Conditions to Include in a 25% Vendor Financind deal

Hi all,

I'm in the process of finalising a creative deal to purchase an IP. I really need some help in filling up the Offer letter, especially to include financing terms.

The deal:
1. 25% vendor financed at 5% for a term of 5 years
2. Vendor pays the borrowing costs and the purchase pays it back to the vendor on settlement. (by borrowing 75%+ borrowing costs from a Lender)

Let me explain you the scenario with an example.

Purchase price: $ 500,000
purchase costs: $ 20,000
Vendor finance: $ 125,000 ( 25% of the purchase price)
Borrow from Lender: $ 395,000 (75% of the purchase price + purchase costs)

Can any of you please tell me how to write an effective and correct offer letter for such a scenario. I would like to know answers to the following questions;

1.What to put at the purchase price in the contract? (is it $500,000 or $520,000 as the idea is to borrow purchasing costs indirectly; would there be any legal issues in doing so?)

2. How to address the conditions for this case? Should I specifically write down all the values in the Offer letter or can I wait till the contract signing stage to go in to detail?

3. I have written up some conditions already

a.Subject to Finance.
b.Subject to Building approval.
c.Subject to vendor finance of 25% of the purchase price, at 4% annual fixed interest rate and a 5 year term.
d.Subject to vendor pay the borrowing costs, which will be settled by the purchaser on the settlement date.

Is this valid?

Please share your expertise in this regard with me.:)

Cheers
Don
 
Hiya Don

I tont know about the letter of offer, but I do know not many mainstream lenders will support vendor finance secured by second mortgage on residential terms.

Id assume you have cleared this bit with your choice of lender.

ta
rolf
 
Hi Rolf,

Thank you for the reply. What if I come to an agreement with the Vendor saying I will provide a personal guarantee instead of using the property as a security for the Vendor financed portion?

Do you think that would be acceptable?

Thanks
Don
 
Hiya

That would be easier for the lender in some ways. Many will still want to know where the funds to complete are coming from, and if you dnt have hurt money in the deal, they might not like the deal.

Also, as an aside, I note that you have buying costs factored into the Loan to valure ratio. Generally lenders wont allow buy costs to be included on the valuation because they dont form part of the asset base.

ta
rolf
 
Hi there,

All of what Rolf said and,

Do you really think 5% Interest for 5 years is a big enough carrot?

Does SA allow Stamp Duty to be paid on Settlement? In NSW it has to be paid before settlement?

Regards JO
 
Hi Rolf and JO,

Regarding the buying costs factored into LVR, what I'm doing is basically agree at a purchase price of $ 520,000 and get the Vendor to pay buying costs (in my explanation I tried to break it down to $ 500,000 + $ 20,000). I believe legally anyone can pay the buying cost in a deal, doesn't have to be the buyer (please correct me if I'm wrong). So in that regard I'm doing it legally yet using Vendor's money.

JO,

This particular property I'm looking at is in a developing area and its a set of units under one title with lots of potential. The selling price is bellow market value. At the moment I don't have much savings or don't have enough equity in my other properties to cover for borrowing costs and 5% deposit. Additionally, if it works the way I'm expecting, my holding costs would be around $3000/ year based on current yield. Considering all these, and opportunity cost wise I believe paying 5% fixed interest for next 5 years (when there is a potential that actual variable rate would be higher than 5.5% soon) will still make it a better deal for me.


Please let me know your opinions about this.

Cheers
Don
 
what are the chances the vendor would accept a price below market with 25% deffered for 5 years with a crappy interest rate?
 
Hiya Bel

probably slim, but I reckon that sort of thing is worth a punt with that sort of security .

I would not contemplate such a deal with a normal resi property.

BTW, the max lend likley if its a block is 70 % lvr if more than 4 units

Id do the homework on that side of the deal before you go to the vendo so u know what you need to stitch together

ta
rolf
 
This particular property I'm looking at is in a developing area and its a set of units under one title with lots of potential. The selling price is bellow market value.

Don - great candidate for vendor financing. Best of luck with the deal, and look forward to reading how it pans out.

cE
 
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