developers can profit from using vendor finance
This is a question property
developers often ask me:
We are currently selling 6 brand new townhouses. We have
managed to get good offers on 4 of the townhouses only to
have the buyer's finance fall thru because banks undervalue
the properties. Is there some way we can use Vendor Finance
by which we can ensure sales and that both the Vendor and
Buyer are happy?
This is my answer:
Your experience that bank valuers tend to undervalue new
properties in a new townhouse or home unit development is
Vendor finance is used to overcome this problem. It is
known as deposit finance or top up finance.
If undervaluation is the only problem, and the buyers
have unconditional loan approval, then this form of vendor
finance would work well to sell your townhouse development.
What is deposit finance?
It is a loan by the vendor of whatever amount is required
to bridge the gap between the funds the bank will loan and
the funds the purchaser needs to complete the purchase.
Here is how deposit
If the property is sold for $300,000, and the buyers are
approved for a 90% LVR loan, then the buyers will need to
have a deposit of $30,000. The actual amount the buyers need
will be: less the new home grant (if applicable), plus stamp
duty (if applicable), plus loan expenses (including LMI) and
plus conveyancing fees.
Let us focus on the $30,000 deposit. If the property
valuation is the sale price of $300,000, then $30,000 is
enough deposit. But if the valuation comes under the sale
price, then more deposit will be needed. For example, if the
valuation is $280,000, then the bank will lend 90% of that
value, that is, $252,000. So the deposit needed is $48,000
(i.e. $300,000 less $252,000) instead of $30,000. The buyer
needs deposit finance for $18,000.
What paperwork is needed?
Sometimes, this form of vendor finance is called a second
mortgage carry-back, because this the way that it is
documented. Specifically, the paperwork is a Loan Offer
which complies with the National Credit Code, a Mortgage and
a Caveat. Usually, the Caveat is registered on the title
instead of the Mortgage, because it is simpler to do so.
The borrower pays the cost of these documents, which is
generally $1,000, and includes the Caveat registration. If
you would like me to help with the documentation, let me
How is the deposit finance
The structure of the deposit finance varies. Most vendors
charge around bank interest - 5% pa fixed, and require
principal and interest payments. The principal and interest
payments can be calculated and the money is payable over 10
years. Some vendors are happy with a 10 year loan, while
others ask for a balloon payment at the 5 year mark.
Whatever structure is used, it should be signed off by a
mortgage broker to ensure that the buyers can afford it.
So long as deposit finance is used to sell your own
property, and so long as it is used occasionally, no
Australian Credit Licence is required because you are not in
the business of giving credit. You are in the business of
developing and selling property.
You do need to issue loan statements every six months,
and use the same procedures for default and hardship as all
lenders use under the National Credit Code.
Disclaimer: Because lenders assess borrowers differently,
and because each borrower’s circumstances are different, the
comments made in this newsletter are not to be relied upon
in specific cases.
The Investor’s Guide to Property Ventures has been
produced by Cordato Partners Lawyers, as part of its
Property Law practice. Our team will meet all your
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