Vendor finance

[spludgey]

How do people actually go about finding vendors that are willing to finance part of a purchase?

I'm currently running low on a deposit after my last purchase, so I thought I'd investigate this a bit further. Ideally I would like to purchase a property, get an 80% bank loan and get vendor finance for 25%.
Do I just start making offers with this clause in it?
How do banks generally respond to contracts like that? Are they more likely to reject an application like that?

Are there any pitfalls that I'm not thinking of?
What terms are reasonable to request for finance? Would 5.5% over 5 years be appropriate?
Are there any pitfalls that I'm not thinking of?

 

[Peter_Tersteeg]

I've had a few clients negotiate these types of contract pre-GFC. It was difficult to get finance for the 80% back then, now I imagine that it would be next to impossible with the mainstream residential lenders and very difficult with the non-conforming lenders.

The biggest pitfall of the deal is in the exit strategy. In a lot of cases, the property didn't increase in value by the time the vendor was expecting to be paid out.

The people doing these types of deals generally offered about 0.5% higher than the standard variable rates of the banks - about 6.4% at the moment. They were able to find these deals by looking at a lot of properties, making a lot of offers. They were also in flat markets with vendors who wanted to sell but were unable to find buyers. This may have led to the purchase of sub standard properties/locations, which led to them often not getting the growth they anticipated.

 

[HLE]

The biggest pitfall of the deal is in the exit strategy. In a lot of cases, the property didn't increase in value by the time the vendor was expecting to be paid out.

I couldn't agree more. People often come to us expecting to be able to refinance out of a vendor finance agreement and there is no equity, a high LVR and in some cases other problems with their income or credit history.

They didn't look at their exit strategy up front. If you look at your exit strategy now then you will be in a much better position in a few years time.

You can get a non-conforming lender to approve an 80% loan for these as long as the valuation stacks up. The valuer will consider that the vendor is lending you a large deposit and if they have put the price up to accommodate for this. In many cases this means the valuation comes in low and the deal falls over.

What I am trying to say is that if you are a great negotiator then you can possibly make it work, however more likely it will not work.

Look at other options such as low deposit loans, releasing equity from your current properties or your parents guaranteeing your loan (all have their own pros and cons) before you go down this path.