It has been awhile since we last looked at common mistakes to avoid when using Vendor Finance to sell a property. While our Industry has settled down considerably since the introduction of the National Credit Code in 2010, a couple of years is a long time in the world of finance. Let’s have a look at the top 10:
1. Selling your property too far above market price. Because vendor finance (VF) buyers are often annoyed at being locked out of home ownership, they’re open to paying well above market price just to ‘get in’. The problem with selling too far above market, is the ‘gloss’ of home ownership rubs off after 3 to 6 months, when buyers encounter the reality of regular repayments for anywhere up to 30 years. As buyers start to realise they’re going to need significant capital gain from their property before they’ll ever be in a position to refinance, the questions about the price they paid often start.
Reflection: Consider pricing the property within the price range shown on various online property valuation websites. It’s best to use more than one of these websites as they can vary widely.
2. Not properly qualifying your VF buyer. Prospective VF buyers want their own home and are out to impress so they can get the property. On the other side of the coin, you as a vendor financier, are always concerned with holding costs. These two factors often lead to newbie vendor financiers doing insufficient due diligence on their VF buyers. Leading to major challenges with your buyers when they work out they can’t really afford the repayments. Not to mention the precarious position vendor financiers puts themselves into when they are found to have operated outside of ASIC’s Responsible Lending requirements.
Reflection: Consider forming an arrangement with an experienced mortgage broker, where you utilise the broker’s resources and experience to Qualify your prospects.
3. Not using a vendor finance specialist management company. There are rules around the on-going management of vendor finance transactions. Make life easy for yourself by handing over your VF transaction to a specialist vendor finance management company, when you have VF buyers ready to move in. Sure the management company charges for its service but you simply pass this charge onto your VF buyer as part of their regular payment. Learn more at Vendor Finance Management.
4. Not insisting your VF buyer gets independent legal advice. ‘Stuff’ unexpectedly happens in buyers’ lives, sometimes leading to some form of financial hardship. When this happens, we’ve found it’s easy for memories to become a little ‘foggy’. Having a certificate from the VF buyer’s lawyer indicating s/he explained the legal paperwork to the buyer is a very reassuring document to have.
Reflection: To ensure we’re not seen to be specifying our buyers use a particular solicitor, we simply mention a number of websites containing lists of solicitors who promote their legal services for VF transactions.
5. Trying to do the legal paperwork yourself. People do come across sample VF legal documents. These important documents are used to direct buyers’ and sellers’ actions in relation to expensive assets, i.e. properties. They need to be drawn up and executed correctly. Using a sample you’ve picked up somewhere, leaves the whole transaction in danger of falling apart because the paperwork wasn’t setup correctly.
Reflection: We get a solicitor to draw up every VF transaction.
6. Not getting some basic vendor finance education. We see people trying to put transactions together who don’t even know the difference between the three most popular VF techniques. You wouldn’t jump into a plane and try to fly it without some instruction. Crashing a vendor finance transaction will be expensive. Get some instruction. If you can’t find a VF educator that works for you, consider point 10 below.
7. Not recognising how close the ‘authorities’ are to outlawing Rent To Buys. The various ‘authorities’ now understand that a Rent To Buy ‘sale’ of a residential property to a consumer, precludes that consumer from the protections of the National Credit Code. Watch this space.
8. Not doing sufficient due diligence on a Seller. Vendor Finance Brokers assist property owners sell their properties with VF. Apart from a sale with Deposit Finance, when a property is sold with VF, the existing owner’s loan normally stays in place and their name remains on the Title. It’s therefore important you know your Seller’s actual financial position, so take the time to find out. This includes making sure you’re dealing with ALL persons named on the Title.
9. Not recognising there are rules around vendor financing, including licensing. There are also rules around driving your car but do they stop you driving? No. It’s the same with VF. There are rules you should know about and work within but they won’t stop you building a great VF business. This is where the Vendor Finance Institute can help.
10. Not recognising the benefits of Joint Ventures with experienced vendor financiers. Our first VF transaction earned us $19,000 and we made all the newbie mistakes. Trouble was, we didn’t know we were making these newbie mistakes and kept on making them. If we’d done a JV with an experienced vendor financier, we would have probably made around the same but, more importantly, we would have been spared the losses associated with our on-going newbie mistakes. Think of it as essential on the job training. More information is available at Negative2Positive AU.