All Topics / Creative Investing / Trying to get my head around Vendor financing

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  • Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    And I was the one who negotiated it! 

    There is a block of land that is already on two titles, we want to cut it in half again giving us 4 blocks of land to sell. I could do it through the bank but as part of the negotiations I threw in the option of vendor finance. The agent has just got back to me and said that the vendor would be happy to do vf at 2% higher than the RBA and a higher selling price. I spoke to my broker about this and he was pretty shocked at how low that was and said I should go for that instead of mucking around with the banks. 

    Before I call the agent back to make sure it was the RBA he meant and not the major banks, I need to know what it all means. 

    Heres the breakdown:

    4000sqm block on the market for $330k,

    Option 1: negotiated down to $280k if unconditional contract with 30 day settlement.

    Option 2: VF on the table at 5% (?) purchase price $295k

    If we do the VF it will be for about 12 months to allow for the subdivision, then we would sell the blocks and pay off the vendor. What would we be paying him per month?

    Profile photo of TerrywTerryw
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    @terryw
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    What do you mean by Vendor Finance?

    Installment contract would mean you would not get title, generally, until you pay him in full.

    Borrowing the deposit would mean you still need a bank loan.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    I don't know. Which would be better? What would the costs involved be for an installment contract vs getting a deposit? I could pull a deposit together pretty quickly if I needed to. Would really like to get this rolling tomorrow.

    Profile photo of TerrywTerryw
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    @terryw
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    Sounds like you need to do some serious research and quick.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of dlsstooshoes2dlsstooshoes2
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    @dlsstooshoes2
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    Is the profit there? That's the question that needs to be asked. Really isn't that what it all comes down to, for the deal to work the numbers need to be there. Does the research and due diligence show that the prices you think you will get are realistic.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    As Terry mentioned you wont get Title to the property until the balance is paid so not as easy to control the deal.

    Get your Broker to negotiate a second mortgage carry back.

    Lot more flexibility.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    The profits are definitely there. I'm worried that I won't be able to subdivide and sell the individual blocks if I don't have the title. Will look into the second mortgage carry back, thanks Richard!

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    I understand the concept when applied to a house, just not as a strategy for developing land. Especially when I want the entire deal finished (ie, all blocks sold) before I pay the vendor out.

    Profile photo of FacilitatorFacilitator
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    @facilitator
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    Talk to a surveyor first to ensure you can subdivide, that would be my first step.

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    All dd has been done. This is a good, sound deal. Just need to work out how to utilize VF (and if it is even worth it). Can I use VF to develop a block of land, paying any remaining money after all blocks are sold? 

    Profile photo of TerrywTerryw
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    @terryw
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    MosicLandscapes wrote:
    All dd has been done. This is a good, sound deal. Just need to work out how to utilize VF (and if it is even worth it). Can I use VF to develop a block of land, paying any remaining money after all blocks are sold? 

    Y

    es it is  possible. Just borrow the deposit from the vendor. He will want to take a second mortgage over the land but titles can be transfered into your name. You can arrange to pay him in several ways – IO or PI or a one off payment on your subsequent sale.

    Once you have found a buyer the vendor will attend settlement with you and your new purchaser will make out a cheque to him and a cheque to you. He will hand over a discharge of mortgage and that will be it.

    Some points

    It may be very hard to find the 1st mortgage lender who allows this.

    It would be easier if you just avoided the vendor financing bit altogether if you can.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    Thanks Terry, talked to a VF lawyer – said all the same things you just said then but made it sound really easy. I'm not so sure.

    Just put an offer in with a subject to finance clause in, going to avoid the VF for now. Much easier just to have control of this one ourselves from the get go. Will maybe look into vendor finance when I am the vendor lol. Thanks for you help everyone.

    Profile photo of Paul DobsonPaul Dobson
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    I've come in a bit late on this one but I would have been tempted to suggest a short term Instalment Contract (1, 2 or 3 year or whatever you need), with a balloon payment at the end.  Beside that I would have put in place a short JV Agreement with the Vendor, for the purposes or outlining the plan, i.e. to subdivide the blocks and sell them.

    In NSW Tony Cordato could have got this done for you pretty quickly and in Vic, Lewis O'Brien.  VF savvy solicitors for others States can be found at:  http://www.vendorfinancelawyer.com.au/vendor_finance_specialists.htm

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of MosicLandscapesMosicLandscapes
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    @mosiclandscapes
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    Thanks Paul, that's the second recommendation for Lewis I've had today. Will file his contact details away for next time (which may not be far away). Tony was who I spoke to this morning and was extremely helpful even though the deal is in Vic.

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