Wish I had more deposits for beach bargains
- Thread starter Propertunity
- Start date
Hi Mark,
No to both Q's: haven't answered b4 or tried vendor finance (ever).
How do lenders view a low doc application where you are leaving 20% of the vendor's money in the deal?
The vendor finance conditions can form a separate contract to the purchase contract. You should of cause advise the lender of all your liabilities under disclosure but it should not necessarily prejudice your application for finance. At settlement cheques are still simply exchanged.
Should you find such deals then it would appear your only cash issues would be stamp duty and legals + holding costs. Which again you might be able to work something out with the vendor.... if their open to such deals.
Mark
whilst not actually completing any. I have had a fair bit of luck with beach house vendor terms, trades etc. I nearly had a guy at $1m vendor finance - thankfully he didn't take it as it has probably dropped by all that and more now! Stamp duty is the killer in these deals
I could handle the stamps at $20K - not an issue really.
But how do the mechanics of vendor financing 20% of the purchase price actually work - need more detail than "cheques are merely exchanged at settlement" please Mark C
But how do the mechanics of vendor financing 20% of the purchase price actually work - need more detail than "cheques are merely exchanged at settlement" please Mark C
Back up a bit:
The thing about markets though is that perceived value can vary plus or minus 10% between informed participants and utility value can vary even more, but that doesn't come into play with an IP. If it can be rented out by you it can be by someone else.
I know you have since changed "worth" to "market value" but as an old shell-back, I'd define "market value" as what someone's willing to pay for it. The early bird can definitely pick up something below market value from a motivated seller, but once it's been on the market for a while the chances diminish greatly.
The thing about markets though is that perceived value can vary plus or minus 10% between informed participants and utility value can vary even more, but that doesn't come into play with an IP. If it can be rented out by you it can be by someone else.
That is mostly true Sunfish. However, I've noticed that after about 3 - 4 months on the market and not selling, the REA's put it into a basket of "no-one will ever buy this place" and stop showing it or being enthusiastic about promoting it. It goes "stale" which is silly really becuase it is the same property that is was 4 months before. Meanwhile some vendors get very motivated at this stage and bargains can be had (again).
Your comments about market vaule, worth, perceived etc are quite true - it is all in the eye of the beholder.
I could handle the stamps at $20K - not an issue really.
But how do the mechanics of vendor financing 20% of the purchase price actually work - need more detail than "cheques are merely exchanged at settlement" please Mark C
You have an agreement drawn up with the buyer that covers the terms of the loan. eg. interest rate, interest only maybe for x years, full repayment due on x date, security, etc.
Your settlement agent or solicitor will take this into consideration when requesting cheques to be drawn up for settlement.
Negotiating with a very motivated vendor might start with the question "How much do you NEED?". What they need may be different to what they want and could just also be less than 80% LVR, making the transaction even easier for you to put together.
Mark
Thanks for that Mark
I prefer to use numbers to make things clear and leave no doubts.
So say for eg. the property is sold for $500K with 20% vendor finance.
So you borrow $400K (IO) from the bank at whatever rate the bank is lending (eg. 6%) and negotiate the terms of $100K (20% VF) with the vendor.
Let's say you negotiate with vendor at fixed rate of 6.5% IO for 2 years and at the end of 2 yrs you settle the due amount of 100K. Does that sound reasonable and real?
1) Who keeps the property as security? The vendor or the bank? I would think the bank?
2) What do the banks think about the whole deal? I mean at the end of the day the bank knows you do not have 20% deposit and have gone the VF route to fund the 20% deposit. So technically, you have borrowed 500K (Full loan amount) and need to service both loans (400K @ 6% and 100K @ 6.5%)
The only benefit I see is you save LMI costs. right??
3) What happens if you defaulted? How does the vendor get his 100K back?
Sorry, if I have completely misunderstood the Vendor finance concept. But I am trying to understand how does the 3 party deal (you, vendor and bank) actually works underneath. How the risks of both lending parties (vendor and bank) are managed. 2 party deals (you and the bank) are pretty straight forward.
Regards,
Oracle.
And that is true too ......
Oracle
Avoiding the extra costs of LMI would not be the reason I would do this type of transaction. The terms you negotiate with the vendor are totally up to you and the vendor, it may be interest only at normal bank rates or not, 1 year - 20+ repayment term. The vendor might register a 2nd mortgage over the subject property and possibly over others you own, or none, you might give the vendor your personal guarantee on the loan or not, it's up to you. If you default then depending on your agreement with the vendor it may trigger the property to be liquidated.
The first mortgage is registered over the property by your chosen bank eg. NAB, as long as you abide by the NAB loan terms then they should not have any issue with you borrowing 100% of the value. Remember as the bank is the 1st mortgagee they get first chop if it all goes south, the 2nd mortgagee gets the remainder. You would probably borrow the deposit from equity in another property making the purchase 100% funded from borrowed dollars any way.
I would suggest arranging the purchase through a Pty Ltd and avoiding personal guarantees on the 2nd mortgage. In the event the purchase heads south and you cannot repay the 2nd mortgage under your agreement, and the property is to be liquidated then the first mortgage still has a good chance of being paid and you wont be accountable personally for the 2nd mortgage. ie potentially not face bankruptcy if the deal turns sour.
Your risks are paying holding costs and repaying loans as agreed with both banks. Plus regular owner issues with tenants etc.
The risk to the vendor is you will not be able to repay the loan and they are forced to take action to recoup costs. This will cost them money to accomplish and depending on where the market is they may not be able to cover costs by liquidating the subject property. But in today's climate this might be an acceptable risk to many vendors.
This is a perfectly straight forward 3 party agreement between you and two funders, it is regular business in the property developing industry.
Mark
Avoiding the extra costs of LMI would not be the reason I would do this type of transaction. The terms you negotiate with the vendor are totally up to you and the vendor, it may be interest only at normal bank rates or not, 1 year - 20+ repayment term. The vendor might register a 2nd mortgage over the subject property and possibly over others you own, or none, you might give the vendor your personal guarantee on the loan or not, it's up to you. If you default then depending on your agreement with the vendor it may trigger the property to be liquidated.
The first mortgage is registered over the property by your chosen bank eg. NAB, as long as you abide by the NAB loan terms then they should not have any issue with you borrowing 100% of the value. Remember as the bank is the 1st mortgagee they get first chop if it all goes south, the 2nd mortgagee gets the remainder. You would probably borrow the deposit from equity in another property making the purchase 100% funded from borrowed dollars any way.
I would suggest arranging the purchase through a Pty Ltd and avoiding personal guarantees on the 2nd mortgage. In the event the purchase heads south and you cannot repay the 2nd mortgage under your agreement, and the property is to be liquidated then the first mortgage still has a good chance of being paid and you wont be accountable personally for the 2nd mortgage. ie potentially not face bankruptcy if the deal turns sour.
Your risks are paying holding costs and repaying loans as agreed with both banks. Plus regular owner issues with tenants etc.
The risk to the vendor is you will not be able to repay the loan and they are forced to take action to recoup costs. This will cost them money to accomplish and depending on where the market is they may not be able to cover costs by liquidating the subject property. But in today's climate this might be an acceptable risk to many vendors.
This is a perfectly straight forward 3 party agreement between you and two funders, it is regular business in the property developing industry.
Mark
I have one question in relation to vendor finance.
Say you get vendor finance at 5% fixed IO on 20% deposit for 3 years.
That would mean you need to come up with 20% deposit amount at the end of 3 years. How do most investors get around accumulating the 20% deposit?
Because at the end of the day if the vendor solves your problem of deposit and tenant for interest payments plus a bit more making it a cashflow positive deal. You can go for high value deals (in millions). But 20% deposit amount of those millions is going to be a very large amount to come up with in short period like 2-3 years.
Cheers,
Oracle.
Say you get vendor finance at 5% fixed IO on 20% deposit for 3 years.
That would mean you need to come up with 20% deposit amount at the end of 3 years. How do most investors get around accumulating the 20% deposit?
Because at the end of the day if the vendor solves your problem of deposit and tenant for interest payments plus a bit more making it a cashflow positive deal. You can go for high value deals (in millions). But 20% deposit amount of those millions is going to be a very large amount to come up with in short period like 2-3 years.
Cheers,
Oracle.
Yes, oracle I was thinking that same thought. My guess is that in the overall scheme of things, the 3 years has been enough for the property to grow in value and you refinance the vendor's money back out of the property with a traditional lender.
In the current environment that might be seen as a bit of a risk to rely on CG but I'd be happy with say 8 - 10 year vendor finance terms for CG to return to trend.
Oracle,
You still need to come up with the vendor finance at some point, your strategy could simply be to liquidate the property in 3-5 years time under more favorable market conditions and pay the vendor out and pocket any profit.
You might be able to add value through a DA, renovation, or simply refinance the vendor out if the property has enough capital growth as already stated by Propertunity. The vendor might get used to the interest your paying and want to continue the arrangement for another x years.
However It's important you limit your risk by protecting yourself against any liability should you not be able to pay out the vendor finance under the terms you negotiate. Have an exit planned for worst case before you start.
The most important part of the plan is the exit, it's where you make the money.
Mark
You still need to come up with the vendor finance at some point, your strategy could simply be to liquidate the property in 3-5 years time under more favorable market conditions and pay the vendor out and pocket any profit.
You might be able to add value through a DA, renovation, or simply refinance the vendor out if the property has enough capital growth as already stated by Propertunity. The vendor might get used to the interest your paying and want to continue the arrangement for another x years.
However It's important you limit your risk by protecting yourself against any liability should you not be able to pay out the vendor finance under the terms you negotiate. Have an exit planned for worst case before you start.
The most important part of the plan is the exit, it's where you make the money.
Mark
The numbers tell the story.
The growth in real terms since this post (and many years) was sweet FA.
31 Jul 2003 $670,000
16 Aug 2013 $580,000
10 Dec 2012 BUY NOW $375K-$405K OR AUCTION.
29 Jun 2013 current $375K-$399K
22 Oct 2008 Unknown $580,000
26 Jul 2013 Unknown $605,000
21 Dec 2010 Unknown $522,500
18 Jul 2013 Unknown $513,000
10 Dec 2003 Unknown $510,000
12 Jul 2013 Unknown $550,000
24 May 2002 Unknown $550,000
4 Jul 2013 Unknown $645,000
19 Oct 2009 Unknown $488,000
11 Jun 2013 Unknown $508,000
4 Feb 2005 Unknown $434,600
6 Jun 2013 Unknown $505,000
The growth in real terms since this post (and many years) was sweet FA.
31 Jul 2003 $670,000
16 Aug 2013 $580,000
10 Dec 2012 BUY NOW $375K-$405K OR AUCTION.
29 Jun 2013 current $375K-$399K
22 Oct 2008 Unknown $580,000
26 Jul 2013 Unknown $605,000
21 Dec 2010 Unknown $522,500
18 Jul 2013 Unknown $513,000
10 Dec 2003 Unknown $510,000
12 Jul 2013 Unknown $550,000
24 May 2002 Unknown $550,000
4 Jul 2013 Unknown $645,000
19 Oct 2009 Unknown $488,000
11 Jun 2013 Unknown $508,000
4 Feb 2005 Unknown $434,600
6 Jun 2013 Unknown $505,000
