Not being one to keep away from contentious issues here are a couple of opinions that should generate strong responses right across the various experience levels of fellow vendor financiers.
Only One Technique was Available Back Then
When we started out, the only vendor finance technique we were taught was the 20 to 30 year Instalment Contract. Later we were taught Lease/Options but we’d already done a few Instalment Contracts and felt comfortable with them.
However I always remember thinking, as we were learning Lease/Options, that the ‘manure’ was bound to hit the fan if the buyer couldn’t get a traditional loan at the end of the ‘term’. As a result we’ve stuck with 20 to 30 year Instalment Contracts ever since. Apart from a few short Lease/Options where the buyers rolled over into an Instalment Contract as soon as they’d saved enough to pay the NSW and Qld Stamp Duty.
What is the Consistent Problem in the Background of Most VF Complaints?
When I look at the tribunal and court cases over the last 12 months or more, my conclusion has been that a lot of problematical vendor finance transactions would have been non-issues if there was no compulsion on the buyer to refinance.
When I mention such an idea I often get a response along the lines of, ‘Sellers will never go for such a long term!’ I’m here to tell you they will and do.
Right at the beginning of every conversation with a new Seller we explain that we’ve found most buyers refinance around the 4 to 7 year mark. But, if they’re not prepared to setup the Instalment Contract for 30 years, then it won’t be possible for us to help them.
We also let them know we believe short ‘terms’ are behind a lot of problems in the Vendor Finance Industry, especially when you consider the stress placed on buyer families when the end of the term is drawing in.
Because we’ve done it this way for so long we know it still works but I can understand your disbelief. All I can suggest is give it a try. It makes for much more low stress transactions J
ASIC, indirectly, gave its opinion on short ‘terms’ within its comments on Balloon Payments. The following is an extract from ASIC’s Regulatory Guide 209.68.
Example 10: Balloon repayments
Some products involve a large ‘balloon’ payment at the end of the loan term. While a consumer may be able to manage the regular repayments under the loan, whether the product is suitable for them also depends on whether they will be able to make the final, much larger, payment. We would expect the credit licensee to satisfy themselves that the consumer understands, and has the capacity to cover, the final repayment before offering this type of product to the consumer. “
Time-out for Lease/Options in Our Business
I’ve been watching how various regulatory authorities (Fair Trading Dept’s), consumer groups and other important stakeholders are really shinning the spotlight on residential Lease/Options. For example, have a read of the following article showing how the Financial Ombudsman Service is now involved in the over-sight of Lease/Options. Also a recent Residential Tenancy Tribunal ruling, regarding a L/O, cost the VF’er $45,000. The problem is, these types of rulings aren’t isolated (see the cases in WA and recent cases in NSW).
As vendor finance Instalment Contracts are regulated by the NCCP and seem to be quite acceptable to ‘the authorities’ we’re sticking with them. With the spotlight shinning on L/O’s we‘ve decided to give them a miss in our VF business until some sort of acceptable ‘peace treaty’ is in place with all stakeholders.
Such a ‘peace treaty’ is interesting to contemplate but my crystal ball J shows a markedly different Lease/Option than the one we work with today.
Vendor Finance Management
All Vendor Finance Management (VFM) clients enjoy the confidence their vendor finance credit transactions are being administered in accordance with the NCC. Additionally most clients have their VFM admin costs paid for by their buyers, If you’d like to experience the convenience of out sourcing your transaction administration, Vendor Finance Management can help.