So what is Vendor Finance?
Vendor finance is the term given to any property transaction where the vendor (seller) provides some of the finance (loan) on the property at the time of sale. There are many ways of doing this and probably new ways being developed even now.
The benefit to the buyer is that they won’t need to have full bank finance to get into their property. In some cases the vendor will provide all the finance and so the buyer doesn’t need to qualify for a bank loan at all. This can be useful if the buyer has had a bad credit rating and getting finance is more difficult for them.
The benefit to the seller is that they may be able to sell their property more easily, or at a higher price, if they can find people who want to buy but would otherwise be prevented from doing so due to the cost or inconvenience of traditional bank finance.
Property investors can also use vendor finance to secure property with little or no cash. Obviously this can be a very desirable skill to have! In some cases a property might be able to be renovated and sold, using vendor finance and in this case the investor never has to actually buy the property.
Examples of vendor finance deals include: Rent-to-own (Lease Option), Wrap (Installment contract), Sandwich Lease Option, Vendor Carryback.
Rent to Own
A Rent-To-Own involves two legal documents – one is the lease, and the other is called an “Option” which gives the buyer the right but not the obligation to buy the property in a certain timeframe, at a pre-arranged price.
This means that the buyer can rent the property in the knowledge that they have first refusal to buy until the option period ends, and that the owner cannot sell to anyone else. They are effectively renting their own home (but that they haven’t bought it yet).
This can be a very good technique for selling a property to someone who will qualify for finance in a few years but just cannot yet.
A Wrap is a situation where a property is sold to the buyer, however the seller keeps the mortgage and then “wraps” a second mortage around the first, which the buyer slowly pays off. The buyer won’t gain title until their mortgage is paid off.
This system provides cashflow for the seller and gives the buyer a chance to get into a house that otherwise they might not be able to, if they don’t qualify for standard bank finance. In essence, the seller is acting as a bank, providing a mortgage to the buyer.
Sandwich Lease Option
A Sandwich lease option is a set-up where two lease options are used, one by the investor to secure the property as an investment, and another by the investor to “on-sell” to the buyer.
This way the investor can secure a property without needing to buy it and can then on-sell to the buyer, without ever gaining title themselves. After a set period, both options are exercised and the buyer will buy the house from the original seller.
Vendor Carry Back
Finally a “vendor carry back” is a situation similar to a wrap, except that the vendor will provide a loan on a percentage of the property, rather than the whole mortgage. E.g., a vendor might “carry back” 20% of the purchase price, allowing the buyer to get 80% finance from a bank, but without needing to come up with the deposit money.
There can be a few constraints to this, however the system can work well to help people without substantial deposits get into a house.
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