the funds necessary to purchase a property as they are considered to be too risky.

To cover this risk these companies charge a premium on the property value and the higher interest rate. Like all businesses they are only trying to make a buck!

The value of the purchaser’s asset is worth less than the amount of money they owe. They are paying an interest rate greater than the market rate. This a recipe for disaster as they have a proven bad record of managing finances.

What happens in the current market when property prices are falling? The value of the asset will reduce even more making it impossible for the purchaser to use the asset as equity to get a loan.

It doesn’t sound like a good deal to me!

I think your business definitely fills a gap in the market and provides a means for those buyers with bad credit rantings to achieve that goal of owning a home.

Just out of interest, do you have many defaults? If someone does default what usually happens then?

It’s amazing how all the “bad’ stories get all the media publicity and the rest of us in the vendor financing business who just quietly go along our way helping people buy their own homes without having to go to the banks, get no acknowledgement or recognition for the service we provide which benefits both homebuyers and investors.

Why don’t people keep an open mind when they hear these media stories and if they’re concerned do the research on the story! We know how the media lies and twists information-anything to get a story! The badder the better!

In response to T-Bone’s story about that wicked company who was”found out” but because the courts took so long to hear the case, those “poor’ investors MADE money (but they were lucky!!?)….

I don’t know the company you are referring to, but the point to be made here, is that when a vendor finance deal is put into place the price is FIXED. Market values for property are EXPECTED to rise in 4-5 years. All that rise in value above the agreed price belongs to the buyer!

There is a specific legal document used for selling a house on vendor finance and it’s called an instalment contract. It is drawn up by lawyers and consists of a Contract For Sale and a Mortgage Document as the buyers have a P & I loan with the vendor. Both parties require lawyers and contracts are exchanged after both parties sign.

It is all done through lawyers. Unfortunately many lawyers don’t know about it! I recommend you go to http://vendorfinancelawyer.com.au if you’d like to know more about this process.

If I may clarifiy Point#4 in your origiinal post, Bob, you mean possession happens quicker! Settlement doesn’t happen at all as the buyer has a mortgage contract with the vendor and the property won’t actually settle until that mortgage is paid out . That will occur when the buyer either refinances to a bank and pays out their original mortgage totally to the vendor, or sells the house (they do have this right).

Because of this,the buyer’s lawyer takes out a caveat on the property to safeguard their interest.That’s why they need to have a caveat as the title will still remain with the vendor until this happens.

I hope this clarifies the legal issues.

We have a vendor finance business where we help homebuyers who can’t get bank loans buy houses by leveraging off investors who can get bank loans. We do JVs with these investors who finance and hold the title until the new homebuyer can get refinanced by the bank. We do mark up the properties by 20% and the interest rate by 1% and we tell our homebuyers this. They know what we paid for the property. We even tell them that they are being financed by investors who can get a bank loan and who expect a return on their investment.

The new homebuyers are grateful for the opportunity and we work out beforehand exactly what mortgage payments they can afford so they know what price range to look in when they go house hunting. The investors are happy also as they get immediate positive cashflow from their investment.

So it truly is a win-win situation.

All the best,

Tamar Goldstein

http://innovativerealestateinvestments.com – for investors
http://youfindit-wefundit.com – for homebuyers.