During the recent round of FBAA Vendor Finance Meetings we asked attendees for ‘Discussion Points’ to help build the Vendor Finance Best Practice Policy. The response was great and discussions ranged far and wide.

As we all know, ‘the Authorities’ have been keeping a pretty close eye on our Industry of late. It always helps to understand the position of parties you’re negotiating with, so the following communication is displayed to help mutual understanding.

Received Correspondence

Recently a vendor financier received the following from a government authority:

Dear {vendor financier}

I am an {employee} with the {authority}. Part of the role of the {authority} is to monitor media and the internet to ensure that consumers are not misled or exposed to unnecessary financial detriment. In the past we have been involved in the successful prosecution of individuals involved in scams involving “rent to buy” schemes in houses that are not their own.

It has been brought to my attention that you lodged an advert on the {name} website for {property address} with a heading; {advertisement heading}, which is a potentially misleading statement. My enquiries show that the property has been owned by {owner’s name} since 20xx, and that it is still registered in {his/her} name. I assume that {s/he} is a client of {vendor finance company}?

I am aware that you hold a real estate licence and are therefore entitled to carry out real estate transactions, and on reading your website, {website url}, it appears that you are providing a service for owners who are having financial difficulties in maintaining their mortgage repayments.

Whilst I acknowledge that there may not be any legislative issue with the business conducted by {vendor finance company}, the {authority} is concerned, and would like to know that no consumers are disadvantaged in the transactions. Some of the common risks to consumers could be:

  • Paying a premium price for the potential purchase;
  • Paying above market value rent;
  • Forfeiting their deposit or on-going payments if the deal falls through;
  • Requiring some type of finance to purchase the house at the end of the rent-to-buy contract.

Please advise whether the potential purchasers/tenants and the property owners are encouraged to seek legal advice prior to entering into any contract, and whether the contracts are drawn up by lawyers (thereby protecting all parties involved).

Thanks for your co-operation in this matter.

Kind regards

The Discussion

The vendor financier had a very positive written discussion with the {employee}, revealing a surprising level of similar thinking between the vendor financier and the {authority}. It concluded with, the file is ‘now closed our file on this matter. The {authority} has ongoing concerns about the “rent to buy” schemes, and we will continue to monitor advertisements in the electronic media.’

More Common Ground Than Expected?

It was somewhat surprising that a lot of the {authority’s} concerns matched up with Discussion Points suggested by vendor financiers during our FBAA Vendor Finance Meetings.

  • Paying a premium price for the potential purchase; See this week’s lively exchange on VF property pricing on the Vendor Finance Professionals Facebook page.
  • Paying above market value rent; I believe all vendor financiers now understand that the rent component of a Lease/Option transaction has to be no more than market rent. Rental tribunals have reinforced this point time and time again over these last few years.
  • Forfeiting their deposit or on-going payments if the deal falls through; Discussion Point suggestions regarding this issue have been put forward at two out of the last three FBAA VF Meetings. It seems obvious that both the VF Industry and other stakeholders see this as an area needing attention in our Best Practice Policy.
  • Requiring some type of finance to purchase the house at the end of the rent-to-buy contract: The concept that Industry should match the traditional home loan industry and provide products that give a Zero Loan Balance at the end of the Term of the transaction, is far from universally accepted by our Industry. However the general consensus, at all three meetings, indicates more work needs to be done in this area as a matter of urgency.
  • Please advise whether the potential purchasers/tenants and the property owners are encouraged to seek legal advice prior to entering into any contract; This concern says it all. Consumers need to get independent legal advice. A point supported at all three VF Meetings.
  • ….. whether the contracts are drawn up by lawyers (thereby protecting all parties involved). I don’t know of any vendor financiers still trying to draw up their own VF legal paperwork. If you are I’d suggest you reconsider your position.

Long Term We Need To Work Together

A dream? I think not. Discussions between the ‘Authorities’ and the FBAA’s VF Committee have already commenced. Become involved and send your suggested Best Practice ‘Discussion Points’ to the Committee by replying to this email.

Our Industry needs your input!

 

Cheers,

Paul