Especially at this time of the year ☺ But seriously, over the last couple of years we’ve seen a number of vendor financiers encounter a major financial challenge associated with a property they bought with Deposit Finance.
Using Deposit Finance
Most of us use Deposit Finance to help one of our buyers to get into their own home. However, often vendor financiers use Deposit Finance to help finance a property they plan to sell with vendor finance.
We did, so let’s see how that worked. We bought the property with an 80% first mortgage and the vendors carried back 20% ($62,200) as a second mortgage. We were happy as we also managed to negotiate the second mortgage as interest free and we agreed to pay $420 per month off the principal of the ‘second’, over the five year term.
The Sting in the Tail
It was precisely two days after the term of the ‘second’ ran out that the vendor rang up asking for her money. Luckily we had planned for this $37,000 ‘balloon’ by putting aside some of the positive cash flow from the vendor finance re-sale. As a result the second was paid out without a problem and the property is now performing even better.
Forgetting the Balloon
Most of us have been taught that ‘you make your money going into a transaction’ and, when it comes to buying with Deposit Finance, this is a must. It’s vital to plan for repayment of any balloon payment you are required to pay at the end of the term of the second mortgage.
Hopping your vendor finance buyers will have refinanced by then is a recipe for being caught short. As we mentioned earlier, we have seen a number of vendor financiers get into major financial strife by both:
• Relying on a refinance to pay the balloon, and overall
• Failing to plan for the payment of the balloon.
Deposit Finance is a great technique to allow you to get into a property with little money down, just make sure you have an exit strategy in place for the balloon payment, i.e. avoid the sting in the tail 😉
On a Different Subject
Earlier in the month, at the VFA’s AGM, I had the honour of being voted in as the Vice President of the Vendor Finance Association of Australia.
For people who were at the AGM, you may remember me speaking to everyone I could find 😉 about my main goal for the Association, over the next twelve months, i.e. to become a united Industry (within achievable limits, of course) and a united Association (hopefully much easier to achieve).
If the banks can see the benefit of a united Banking Association (and they’re not the best of friends), surely we, as participants in the vendor finance Industry, can do the same.
Why not have a look at the Association’s web site and consider joining your Industry’s Association to become a catalyst for change.