Selling a poorly performing IP with Vendor Finance

Hi

In the recent past I've noticed a increase in the number of people 'having a go' at selling a poorly performing IP with vendor finance. There are some important compliance issues involved in this process, so I've started a newsletter to help cover these issues. It's called N2P News, short for negative2positive News.

I've posted the contents of the first issue below. It has a bit of self promotion at the bottom so 'mods' please feel free to edit as necessary. I hope it's helpful.


In the current market many investors are looking to convert their investment property from negative gearing to positive cash flow by selling with vendor finance (VF). Interestingly a lot of investors have decided to undertake this VF sale on a ‘do it yourself’ (DIY) basis.

Selling your own property with VF normally involves a Lease/Option (Rent To Own), an Instalment Contract or Deposit Finance. Lease/Options are regulated by the various State Residential Tenancy Acts. Instalment Contracts and Deposit Finance are regulated by the National Credit Code.

Selling with VF can be divided into three sections:
1. Marketing & Qualifying,
2. The Legal Paperwork, and
3. On-going Management.

Most DIY’ers are getting the Legal Paperwork done exceptionally well by our excellent VF specialist solicitors ;-) but some are forgetting about their compliance requirements in sections one and three.

Marketing & Qualifying

When marketing a property you own, for sale with a Lease/Option, you need to make sure you abide by the Australian Consumer Law and don’t make false or misleading claims and/or statements.

When marketing a property you own, for sale with and Instalment Contract or Deposit Finance, you need to make sure you abide by Australian Consumer Law and the National Credit Code (NCC).

On-going Management

When managing a lease on a property you own that you’ve ‘sold’ with a Lease/Option you need to abide by your State’s residential tenancy laws. As with standard residential tenancies, some landlords self-manage and some outsource the management to a licensed property manager.

When managing a loan that results from an Instalment Contract or Deposit Finance arrangement, you need to abide by the National Credit Code. You, as the title holder, are the credit provider and may manage the loan yourself (in accordance with NCC requirements).

However, if you wish to outsource the management of this loan, you must choose a management company that operates within the requirements of an Australian Credit Licence.

Two easy ways to help with your Marketing & Qualifying and On-going Management are:
- The Vendor Finance Institute sells their NCC Application Pack (Click Here) and their Qualification Pack (Click Here)
- Vendor Finance Management Pty Ltd provides loan management services for both Instalment Contracts and Deposit Finance. Click Here to visit VFM.

In coming editions of N2P News we will cover the requirements of both the Australian Consumer Law and the National Credit Code, including information regarding Australian Credit Licence coverage and whether your transaction is being undertaken 'in the course of a business'.

Cheers, Paul
 
if i was to VF a block of land thats not income producing would it then be classified as an income producing asset and be tax deductible?
would i have to claim the income if it wasnt tax deductible?
 
Hi Bman

I'm not an accountant so take the following with a pinch of salt and check with your relevant professional ;-)

If you sell the block of land with an Instalment Contract it is likely the transaction will generate positive cash flow and will therefore be viewed as an income producing asset. Therefore the costs of generating this income should be tax deductible.

However positive cash flow normally equates to profit, so you have to declare the profit in your tax return. In my view, definitely a job for a good accountant ;-)

Cheers, Paul
 
Our solicitor charges us $1,200 to draw up the Instalment Contract and act for us to get the contract 'exchanged'.

Cheers, Paul
 
Hi Dave

If they've got the lawyers to draw up an Instalment Contract (IC) that's fully compliant with the NCCP Act 2009, more power to them. Currently there's only really one solicitor in Victoria that draws up IC's on a regular basis, so another entrant into the market place can only be a good thing for the vendor finance industry. Thanks for the information.

Cheers, Paul
 
I was interested to note there was a full double page spread on this exact strategy in the latest Money Magazine and they managed to not use the term "vendor finance" in the entire article. I think they referred to it as the "negative gearing turnaround" strategy.

Maybe the term "vendor finance" has negative connotations that they wanted to avoid??

Regards,

Jason
 
And some of their advertisers may not be too keen to see vendor finance become too mainstream :)

Cheers, Paul
 
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