Continue reading »]]> Low rates have a high price tag for first home buyers

The value of housing loan approvals continued its upward trajectory in October, particularly for investors. But for first home buyers, it was an entirely different story: their activity has never been weaker.

It is a very different story for first home buyers. Recent surges in house prices, particularly in Sydney, appear to have effectively priced them out of the market. Despite the historically low mortgage rates offered by lenders, most first home buyers simply do not have the deposit or capacity to buy a home at current prices.

……………………………………….

Stories like this just go to show that the supposedly traditional way of buying a house by putting up a deposit and getting a bank loan is not working for everybody, as it never has. With governments around the country dropping  first home buyer grants  for various types of housing, and in some states for no housing at all it is no wonder the first home buyers stopped looking at the market.

A lot of people might say that $7000 is not a good reason to buy a house, but if you’re buying a home through a bank by having an extra $7000 for deposit instead of costs means you can increase your borrowing capacity on a 90% loan to value ratio by $70,000. As with many people it is not really/always the weekly cost that is the problem, it is the amount of money they need upfront. With record low interest rates the weekly payments are very low compared to what they have been for many years but the need for the large deposit is still there as it always has been and this is always the stumbling block for many people trying to enter the housing market.

Using Vendor Finance, this ‘deposit’ stumbling block is much smaller, and as long as the weekly payment is affordable and sustainable for the person buying a house it means that more people can experience home ownership rather than be condemned to rental slavery forever.

Properly structured Vendor Finance means that buyers can enter the property market with a much lower deposit and with the combination of growth and payments they will be in a position after a few years to get a bank loan based on the equity they have in the property at a time.

David Siacci

Continue reading »]]> Vendor Finance

At Meriton we are able to assist clients in purchasing a Meriton apartment by offering a low cost mortgage loan. Whether you are a resident or non-resident, investor or owner, Meriton Property Finance will gladly consider your application.

What do we offer?

Meriton Property Finance offers up to 90% of the purchase price on a 2 year fixed interest only loan, which means you only need to put down a minimum 10% deposit. Meriton combines competitive interest rates with no valuations or valuation fees, no mortgage insurance, no brokerage fees and no early payout penalty fees.

Why Meriton Property Finance?

Up to 90% lend of the purchase price     Fixed interest rate for up to 2 years     No early discharge penalty fees     No valuation fees     No mortgage insurance payable     No brokerage fees     Pre-payment of interest allowed with no penalty     Lump sum principal reductions with no penalty     80% lend available to self managed super funds     48 hr approvals

How it works

Once you have applied and your loan has been approved, the interest rate is fixed and the approval is valid until you are required to settle. Unlike a traditional lender, Meriton does not adjust the interest rate on any loan after it is approved. Once you have settled, loan interest payments are debited by direct debit from your nominated bank account on the first business day of each month. Pre-payment of monthly interest and lump sum principal reductions are allowable. You may discharge your loan penalty-free at any stage. The loan is for 2 years only and must be discharged on expiry. The finance cannot be extended with Meriton beyond the 2 year term.

What does it cost?

An application fee of $1000 is required to be paid at time of lodging the application. It is only refundable if Meriton Property Finance declines your application.

From the Meriton website.

Continue reading »]]> Stamp Duty and Vendor Finance across the land.

In all  states Stamp Duty is payable on the purchase price or the value of the property, which ever is greater ( the government always wins ). The stamp duty is always payable but is due to be paid at different times according to the paperwork you use and the state you are purchasing in.

Instalment Contracts

As an instalment contract is deemed a sale awaiting settlement stamp duty is due in all states within 60 days of exchange of contracts ( this is when both parties have signed the instalment contract and have exchanged them for the other party to sign ). The 60 days varies from state to state so check with your Office of State Revenue.

The exception is Victoria where the Stamp Duty is not due until the Title transfers to the new purchasers name.

Lease Options

In all states a lease Option is not considered a sale as a Contract of sale is not yet exchanged. The exchange of contracts for the purchase occurs at the end of the Lease Option period.

Stamp duty is not payable by the purchaser on a Lease Option until such time as they have acquired the bank loan and have exercised the option to purchase (that is the purchaser has approval for the loan and a contract of sale is drawn up and exchanged.)

The exception is Victoria where the full Stamp Duty is payable within 30 days of signing the Lease Option paperwork.

Continue reading »]]> An Introduction to Vendor Finance for Real Estate in Australia

There are many reasons why vendor finance is popular with buyers and sellers, and why vendor finance has been popular for the sale and purchase of real estate in Australia for many years.

These topics are covered in this introduction:

• Why do buyers and sellers choose vendor finance?
• Why are Instalment Contracts, Rent to Own and Deposit Finance popular forms of vendor finance for buyers and sellers?
• How has Vendor Finance been used for over a century for the sale and purchase of Real Estate in Australia?
• Vendor Finance as an investment strategy

Why do buyers and sellers choose vendor finance?

Vendor Finance (also known as ‘seller finance’) is offered by a seller (a vendor) to finance the sale of real estate to a buyer (a purchaser).

Buyers

The buyer who buys with Vendor Finance is taking the first step on the path to home ownership.

The buyer who chooses vendor finance is usually looking for a home to live in, but can also be a business looking to buy a shop, factory or office for their business, or is looking to buy as an investor.

Buyers choose the form of vendor finance that meets their needs.

Sellers

The seller who chooses vendor finance is usually looking to sell their property for a better price than they are able to sell the property using the standard cash sale. Selling on terms therefore provides a better outcome than selling for cash because it makes the property more attractive to potential buyers.

Selling for cash means the sale of a property in the standard way, with a deposit of 10% of the price payable at the time the Contract for Sale is entered into; then waiting 30/42/60/90 days (depending in which part of the country the property is situated); until the remaining 90% of the price is paid – from bank finance. The sale is therefore dependent upon bank finance.

Selling on terms means the sale of the property on vendor finance terms, where the seller can mould the terms of the sale to fit in with the buyer’s needs. The vendor finance terms are set by the seller to suit the seller’s needs, as well as the buyer’s needs. Significantly, the sale is not dependent upon bank finance.

In short, by using vendor finance, a seller receives two benefits; the first is that the seller sells the property more quickly than if offered at a cash price because the property is attractive to more buyers, and because the price does not need to be discounted for a quick sale, because terms are being offered.

Sellers choose the form of vendor finance that meets their needs.

Why are Instalment Sales, Rent to Own and Deposit Finance popular forms of vendor finance for buyers and sellers?

Why are Instalment Sales popular with sellers and buyers?

For the seller, the reasons why Instalment Sales are popular are –

• the seller receives a fair sale price because they are providing vendor finance
• the seller can qualify the buyer themselves and allow them to move in quickly
• the seller can set the income to be received from the buyer so as to exceed the mortgage payments the seller must make to their financier, until the buyer is ready to ‘cash out the contract
• the seller passes on the obligation to pay for maintenance and repairs to the buyer from the date the buyer moves in
• the seller continues to receive rates notices and insurance premiums assessments (because the title to the property remains in the seller’s name) but is reimbursed for outgoings, such as council rates, water rates and insurance premiums by the buyer from the date the buyer moves in
• the seller is no longer liable to pay land tax (in some States) – neither is the buyer liable because of the owner-occupier exemption
• the seller retains the title to the property in their own name – the buyer has an equitable interest until they ‘cash out the contract’ – only when the buyer pays out the price, is the title to the property transferred into the buyer’s name.
• the seller can continue to depreciate the property and obtain tax benefits until the buyer ‘cashes out the contract’ and the title to the property is transferred into the buyer’s name.

For the buyer, the reasons why Instalment Sales are popular are –

• the seller is able to set vendor finance payment terms to suit the buyer, rather than the buyer needing to fit into the straightjacket of a standard home loan offered by the banks – for example, the seller can offer low payments to start, permitting extra payments to be made
• the payments are structured like a bank loan – as principal and interest repayments usually over 30 years
• the buyer can move in immediately the seller’s background checks are completed
• the buyer has the freedom to improve the home and keep the increase in value, because the purchase price is fixed up front and never changes
• the buyer can refinance or sell the property at any time, and pocket the profit!

Why is Rent to Own popular with sellers and buyers?

For the seller/owner, the reasons why Rent to Own is popular are –

• the seller/owner receives a fair sale price because they are providing vendor finance
• the seller/owner can qualify the tenant/buyer themselves and allow them to move in quickly
• the seller/owner can set the income to be received from the tenant/buyer so as to cover the mortgage payments the seller/owner must make to their financier, for the duration of the Rent to Own arrangement
• the seller/owner cannot pass on to the tenant/buyer the obligation to pay for maintenance and repairs, but can encourage the tenant/buyer to renovate the home by offering a sweat equity credit
• the seller/owner continues to receive rates and premiums assessments (because the title to the property remains in the seller/owner’s name) but can set the rent at full market rent, rather than a reduced rent, and by this means ‘cover’ these outgoings
• the seller/owner remains liable to pay land tax – there are no exemptions
• the seller/owner retains the title to the property in their own name – the tenant/buyer has an equitable interest because of the option to purchase
• the seller/owner can continue to depreciate the property and obtain tax benefits

For the tenant/buyer, the reasons why Rent to Own is popular are –

• the seller/owner is able to set the payments terms to suit the purchaser – for example, the seller/owner can agreed to accept a larger up front payment and lower ongoing payments
• the payments are fixed for the duration of the Rent to Own arrangement – so that the tenant/buyer can budget for a long period
• the tenant/buyer can move in immediately the seller/owner’s background checks are completed
• the tenant/buyer has the freedom to improve the home and keep the increase in value, because the purchase price is fixed up front and never changes
• the purchaser can finance or sell the property at any time, and pocket the profit

Why is Deposit Finance popular with sellers and buyers?

For the seller, the reasons why Deposit Finance is popular are –

• the seller receives a fair sale price because they are providing vendor finance
• the seller can rely upon the lender which lends the first mortgage loan to qualify the buyer as being creditworthy to be able to afford to pay the Deposit Finance
• the seller can set the payments according to what the buyer can afford
• the seller no longer has the obligation to pay council and water rates, insurance premiums, maintenance and repairs, strata levies or land tax, by selling the property under standard Contract terms, because the title passes to the buyer when the property is sold
• the seller pays out their mortgage and no longer has a loan liability when the property is sold
• the seller has security for the payment of the Deposit Finance in the form of a Second Mortgage which can be registered, but often a Caveat is registered on the title instead, because a Caveat is simpler and cheaper to register.

For the buyer, the reasons why Deposit Finance is popular are –

• the buyer can buy the house with a bank loan and a little cash, without needing all of the deposit
• the buyer can avoid Housing Loan Insurance, which is expensive and which is only necessary if the borrower borrows more than 80% of the price on a first mortgage from the bank or mainstream lender.
• the seller is able to set the Deposit Finance payment terms to suit the buyer, rather than the buyer needing to fit into the straightjacket of a personal loan offered by the banks
• the interest rate is the same as a bank loan – and the payments can be interest only or principal and interest, can start immediately or be deferred
• the buyer has the freedom to improve the home and keep the increase in value, because they own the home
• the buyer can refinance the Deposit Finance or sell the property at any time, and pocket the profit!

How has vendor finance been used for over a century for the sale and purchase of real estate in Australia?

Vendor Finance has been used for selling real estate in Australia for a very long time. In fact, for long periods of time banks were reluctant to lend for residential purchases, preferring instead to finance business and investments because they offered better profits.

1870s – 1920s

In the land boom years of the 1870s and 1880s which were fuelled by the gold rushes and boom time exports of wool and wheat, property developers subdivided land for sale to meet demand. Some blocks of land were sold to buyers who build homes upon the land; other blocks of land were sold to property speculators who purchased the land for re-sale at a profit.

Then as now, bank finance was not freely available to buyers on vacant blocks of land, because banks were not comfortable with recovering their money if they lent on vacant house blocks of land.

Therefore, in the 1870s and 1880s, to sell their land property developers offered vendor finance terms which were typically ¼ of the price as a deposit, ¼ of the price after six months, ¼ of the price after 12 months and the final ¼ of the price after 18 months. Interest was payable at 6% p.a. on the outstanding amounts.

In the early 1890s, many banks collapsed as the weight of property speculation and the great drought took their toll. Variations appeared to the vendor finance model. For example, here is a plan of subdivision at Blacktown, near the railway station, dated 1895.

You will notice that the land is for sale, not at a price, but on vendor finance terms being a £1 deposit, followed by 24 monthly instalments of £1 each. The total terms price was £25 for the land, and it is safe to say that the cash price would have been less! But more importantly, the property developer was able to sell the land because they offered terms to suit the buyer’s pocket, in a climate where no bank loans were available.

1901

In Phillip Street Sydney, James Edward Hogg authored a book of Conveyancing Precedents and forms for use in New South Wales and other States and Colonies in Australia. Included was a precedent instalment payment clause, for vendor finance of real estate, which I reproduce –

Instalments. The purchase money, with interest thereon, or on the unpaid part thereof, at £– p.c. p.a. from the – day of —, shall be paid by – equal half-yearly instalments of principal amounting to £– each, payable on the – day of — & the – day of – in each year, the first to be paid on the said – day of –, with the addition to each instalment of the interest on the portion of the purchase money remaining unpaid, ….

Another vendor finance precedent in the book is for the conveyance of property following upon the exercise of an option to purchase contained in a lease – the title of the precedent is –

CONVEYANCE of a REVERSION EXPECTANT on a LEASE to the LESSEE, who purchases under an OPTION OF PURCHASE given him by the lease

1900 -1927

Between 1900 and 1927, the practice of selling land on vendor finance terms was widely used and accepted, with land in Sydney suburban locations such as North Sydney, Chatswood, Hornsby, Centennial Park, Randwick, Potts Point and Heathcote advertised for sale on terms.

The vendor finance terms were typically 1/5 th (i.e. 20%) of the price paid as a deposit, followed by 4 equal annual instalments of 1/5 th (i.e. 20%) each. Interest was payable at 5% pa on the outstanding amounts.

1927

With this high level of vendor finance activity, it is not surprising that the profits from vendor finance came to the attention of the Federal Commissioner of Taxation, and that a legal dispute arose.

In 1927, the High Court of Australia considered the tax consequences of two forms of Vendor Finance, in the legal case of:

The Federal Commissioner of Taxation -v- Thorogood
which is reported in: (1927) Volume 40 Commonwealth Law Reports at page 454.

The facts were:

James H Thorogood carried on the business of buying land, subdividing it into allotments and building houses on them, selling these as house and land packages.

Thorogood sold some house and land packages where he ‘funded’ the whole of the price with seller finance on terms consisting of – a deposit paid in cash which was paid to Thorogood, with the balance price payable by instalments over several years. These sales were documented by a Contract for Sale, which continued for several years, with Thorogood retaining the legal title to the property in his name until the Contract for Sale was completed by payment of the final instalment. Today these are known as Instalment Contracts.

Thorogood sold other house and land packages where he ‘funded’ a part of the price with seller finance on terms which consisted of – , the purchaser paying a deposit to Thorogood, an external financier funding a large part of the price secured by first mortgage, which was paid to Thorogood, with the balance of the price payable funded by Thorogood, who took as security a second mortgage over the property. These sales were also documented by a Contract for Sale which was completed in the normal time. Legal title to the property was transferred immediately to the buyer. The documentation for the seller finance took the form of a second mortgage in favour of Thorogood which was registered, ranking after a first mortgage from the external financier. Today these are known as Deposit Finance arrangements.

In both cases, interest was payable on the amount payable and owing to Thorogood.

The dispute:

The Federal Commissioner of Taxation assessed Thorogood to pay income tax on the whole price payable under the Contract for Sale in the year the Contract for Sale was entered into, even though in both cases, payment of part of the price was deferred until future years. Thorogood objected to the tax assessment and contended that he should only pay tax on the parts of the price for which payment was deferred until in future years in the future years in which payment was actually received.

The decision:

The High Court did not decide the dispute – it decided only that it was possible to take either view of the tax consequences of the transaction, depending upon the facts, and in particular, whether the taxpayer was in the business of providing vendor finance.

For our purposes, the important point is that the legality of both forms of vendor finance was accepted by the High Court of Australia.

1950s – early 1960s

• The use of vendor finance continued to fluctuate according to social and economic conditions and the availability of bank and non-bank finance.
• The supply of housing real estate became scare towards 1950, unable to meet the demands or veterans from World War II wanting to settle down an raise a family, as well as the large numbers of migrants coming to Australia wanting to do the same. This drove up the price of building materials and housing, which meant that saving the money to purchase real estate without borrowing was no longer feasible. But who was to provide the finance? Answer – the vendor!
• In the 1950’s and early 1960’s, land for housing was subdivided and sold on vendor finance terms of up to 5 years, with instalments paid monthly. The reason vendor finance was used was that the banking system did not usually provide loans for the purchase of blocks of land for housing.
• Therefore, in the 1950’s and early 1960’s, most young couples looking to build a home would purchase a block of land to build a home upon, from a property developer ‘off the plan’ in a land subdivision, using the terms finance form of vendor finance. Once the land was paid for, they would borrow the money to build their home from a bank.
• An example, here is a newspaper advertisement for the sale ‘off the plan’ of housing block land near Kiama south of Sydney, dated 1957, where terms were offered.

You will notice that terms are offered over 3 years.

• In 1961, there was a credit squeeze and many land subdividers went broke, leading to a tightening of the law applicable to vendor finance. Laws were passed in many of the States to restrict vendor finance.
• In the mid 1960s, the Commonwealth Government decided to make it easier for banks to lend for housing, and so bank finance became more readily available.
• These two events led to decline in the use of vendor finance.

1970s – 1980s

• In the late 1960’s, 1970’s & early 1980’s, home builders became major users of vendor finance to sell house and land packages to young couples.
• In those times, to obtain bank finance to purchase a home, a buyer would need to demonstrate a 12 months savings record and have a 25% deposit because the banks would only lend up to 75% of the value of the home.
• Home builders therefore sold house and land packages on an Instalment Contract, with payments mirroring a bank loan. This enabled to builder to obtain finance to build from their finance company. After twelve months, the builder would “cash out” the Instalment Contract, by transferring the Instalment Contract to their finance company.
• Generally after twelve months, the bank would be satisfied that the payments made by the buyer constituted a satisfactory payment/savings record, and so might then provide standard mortgage finance to the Purchaser to pay out the finance company.
• It is interesting to note that the NSW Department of Housing has had a policy to use the Instalment Contracts form of vendor finance to sell houses to its tenants since the early 1970’s, with 40 year terms on a 25% deposit being common. The same policy has applied in other States, such as South Australia.

Mid 1980s to date

• In the mid 1980’s the Commonwealth Government deregulated the banking system, which resulted in an influx of foreign banks offering housing finance.
• From the mid 1990s until the Global Financial Crisis (the GFC) in 2008, non-bank lenders, also known as securitised lenders, sourced loan money from the money markets especially in the USA and went from 0% of the home loan market to 20% of the home loan market.
• During this period of between mid 1980’s to the mid 2000s, increasing availability of home loan finance from the banks and the non-bank lenders made vendor finance shrink to a rump of what it was. By the mid 2000s, driven by competition, loan finance of up to 95% of valuation with minimal savings record was available to the employed and the self-employed.
• In the 2006 Australian Census, the Australian Government Statistician included
  Question 56 -Q Is this dwelling: Being purchased under a rent/buy scheme?A 1.2% of Australians ticked “yes”.The answer to this question underestimates the houses financed with vendor finance because it is restricted to rent to buy and instalment sales and because these last a short time – often 3 years, and are used as a stepping stone to bank finance.The question was repeated in the 2011 Australian Census.
• The GFC has seen the demise of the non-bank lenders and Basel II has put the shackles on bank lending, leaving the 18% of the home lending market that the non-bank lenders had serviced, without finance.
• Some of this 18% of the home lending market will not exist due to a decline in demand for housing, but as for the rest, represents an obvious market for vendor finance.
• In summary, there is an unsatisfied demand for vendor finance which has become apparent amongst buyers with low deposits, buyers who have their own business or trades and buyers whose credit rating is impaired, who do not qualify for loans from the banking system.

1 July 2010

• On 1 July 2010, the National Consumer Credit Protection Act came into force. This Act is a Commonwealth Act of parliament, and consolidates the laws governing consumer credit in Australia. From 1 July 2010, ASIC (the Australian Securities and Investments Commission) is the responsible governing body.
• This Act covers two forms of vendor finance, namely Instalment Sales and Deposit Finance. It does so by making them explicitly subject to the National Consumer Credit Code.
• The Act also provides that if a person is engaged in the business of providing these two forms of vendor finance, they must hold a National Credit Licence.
• For more information on the National Consumer Credit Code – Click

The article can be seen here

Continue reading »]]> Lease Option

If you are new to real estate, the term “rent to buy” can be quite misleading. It implies you are renting a house and buying it afterwards. That is only half right: A rent to buy contract can be dismantled into 2 parts:

1. A lease arrangement and

2. An option to purchase.

So to be more precise, rent to buy is in fact renting a house now with the exclusive right to buy it at a fixed price sometime in the future (so it’s not a must to purchase it).

Now a rent to buy agreement sure seems like a good deal for the buyer… who gets a place to stay and reserves the exclusive right of buying it in the future. Of course there’s never a free lunch in real estate, and the buyer has to fork out extra for these perks and privileges… in the form of extra rent (rent premium) and a lump sum for the option to purchase (option fee / like a deposit). No worries we will drill deeper into these costs below.

A rent to buy contract focuses heavily on the option to purchase the lease is just a standard lease for your state. The finer details are actually laid down in the option agreement.

Option to Purchase: How Long and How Much?

Just like a normal property sale, the buyer and the seller will first have to agree on a selling price. Once the bargaining is over and the rent to buy paperwork is signed, this sale price will be locked in until it’s time for the buyer to exercise the option to purchase (i.e. time for the buyer to get a bank loan and pay out the seller). This option period should be a minimum of 5 years, which will be the duration of the lease as well.

Let’s say we have a rent to buy agreement for a house with a selling price of $500,000 and an option period of 5 years. The buyer will first have to rent the house for up to 5 years and once they achieve getting their finance he or she will have the right to buy the house for $500,000 (regardless of whether housing prices have risen or fallen during that period of time). Therefore they can payout the owner anytime within the 5 years; you do not have to wait until the final date in the paperwork.

Of course, the buyer has to pay some upfront money to enjoy this option… commonly called the up front option fee( similar to a deposit but not the same).  It is common for the up front option fee to be between 1 to 5% of the property’s sale price.

If the buyer chooses to exercise his or her option to purchase, this option fee will become part of the deposit on the contract of sale. If the option isn’t exercised and the deal falls through, legally the seller gets to pocket the option fee as it is non-refundable.

Rent Premium:

In a rent to buy agreement, a buyer has to pay higher-than-market rent – That’s because on top of the normal rent rates, he or she has to cough up additional money as rent premium. This is usually similar to what a loan payment would be on the property.

The rent premium works like this: If the buyer ends up buying the property, this rent premium graduates into a equity credit… which goes toward paying off the purchase price of the house. In eyes of a person (who exercises the option to purchase), paying rent premium is the same as building up equity in his or her future home.

To give an example, let’s say we have a $500,000 rent to own house that normally rents for $1,700 a month. The buyer and seller have agreed on a rent premium of $500 and lease period of 5 years… so the buyer will be paying $2,200 each month instead of the $1,700. If the buyer ends up buying the house 5 years down the road, a portion of the premium will go towards the amount the buyer now owes the seller.

If the buyer fails to close the deal and purchase the house, this rent premium will be swallowed up by the seller. In this case, the seller is acting as a landlord who leased out his or her property at a gainful rate.

Rent to buy contracts are popular with many buyers who are shut out of the banking system due things like employment history, credit issues from years ago, deposit shortfall, lack of funds for government taxes (such as stamp duty) and many more little problems. This same arrangement will benefit buyers who are not yet able to get their hands on a mortgage loan… so the lease period buys them precious time to build up equity and repair credit scores.

Continue reading »]]> Warning on ‘risky’ We Buy Houses scheme

Helping families realise the Australian dream, or a risky investment scheme? Photo: Paul Rovere

Consumer advocates are warning about the spread of a “risky” new investment scheme that encourages distressed home owners to sell their properties on lay-by to buyers with low incomes or bad credit.

The complex deals are often orchestrated by start-up operators, many of whom may not have credit or real-estate licences and whose training has come from “boot camp” style investment seminars.

“These transactions can be risky and some consumers may not be protected by consumer credit laws,” said Carolyn Bond, co-chief executive of Victoria’s Consumer Action Law Centre.

“The houses may be overpriced, repayments high and, unlike a traditional mortgage, the buyer’s name is not put on the title of the property until they have purchased the house outright.”

The claims have been denied by operators and promoters, with leading instructor Rick Otton arguing the system helps families realise the Australian dream while turning a profit for investors at the same time.

Known as the “We Buy Houses” system, operators look for home owners in financial trouble or facing foreclosure and then connect them with a “buyer” who has little or no deposit, can’t qualify for a traditional mortgage, or has a poor credit history.

Participants are found through “guerilla style” marketing campaigns using brightly coloured hand-written signs posted on street corners, typically in blue-collar and mortgage-belt outer suburbs:

“Can’t pay mortgage? Need to sell fast?” one says, listing a phone number. “I Buy Houses And Pay $20,000 More”, another offers. “No fuss, no commission, fast sale!”

Ads can also be found on Gumtree and dozens of “We Buy Houses” websites and blogs, many of which promise vendors they can sell “for cash” and for buyers that “we give homes to those the banks don’t.”

But the deals actually involve complex “vendor finance” agreements where a buyer agrees to move into a house and make regular payments until the agreed purchase price is paid off or they are able to secure a home loan to repay the vendor in full.

If the buyer defaults, they lose all of their repayments and have no claim over the property.

In one recent case, CALC said a buyer forfeited all the money she paid into the scheme, as well as the first home owner’s grant that was used as a deposit, when she could no longer afford her payments less than a year after signing the agreement.

Vendors, who remain legally responsible for the property, may have to accept a below market price for their home or receive little or none of the monthly payments beyond what it takes to cover the mortgage. They also lose any right to future capital growth.

Operators — who refer to themselves as “transaction engineers” — receive a share or even the full amount of any deposit paid and a share of the monthly payments after costs. Some also charge the buyer an interest rate up to three percentage points above variable lending rates.

“We suspect that the middle-man might be the only one to benefit in some of these deals,” Ms Bond said, citing a recent case where the operator took 100 per cent of the deposit and profit.

Concerns are also being raised about the qualifications of the operators, some of whom may use a loophole in the National Credit Act that allows them to structure the deals without holding a credit licence from the Australian Securities and Investments Commission.

It involves repeatedly creating “one-off” joint-venture agreements with different vendors, meaning the operator may technically not be providing credit services as a business but a co-owner.

Many operators claim they are similarly exempt from state-based real-estate licensing requirements.

But Consumer Affairs Victoria said that anyone who acts on behalf of owners, buyers or tenants in the sale or leasing of property, including negotiating or preparing sale agreements, must hold an estate agent’s licence or be employed by a licensed real-estate agent.

David Siacci, president of the Vendor Finance Association of Australia, said reputable operators obtained ASIC credit licenses and received regular advice from solicitors.

“You have got a small minority of people out there, like in any industry, who do the wrong thing,” he said. “You can get a plumber that will do a fantastic job at a reasonable price, or you can get a plumber that will do a really shoddy job at an expensive price. We’re not the shoddy job people.”

Read more…

Continue reading »]]>

29th June 2012

Get on the property ladder with a rent-to-buy option

There’s a little-known way of getting a start in the property market that allows aspiring property owners to get a toehold in the market without having to save a sizeable deposit. It’s called rent-to-buy and it’s essentially a form of vendor finance. Here’s how it works.

Under a rent-to-buy agreement potential property purchasers have the right to purchase the property that is the subject of the agreement at any time during the contract term.

Increasing your options

A rent-to-buy contract comprises two parts. The first part is a standard residential lease that gives the tenant the right to occupy the property in question. The second part of the agreement is an option (in some states such as Queensland this is called a lease purchase option). The option gives the purchaser the right to buy the property at any point during the term of the contract – which is usually between five and seven years.

Fixed price

The price at which the property will be purchased is fixed in the lease option and the leaseholder pays an ongoing option fee to maintain the right to purchase the property during the term of the contract.

“Under a rent-to-buy arrangement the contract holder pays a weekly fee comprising two components, the lease and the option fee, which combines to equal an amount that’s equivalent to a home loan repayment,” says rent-to-buy specialist David Siacci.

Over time, part of the option payment gives the contract holder a certain amount of equity in the property, which financial institutions can consider when assessing the potential property holder’s eventual application to take out traditional finance to purchase the property.

“A lot of people have enough income to make the repayments on a mortgage but they don’t have the required deposit to buy the property. That’s where rent-to-buy arrangements come in. This gives people a chance over a five-year period to build up some equity and show the bank they have a proven payment record. People usually do some renovations and repairs on the property over the period plus the property usually increases in value over the term of the agreement,” he explains.

Applying for a loan

The contract holder can approach the bank at any time during the contract period for a loan to purchase the property, without incurring any penalties from the vendor. Plus, the purchase price is locked in at the time the initial rent-to-buy agreement is signed. But until then, the title of the property stays in the vendor’s name until the rent-to-buy contract holder obtains finance to buy the property.

“Rent-to-buy is a great way to set people up for home ownership when they have trouble saving a deposit but still want to enter the property market,” Siacci says.

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Continue reading »]]> Vendor financing is a strategy that involves the home seller accepting payment directly from the buyer instead of using a bank or mortgage lender to finance the purchase. This strategy may be appropriate for a seller when demand for housing is low, and for a buyer who may have difficulty obtaining traditional financing. Vendor financing can have advantages and disadvantages for both buyers and sellers.

Advantages for Sellers

Offering Vendor financing can benefit sellers by increasing the pool of available buyers to include those who do not qualify for bank loan, thereby improving the chances of a home sale. Because there is no lengthy financing approval process, a seller may be able to sell the home quickly. Vendor financing also allows the seller to determine the interest rate, which gives the seller control over his return on the investment.

Advantages for Buyers

Finding an Vendor financed home can benefit buyers by eliminating the need for traditional mortgage qualification — this can be particularly advantageous for buyers who have suffered past credit problems. The seller may also cover closing costs, which can reduce the amount a buyer needs for a down payment.

Disadvantages for Sellers

Unlike in a traditional real estate transaction, the seller’s money remains tied up in the home until the buyer pays off the loan. Because the seller gives a loan for the purchase, she is stuck with the home if the buyer defaults on payments. Also, offering Vendor financing may primarily attract buyers with poor credit histories, which may increase the risk of default or the length of the contract.

Disadvantages for Buyers

In a Vendor financing transaction, the seller does not usually report payments to credit bureaus, so the buyer typically will not be able to build or rebuild his credit history by making timely payments to the seller. If the seller still owes money on her mortgage, the lender may enforce a “due on sale” clause and require the seller to pay her entire mortgage immediately if they default. Also, because the seller is free to set thier own terms, the buyer may pay a larger down payment and a higher interest rate than a traditional buyer.