Positive Cashflow Property

Improve a Real Estate Property’s Return by Using Vendor Finance

About Vendor Finance

Vendor financing can be a great strategy to turn your investment property into a positive cash flow investment rather than a negatively geared cash drain on your financial resources.

The utilisation of a vendor finance arrangement, while capping the future potential capital growth of an investment, can be an effective strategy to generate a positive cash flow from a property investment.

Who Uses Vendor Finance?

Vendor finance was one of Australia’s main sources of residential property finance, dating back to the 19th century, until institutional lenders entered the market in a major way during the mid 1980s, and is a process by which the owner of a property extends finance to a buyer to purchase their property without the buyer having to obtain a loan from a financial institution.

The use of vendor finance for residential property decreased once mortgage finance was recognised as a major source of business growth by financial institutions.
The increase in property prices and the associated changes in lending criteria have seen a re-emergence of vendor finance in the residential property market, even though it has remained a common means of financing business purchases in Australia even over that time.

Before Using Vendor Finance

Buying a property using vendor finance provides a good alternative for people who can’t get a bank loan and is usually intended to be a transitional position until the purchaser’s are actually in a position to obtain a potentially lower cost finance arrangement.

When considering a Vendor Finance transaction it is important that all parties undertake an appropriate level of due diligence with respect to the capability of the buyer to afford the payments and to ensure that lending affordability guidelines are followed.

The buyer should also get advice as to the suitability of the arrangement for their circumstances, affordability, reasonableness of the pricing and terms of the agreements before making any legal commitment to a deal.

Why Sell Using Vendor Finance

Provided the due diligence is done, then the property owner will usually:

• Obtain an agreed and fixed sell price in the upper range of the existing market values for similar properties in that area at that time as they are making their property easier for potential buyers to purchase
• Generate a positive cash flow from the difference between what they are paying and that which their purchaser is paying them based on a private financing premium that may even still be more competitive than non-conforming alternatives for your buyer
• Have the satisfaction of knowing they are helping someone achieve their objective of eventually owning their own home
• The surplus income over and above all costs means the owner has additional income that may increase their borrowing capacity, so the more of these in their portfolio, potentially the more property they can buy.
• Gain time and cashflow to eliminate a Capital Loss should the property be worth less than the existing debt and be “underwater” at that time.
• Increased revenue certainty as the occupant of the property is planning on staying there for an extended period of time.
• Improved property maintenance and condition as the occupant is more likely to take care of the property and even make improvements to the property as they are intent on purchasing it.
• Avoid the expense of real estate agent commissions on the sale when their buyers eventually re-finance the purchase of their home.

Why Would Someone Buy Using Vendor Finance

Vendor finance arrangements provide a viable alternative for people who for some reason cannot obtain finance today for a property purchase.

Whether that is due to change in job circumstances, working for themselves, not enough approved savings, a past credit default or any other issue that denies them access to the what is now seen as the conventional approach to funding a home purchase.

• Freedom from Landlord Inspections and to have the ability to make the property their home as they would like it to be
• The opportunity to benefit from any property improvements they undertake.
  
• Lower Upfront costs as usually only 3-5% of the agreed purchase price is required as an upfront payment.
• Property purchase price is fixed at today’s market prices for the duration of the agreement
• Depending on the arrangement and Australian State no stamp duty may be required to be paid until they decide to refinance
• Purchaser’s have the Right to Buy but NOT the Obligation to Buy the property and they can exit the deal without the problems and costs associated with selling the property.

Vendor Finance Association of Australia

A Vendor Finance Association of Australia representative David Siacci recently outlined the importance of all parties to undertake an appropriate level of due diligence and ensure that lending affordability guidelines were followed.
“Rent-to-buy and vendor finance deals provide a good alternative for people who cannot get a bank loan,” Mr Siacci stated.
“Vendor finance is a fantastic way of transacting real estate for sellers and buyers, as long as it’s done with integrity,” he said.

http://vendorfinance.asn.au/misguided-reporting/

Want to Know More?

If you would like to know more about how to improve the cash flow from your property by using Vendor Finance then contact us at admin@webuyperth.com and title your email “More Information on Vendor Financing” as well as a brief introduction to what you would like to know.