Robert
Reply: 1
From: Mike .
The In's & Out's of Vendor Finance
From: Be glad to reply Pierre: From Robert
Date: 6/18/00
Time: 12:58:41 PM
Vendor financing is when you purchase a property using, usually 80% bank loan and you borrow the deposit from the developer. The usual breakdown of this is 20% financing from the vendor and 80% from a financial institution YOU need to come up with the cash to pay for all the legal fees and stamp duties Approx. 7-10%. (This helps for people with nil assets to enter the IP market without needing +20% for deposit and fees). Though with Vendors financing they usually make you go through a financial institution that they chose. (I was fortunate that the vendor financed with a good institution and I've now got a LOC for $160 000 to play with, though if I were to do this again I'd be more involved with the selection of Financing Institution (This is one thing I've learnt from my first IP)). The vendor part of the financing is usually at a higher interest rate (mine being 12% (OUCH!!)) which is IO for a period of 2 years and then is expected to be paid off in total.
Now the WARNING about vendor financing: You need to select the property a lot more closely, meaning you will need to gain a rather high amount of capital gain within the 2 year period so you can refinance your mortgage to pay off the vendor after the 2 year period is up. OR have the ability to pay the vendor financing amount off within this time period.
Another problem with Vendor Financing is because your taking 2 mortgages, Banks + Vendors you will be hit up for 2 lots of mortgage fees. This added $2500 to my bill. But I'm still happy cause I'm into IP's now and will soon have enough to start buying more.
In my case Vendor Financing was the only way I could get into an IP so quickly. I can save in excess of $30 000pa but have nil equity in any property as in my own home. So I am able to to pay off this Vendors financing rather quickly. ALSO the property I've purchased has already gone up in value by over 15%. So my little dilema now is to pay back the Vender Finance in the next 15 months (as I owe $40 000) and have a positive geared property giving me +$80 per week or refinance in 6 months and have a negatively geared property to the tune of approx $10 per week. I'm currently sitting on the fence with what to do... Need to do my figures a bit more.
I would only agree with going with Vendor Financing for anyone if you have a good cash surplus and/or have a property that will have large capital growth.
Hope this helps you out and gets you into an IP.
Regards Robert
