Forums / Property Investing / Creative Investing / Deposit Builder – a new vendor finance strategy

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  • Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    It's not often that a new vendor finance technique crops up but it has and here is some information about it.

    The new technique is called the Deposit Builder.

    In short, it's made up of a standard Contract of Sale for the State the property is in, along with:

    • in NSW, VIC and WA a Licence To Occupy.
    • in QLD, TAS and ACT a standard Residential Tenancy Agreement (Lease).

    Vendor finance specialist lawyer, Mr Tony Cordato, has been the driver behind this new technique and Tony has been kind enough to produce a two page information sheet on the Deposit Builder. To download it, CLICK HERE.

    I have no doubt it will cause some 'discussion'  ;-)

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
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    An alternative way to finance your home.

    Profile photo of oc1oc1
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    @oc1
    Join Date: 2012
    Post Count: 148

    Interesting, thanks Paul.

    What's your opinion on using this technique with newly developed property?

    Oscar

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Oscar

    I'm guessing it should work well, especially when coupled with eligibility for the FHOG.

    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 AndoAndo
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    @ando77
    Join Date: 2015
    Post Count: 9

    How does this work on a shorter term? as in, the vendor offers deposit financing to a purchaser who has been pre-approved for finance and negotiates the repayment of the deposit over an agreed term after the settlement takes place.
    what requirements would the lender (if any and who) need to satisfy that a deposit is being held/”paid” in order for the purchaser to obtain the finance?
    is it simply a binding contractual agreement between the vendor and purchaser additional to the standard sale contract for the repayments after settlement? and does the vendor have the right to oppose a second mortgage or caveat over the property, can they just be happy to have the repayment arrangement in place? is it ever possible for a vendor to waive or gift the deposit to a purchaser? silly questions probably, but i just want to know all the options available and that can be used.
    thanks in advance

    Profile photo of David SiacciDavid Siacci
    Participant
    @david-siacci
    Join Date: 2014
    Post Count: 17

    The Deposit Builder Strategy (“the Strategy”)
    by Lewis Obrien

    This article explores the merits of the Strategy and examines whether it is likely to be effective in avoiding the requirement of the National Consumer Credit Code (“the Code) that vendors in the business of selling residential real estate to consumers under vendor terms contracts (aka instalment sales agreements) obtain an Australian Credit Licence. Whilst some of the legal concepts are complicated, I have tried to explain them as simply as possible.

    I should make the point at the outset that lease option agreements (or rent to buy arrangements) do not typically involve interest being charged and therefore do not generally attract the operation of the Code or the need for an Australian Credit Licence.

    The Strategy

    The Deposit Builder Strategy was launched in 2013 as a solution for those investors who wished to sell residential property on vendor terms (aka instalment sales agreements) but did not have an Australian Credit Licence.

    The Strategy involves a property being sold under a standard contract of sale. Whilst the contract provides for a 10% deposit, this is paid in instalments over an extended period – say two years – after which time the purchaser is supposed to pay the remaining 90% with the assistance of a bank loan. The purchaser takes possession of the property shortly after the contract is signed under a Licence to Occupy. The purchaser pays a separate amount as rent under the Licence to Occupy.

    The promoters of the Strategy argue that no interest is being charged and the instalments due under the contract total a deposit of no more than 10% the Code cannot apply. Specific mention is made of Section 10 of the Code which provides that the Code will apply to contracts for the sale of land where the purchaser moves in before they get title and makes payments (other than a deposit of no more than 10%) without getting the title to the property. As no payments, other than the deposit, are made they argue the Code cannot apply.

    The Analysis

    The problems begin with section 10(3) of the Code which says that if the contract is subject to the Code section 10 doesn’t mean that it is outside the Code.

    Hence, we need to go back to basics. Under the Code, the test of whether interest is being charged is whether there is a charge for deferring payment of a debt. That is, if I allow you to repay the $100.00 you owe me in a month’s time there is no charge and hence no interest. On the other hand if I let you hang on to the $100 if you agree to give me $105 in a month’s time, then there is a charge for deferring payment and hence interest.

    In the context of the Strategy, it makes no sense to sell a house at today’s price on the basis that I get paid in two years time. It is implicit that I will set a higher price for the house, knowing that I won’t get my money for two years and / or that house prices may increase over two years. Hence there is a charge for deferring the payment of the 90% – being the amount by which the contract price exceeds the market value of the property. This means the purchaser is paying interest. For what it is worth, the fact that the 90% is payable in two years means that payment is deferred.

    Put another way, selling a property using the Strategy will usually involve charging a premium for allowing the purchaser to pay in two years – and hence the vendor is charging the equivalent of interest. If the vendor does this a number of times then the vendor is in the business of charging interest to consumers, is subject to the Code and needs an Australian Credit Licence.

    In words extracted from the Explanatory Memorandum accompanying the legislation when it was introduced to Parliament:

    “Section 10 applies the Code to sale of land by instalments contracts by treating them as credit contracts.”

    The Explanatory Memorandum makes it clear that the intent of section 10 was not to provide exceptions to the Code, but to expand the operation of the Code to ensure that terms contracts were subject to the Code. I note that the Victorian Supreme Court had already decided that the Code applied to terms contracts anyway.

    Other Arguments

    There are other reasons to think that the Strategy would not be effective in avoiding the need for an Australian Credit Licence.

    It is implicit in the Strategy that the vendor may need to bridge the gap when the contract is refinanced. That is, in two years when the purchaser needs to refinance the purchaser may not be able to obtain sufficient finance to pay out the 90% (plus stamp duty) the vendor will provide some sort of bridging loan. This loan might attract the operation of the Code (to the extent that interest is charged).

    A court may decide that the payments over two years fall outside the meaning of “deposit”. There is some statutory basis for the argument that a deposit is an amount paid prior to the purchaser taking possession of the property. That is payments made after the purchaser moves in may be found not to be part of the deposit.

    The Strategy suggests that if the purchase cannot refinance after two years the term of the deferral can be extended for a further period without reduction of the purchaser’s payments. However, if the purchaser has reached the 10% deposit ceiling, the purchaser is effectively paying higher than market rent for no direct benefit. A court may find this to be unconscionable and set the arrangement aside.

    In Victoria

    In Victoria, the Sale of Land Act provides that any contract where the purchaser takes possession prior to getting a transfer of title is a terms contract. A terms contract which runs for more than 90 days must require that the purchaser takes responsibility for the vendor’s mortgage. The Victorian Supreme Court has suggested that the mere act of taking responsibility for the vendor’s mortgage may be sufficient to attract the operation of the Code.

    You cannot contract out of the relevant Victorian provisions so this is another reasons why the Strategy cannot be effective in Victoria (to the extent the aim is to avoid the Code).

    Concluding Thoughts

    Given that the Code is what is known as consumer protection legislation the courts will favour approaches and interpretations that seek to expand the ambit of the Code (and the protection for consumers) rather than uphold technical arguments that seek to limit the scope of the Code.

    I do not believe that the Strategy is an effective way to avoid the need to obtain an Australian Credit Licence or to avoid the operation of the Code.

    I believe that the Strategy offers no real advantage over a conventional terms contract. On the other hand, I am concerned that being new, untried and untested it raises new and unforseen risks.

    The above represents a summary of my views – albeit after having taken advice from a barrister experienced in the area. This summary does not take into account the personal circumstances of any reader or their specific needs and objectives. It is general advice only and has been simplified to aid understanding and is therefore not intended to take the place of specific legal advice.

    Thanks Lewis Obrien

    Profile photo of David SiacciDavid Siacci
    Participant
    @david-siacci
    Join Date: 2014
    Post Count: 17

    Hi Ando

    What your describing is different to the deposit builder. Your talking about Deposit Finance.
    You will need a lender that will approve the finance for the larger portion ans well as accept the payments they make on the deposit. This used to be relatively easy as far as ‘different’ goes. With tightening of the credit laws it may be more more difficult.

    You could set it up as a loan agreement with a caveat on title or as a registered second mortgage. I could be the loan agreement you have is an unregistered second mortgage as well, in which case you would show your interest via a caveat…

    If this Deposit amount is a loan then if you try to do it more than once you will most likely need to have a credit licence. Ask your solicitor about the legals on that.

    Dave Siacci
    Facebook Discussion Group: Vendor Finance/Terms Property

    Profile photo of DeanCollinsDeanCollins
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    @deancollins
    Join Date: 2015
    Post Count: 376

    So basically if you can prove (via valuation) that the price you are selling it is TODAYS market value then you are ok…….but if you “INFLATE” the price above market value……you are providing illegal credit.

    Profile photo of David SiacciDavid Siacci
    Participant
    @david-siacci
    Join Date: 2014
    Post Count: 17

    When selling via VF a realistic selling price is always preferential or your starting a transaction that will probably be doomed to fail. Keep the price real.

    In theory you can charge what you like as the market value of a property is supposed to to be what a buyer and a seller agree upon. However in the Australian Socialist System this will not fly. Choice has to a large degree has been removed form the hands of the consumer and a professional (like a valuer or dare I say a real estate agents) opinion will be relied upon should external forces become involved.

    Keep the price real and you will still make a nice profit over the term of the transaction

    Dave Siacci

    Profile photo of D.T.D.T.
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    @dtraeger
    Join Date: 2014
    Post Count: 128

    Worth noting that this is not possible in South Australia.

    D.T. | DT Property Management
    http://www.dtproperty.com.au
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    Adelaide Property Management - whole Adelaide metro

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Yes might have it uses.

    In saying that we are looking to launch our new 100% owner occupied loan product in the next 4 weeks.

    Licenses all in place and funding signed off my 2 x heads of credit for a couple of leading lenders.

    We will be launching it in pilot format in Qld first and then expanding to other States.

    Cheers

    Yours in Finance
    0-40 properties in a decade. Ask me how.

    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 GoosedashdotGoosedashdot
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    @goosedashdot
    Join Date: 2019
    Post Count: 1

    Hey Paul

    The link to the document no longer works.

    I’m really interested in inderstanding how the vendor “deposit” is used for a bank loan to get the rest of the finance?

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