Risk of offering Vendor Finance for Development Site?

[Renoir]

Hi everyone,

I am hoping someone can give me advice about Vendor Finance Options. I have a DA Approved Development Site in Brisbane that I want to sell.

I have owned this site for many years and don't have much of a mortgage left on it ($80K).

I have had a few builders/developers want to buy it but it always seems to fall down because they are unable to finance both the cost of the land and the build (apparently the banks are tight on lending on development sites at the moment or so I'm told). Or it might be because as development sites go it is a small scale development site (607sqm) so only smaller developers are trying to buy it so that may be the problem. The real estate agent wants to do a joint venture but I'm really not interested in doing that with someone I don't personally know.

So I was wondering if I should go down the path of offering Vendor Finance for the purchase price of the land. I am in no rush to sell as I don't need the money straight away so I would have no problem waiting up to 2 years for the purchaser to pay me out the balance of the purchase price of the site once the development is built.

Is there any real risk to me offering the site with Vendor Finance? Do you think this would be a good option for me (the vendor) since I am in no rush to sell?

Also can anyone recommend a lawyer in Brisbane that specialises in Vendor Finance in Brisbane.

Thanks in advance.

Renae.

 

[Terryw]

Yes.

With vendor finance you basically be lending the deposit to the purchaser then they will be borrowing the rest from a bank and the bank will take a first mortgage and have priority over you.

So if things go bad and the purchase stops paying his bank loan before he pays you off the first mortgagee, ie the bank, will sell the place and then there may not be enough to pay you after they have been paid.

There are other potential risks too, but this would be the main one.

 

[Renoir]

Yes.

With vendor finance you basically be lending the deposit to the purchaser then they will be borrowing the rest from a bank and the bank will take a first mortgage and have priority over you.

So if things go bad and the purchase stops paying his bank loan before he pays you off the first mortgagee, ie the bank, will sell the place and then there may not be enough to pay you after they have been paid.

There are other potential risks too, but this would be the main one.

Thanks Terry, if the bank gets first dibs that probably makes it a bit too risky a proposition for me. I don't think I would be brave enough to risk that.

 

[Aaron_C]

Don't forget the only thing at risk is the initial deposit. The remaining amount is given to you by the bank when you settle.

 

[Renoir]

Don't forget the only thing at risk is the initial deposit. The remaining amount is given to you by the bank when you settle.

Thanks for clarifying Aaron, I didn't realise that is was only the deposit that was at risk. I'm sorry but I really don't know how vendor finance works

 

[Aaron_C]

Thanks for clarifying Aaron, I didn't realise that is was only the deposit that was at risk. I'm sorry but I really don't know how vendor finance works

Yeah that's fine. Big difference

 

[mattnz]

Why don't you just do the small development yourself if there is enough margin in it, rather than selling to someone else who then makes the profit on it?

 

[Renoir]

Aaron can you please tell me very simply how Vendor Finance would work.

Does the purchaser...

A) Pay me a deposit (ideally the deposit would be $80K so I can could pay out the mortgage) and then they borrow the rest of the funds for the build cost. And they pay me the remaining cost of the land at project completion.

or

B) The purchasers buys the land outright from me and then I loan them back the money to finance the build?

Renae

 

[Aaron_C]

Vendor finance is for the purchase of the land itself - and has nothing to do with the subsequent construction finance. That is the bank's issue, and I suggest you don't get involved in providing construction finance because it's a very specialised area!

 

[Renoir]

Why don't you just do the small development yourself if there is enough margin in it, rather than selling to someone else who then makes the profit on it?

I'm a single, self-employed female, quite frankly I have found it all too stressful and I'm over it. Originally when I started this process (years ago) my Dad was going to build them for me (he is a builder) but he had a stroke and he can't do it anymore.

I know I would be much better off to go ahead and do it myself but I have decided that development is not really for me and my heart isn't in it anymore.

 

[Aaron_C]

Why don't you just do the small development yourself if there is enough margin in it, rather than selling to someone else who then makes the profit on it?

Because some people don't have the expertise, time, capital etc to do it and would just rather pocket the profit from the land itself.

 

[Renoir]

Because some people don't have the expertise, time, capital etc to do it and would just rather pocket the profit from the land itself.

Yes Aaron that is the category that I fall into, I purchased the land 13 years ago so I will still be a happy camper and will have made a decent enough profit on the land value alone.

 

[Terryw]

Aaron can you please tell me very simply how Vendor Finance would work.

Does the purchaser...

A) Pay me a deposit (ideally the deposit would be $80K so I can could pay out the mortgage) and then they borrow the rest of the funds for the build cost. And they pay me the remaining cost of the land at project completion.

or

B) The purchasers buys the land outright from me and then I loan them back the money to finance the build?

Renae

There are many ways to structure it, but generally you might only receive a % of the full price upfront and the rest over several years.

e.g. $1,000,000 land value

You accept a sale price of $1mil, with the purchaser giving you $800,000 at settlement and $200,000 over the next 5 years payable in monthly installments with an interest rate of 5% pa.

or

$800,000 at settlement with $200,000 in full on 21 Jan 2014.

etc

It is just like they are giving you $1mil and then you are loaning them $200,000 for the deposit. So, you would need all the standard contracts for the sale of land etc and then a loan agreement and probably a mortgage over the land to protect your loan. But your mortgage will have to come after the bank's mortgage (they won't accept otherwise).

Your dad may not be able to build, but it may still be possible to use another builder. Maybe he knows of someone and/or can assist with advise.

And females can be developers too.

 

[Aaron_C]

I'm a single, self-employed female, quite frankly I have found it all too stressful and I'm over it. Originally when I started this process (years ago) my Dad was going to build them for me (he is a builder) but he had a stroke and he can't do it anymore.

I know I would be much better off to go ahead and do it myself but I have decided that development is not really for me and my heart isn't in it anymore.

It's not an easy thing to do, especially if you have to borrow money from the bank to finance the construction. Stress from delays, unions, market conditions etc is not for everyone. I am doing one myself and I know what you're going through!

 

[Renoir]

There are many ways to structure it, but generally you might only receive a % of the full price upfront and the rest over several years.

e.g. $1,000,000 land value

You accept a sale price of $1mil, with the purchaser giving you $800,000 at settlement and $200,000 over the next 5 years payable in monthly installments with an interest rate of 5% pa.

or

$800,000 at settlement with $200,000 in full on 21 Jan 2014.

etc

It is just like they are giving you $1mil and then you are loaning them $200,000 for the deposit. So, you would need all the standard contracts for the sale of land etc and then a loan agreement and probably a mortgage over the land to protect your loan. But your mortgage will have to come after the bank's mortgage (they won't accept otherwise).

Your dad may not be able to build, but it may still be possible to use another builder. Maybe he knows of someone and/or can assist with advise.

And females can be developers too.

Thanks Terry that helps clarify it. I think I will just get the agent to advertise it with Vendor Finance as an option and see what comes of it.

And I know women can be developers too , it is more the self employed part that is problematic.

 

[Renoir]

It's not an easy thing to do, especially if you have to borrow money from the bank to finance the construction. Stress from delays, unions, market conditions etc is not for everyone. I am doing one myself and I know what you're going through!

You have my sympathy Aaron, I hope it all goes well for you

 

[Qlds007]

Must admit i am not sure which Street it is in Nundah but i certainly wouldnt ever consider selling the property with Vendor Finance which on a construction is fraut with danger.

What happens when the developer comes in, knocks the house down and starts to half build 3 Townhouses on the site. He gets to frame level, runs out of money and goes bust. You know have a construction site 1/4 of the way built and no way of onselling it.

You have 2 choices and both of them are costly.

1) Try and get it completed yourself although good luck in finding a Builder want to do someone else development with the usual risks.
2) Knock the thing down and start again.

Both are going to cost you time and money.

To be told developers cannot finance the deal is absolute rubbish even in the current climate.

Not sure what you are wanting for the site but i have been picking up sites for development in and around Brisbane for the last 15 years and anything that is the right price sells fairly easily.

 

[cu@thetop]

I've yet to see a vendor finance deal go smoothly- they usually end up in litigation. Can builder/developer offer some other security (ie his home) as 1st mortgagee?

2nd mortgagee is next to useless in these deals.

Why not pay the fee to extend DA and wait for better offers.

I'm sure you've already been innundated with PMs from Rolton style flippers/optioners covincing you that a $1000 option fee for 2 years is a good deal for you!

 

[Renoir]

Hopefully this will not be a option that I will need to consider afterall. The real estate agent rang me this morning and he has been running around all day trying to finalise a deal with a Chinese buyer......he has sold numerous sites to this buyer and he is expecting him to make a decision tomorrow. And apparently finance is not an issue for this buyer.

I have had to send him a plethora of information and he has spoken to the Architect and Certifier so it sounds very promising.

So fingers crossed!

 

[cu@thetop]

"Chinese buyer" - those words send tingles of joy followed by fear up and down my spine.

Yes- they have the money, but they didn't get that way writing cheques!

Enjoy the negotiation experience.

Hint: make sure the price has a few "8"s in it.