What are the risks

[skater]

I have a property that is for sale & have been offered full asking price, but with me to carry a second mortgage for 20%.

What are the risks in agreeing to do this? How long should it go & how do I go about it? What happens if they default? How do I protect myself? Do I need special software & send out statements? Do I need a special Solicitor to set it up? What happens if, prior to settlement they pull out & they haven't got any of their $$ committed to this deal?

So many questions & I haven't really sat down to think about it yet.

Surely the combined wisdom of the forum can answer these questions & more.

 

[evand]

If theres a chance you will sell it to someone who's willing to pay full price, why bother with the hassle? Just say no.

I wouldn't bother regardless. For what reasons would you consider it?

 

[softmonkey]

so buyer gets 80% from bank and 20% from you does that set of any alarm bells? i think you would be entitled to find out more about their income and assets at the very least

 

[skater]

For what reasons would you consider it?

Suffice to say there are reasons that make this attractive. I just want to know what the downsides are.

 

[skater]

i think you would be entitled to find out more about their income and assets at the very least

Obviously that will be one of the criteria to consider.

 

[Raddles]

HI there
do you have a solicitor or conveyancer acting on the sale?
If so they could prepare the mortgage or caveat documents required.
Perhaps review your last loan application and see the questions that were asked of you and ask the same of these people.
The terms are negotiable - and should reflect your preferences - if you envisage you will need the 20% in the foreseeable future - have some form of bring forward notice which will require the purchaser to refinance your interest after a reasonable notice period.
I must admit I have only ever done this in family situations but have acted for clients who have been prepared to do the vendor financing. There was a relationship with the parties in those circumstances which mitigated the risk.
thanks

 

[skater]

Are there any more opinions on this. Someone must have done one of these? Of all the experienced people on the forum, there has to be at least one person that can give me some more info.

 

[Bradsdad]

I'd be asking myself the question "why do they need vendor finance?"
In my experience it's very unusual for someone to be looking for vendor finance in a residential property.
Answers to this question may be one of the following:-

They don't meet the serviceability requirements to borrow 100% of lenders who offer this facility.
They may be taking out a 80% Lo-Doc and/or credit impaired loan and cannot source the 20%.

Answers to both these would be a concern should you be looking at providing 20% finance yourself.
The appealing point is that you could charge them 10-12% in interest which is a fair rate of return. You would also charge the set-up costs associated with it and ensure he/she/they provide an up to date Baycorp check for you.
Another thing to be considered is will the 1st mortgage holder allow a 2nd mortgage/caveat. Even if they will, if they are receiving repayments will you be able to foreclose if required?

With the loan products available in the market nowadays it seems a strange request by the prospective purchaser. There are 100% lend products (107% even but I wouldn't touch these with a barge pole) and EFM products that a suitable borrower can source.
Personally I'd be giving this a wide birth or get your RE to have the purchaser see a MB to sort their @#$% out.

Finally, it interests me that you make mention of "have been offered full asking price". How long have you had the property on the market? How close is the next best offer?
Is the asking price that excessive that "have been offered full asking price" is that appealing to go through all this? If so then obviously the buyer hasn't done that much home work. This being the case and with the other possibilities mentioned above, why on earth would you consider it?

 

[Rolf Latham]

HIya

I find it a common strategy.......................for people trying to get into an expensive deal,or for those borrowers who have trouble getting loans > than 80 % LVR

Core issues are.

1. First mortgagee must provide you with a deed of prioriry, otherwise if the borrower doesnt pay you, but pays the bank, then you are sitting powerless.

2. The choice of funders is very limited

ta
rolf

 

[skater]

Thanks Rolf, that's the kind of thing I'm looking for. Would I be best getting a monthly payment or capitalising it at the end of, say, 12 months? How long do the vendors usually carry the second mortgage for & what lenders are happy with this sort of deal?

 

[Bradsdad]

My appologies for not being specific with lenders or covering the question in my post but I thought I had.
I don't know of any of the top of my head that will give you a deed of priority but maybe someone has come across one.
I find in interesting that Rolf comes across this a fair bit as in over 20 years I haven't one for a RESI loan. Commercial is a different matter. What suprises me more is a solicitor I was speaking to says it's a rarity that he comes across it. Maybe I've got to get out more

 

[Token Funder]

Sounds like your potential buyer could look at a shared equity mortgage. That way someone else takes the hassle/risk of the second mortgage but you still get your sale.

 

[Bradsdad]

Sounds like your potential buyer could look at a shared equity mortgage. That way someone else takes the hassle/risk of the second mortgage but you still get your sale.

Yep but I'm guessing they may not be willing to share in the potential growth.
Sounds like the potential buyer wants his cake and to eat it too.

Probably a common theme

 

[asdf]

It was a strategy I looked into when the market was flat but even then agents weren't interested in the complexity and lenders surely aren't up to speed with it. Sounds like the buyers just read how to leverage Other People's Money 101. The bank will probably not be bothered to sign a deed of priority with you due to the hassles. To protect your interest, you need to be registered as a 2nd mortgagee in the CT. It will still be kept at the 1st M'gee vaults though. In the event of a foreclosure, I would say it would be buckleys chance of you seeing any money after the bank is paid out as they would be on 80%. The buyer will also want to shield this 2nd mortgage away from the bank's knowledge as the terms of the vendor financing arrangement will be used to calculate serviceability. From your perspective, you want them to know so you can get on the CT. A bit of a catch 22 really on that part.

As for the terms of the vendor finance, just negotiate something that would work with the purchaser. I wouldn't do this unsecured though cos upon a default (with you), theres not much you can do at all until he defaults with the 1st mortgagee. The additional loan agreement should be drafted by your solicitor but paid for by the vendor.

You could try a wrap maybe? so you don't relinquish title but theres been a lot of discussions recently on wraps re Trade Practices Act and licencing issues..etc.. Good luck!

 

[Ausprop]

well if your asking price was optimisitic in the first place you aren't risking as much anyway. tell them you want 5% over, so your exposure is negligible, then take a chance!!

 

[ugachuka]

Ugachuka

Hi Skater,

Possible downsides are
- This client has another contract over the property at the price he's purchased it for but will not settle until 2 years.
- In doing this, he gives them a rent to buy scenario, where their rent(inflated) will cover predominantly all costs involved even your loan.
- At the 2 year period, the clients can then settle but have the benefit of Capital Growth over the last 2 years & the buyer you currently have, benefits from the profits of your reduced vendor finance loan without him having to pay 1 cent into the deal.

This is one of the Vendor Finance deals that property investors are specialising in. Especially in Sydney due to the niche market.

 

[Perp]

I've not been a "giver" of vendor finance so I'm afraid I can't give Skater too much advice on that front, sorry. But definitely do talk to your solicitor and ensure your interests are protected. I believe it's possible to protect yourself via a second mortgage and/or a caveat (at least in QLD).

But I do wish to address why buyers with good credit and in strong financial positions may want to obtain vendor finance. We have all our equity tied up in other properties, but we have very strong cashflow and servicability and want to expand our portfolio.

If I borrow 100% I pay, say, 2.5% LMI, plus an extra 1.5% in interest on the whole balance. So if I only need the "extra" 20% for 1 year, borrowing 100% rather than 80% costs me an extra 4% of the whole deal, which equates to paying 20% interest on the 20% deposit. And at the end of 12 months I'm in a high-interest product, that I'd have to pay significant penalties to refinance.

I'd rather borrow 80% on a competitive product that I plan to stick with long-term, then borrow the remaining 20% from the vendor, and even if I pay them 20% interest I'm better off because I'm not "stuck" with the 100% LVR product going forward.

 

[Perp]

PS: Skater, if you're providing, say, $100K in vendor finance at 12% interest, then instead of getting $1K per month in interest plus $100K at the end, I'd be tempted to increase the contract price and get $112K as a "balloon payment" at the end - then you pay CGT rates on the $12K rather than income tax rates (on interest).

Not a huge deal, but every bit helps...