Recently there’s been an increase in the number of people ‘having a go’ at selling a poorly performing property with vendor finance. And why wouldn’t you! It’s a great way to transform your property from negative gearing to positive cash flow.
You may decide to undertake this vendor finance sale on a ‘do it yourself’ (DIY) basis, so let’s see what you should keep an eye out for.
Selling your own property with vendor finance normally involves a Lease/Option (Rent To Buy), an Instalment Contract or Deposit Finance. Lease/Options are regulated by the various State Residential Tenancy Acts. Instalment Contracts and Deposit Finance are regulated by the National Credit Code.
Selling with vendor finance can be broadly divided into three sections:
- Marketing & Qualifying,
- The Legal Paperwork, and
- On-going Management.
Most DIY’ers are getting the Legal Paperwork done exceptionally well by our excellent vendor finance specialist solicitors but some are forgetting about their compliance requirements in sections one and three.
When marketing a property you own, for sale with a Lease/Option, you need to make sure you abide by the Australian Consumer Law and don’t make false or misleading claims and/or statements.
When marketing a property you own, for sale with and Instalment Contract or Deposit Finance, you need to make sure you abide by Australian Consumer Law and the National Credit Code (NCC).
Take special care if you’re going to advertise a regular payment amount, e.g. weekly, fortnightly or monthly. If you wish to display a regular payment amount in your ad:
- the Australian Consumer Law requires you to also include in your ad, the full amount of the purchase price, and
- the NCC requires you to supply all the prescribed ‘Comparison Rate’ information in your ad, if you display a regular payment amount.
When you’re qualifying a buyer for a property you own that you’re selling with an Instalment Contract or Deposit Finance you must abide by ASIC’s ‘Responsible Lending’ obligations. This means you must you must:
- make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;
- take reasonable steps to verify the consumer’s financial situation; and
- make a final assessment about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).
There are no specific Qualifying rules for Lease/Options. However it is worth remembering that your Lease/Option buyers will need to qualify for a traditional home loan when they decide to transfer to traditional finance. We suggest you qualify your Lease/Option buyers in the same way you qualify your Instalment Contract buyers. With paperwork in place to show you used Responsible Lending procedures in your Lease/Options transactions, you can be assured you’ve setup your buyers for success.
When managing a lease on a property you own that you’ve ‘sold’ with a Lease/Option you need to abide by your State’s residential tenancy laws. As with standard residential tenancies, some landlords self-manage and some outsource the management to a licensed property manager, i.e. a real estate agent.
When managing a loan that results from an Instalment Contract or Deposit Finance arrangement, you need to abide by the National Credit Code. You, as the title holder, are the credit provider and may manage the loan yourself (in accordance with NCC requirements).
However, if you wish to outsource the management of this loan, you must choose a management company that operates within the requirements of an Australian Credit Licence and operates with a Statutory Trust Account.
Two easy ways to help with your Marketing & Qualifying and On-going Management are:
- we have our NCC Application Pack and Qualification Pack
- Vendor Finance Management Pty Ltd provides loan management services for Rent To Buys, Instalment Contracts and Deposit Finance.
If you would like more ‘hands on’ help turning your negatively geared property into a positive cash flow asset, Negative2Positive may be able to help.
Overall the concept of converting negative gearing to positive cash flow is an excellent portfolio improvement tool and it’s not hard to do. Obviously, various governments have rules in place to protect consumers who are buying what may be their biggest ever purchase, i.e. their family home. Work within these rules and positive cash flow is very achievable.