A few weeks ago I put out a VFI News entitled ‘Easing Management Fee Confusion‘.  In this edition I gave an example showing how to make your transaction Management costs invisible to your Lease/Option tenant/buyer.

How to Make Your Management Costs Invisible

From the number of enquiries, there’s no doubt I should have included an similar example for Instalment Contracts and Deposit Builders.  For clarity here is an example a Lease/Option, an Instalment Contract and a Deposit Builder.

Lease/Option

Here’s how to adjust your weekly Lease/Option (Rent To Buy) payment so Management Costs are included:

  • The full amount you want each week, in your hand, including any amount for rates & insurance, is $628.  To cover Vendor Finance Management’s costs, you would amend the weekly charge to your buyer to $655.  The calculation goes like this:
  • $628 divided by 0.96 (adding 4% – VFM Management Fee) = $654.17. Say $654.
  • $4 per month (VFM Admin Fee) = $0.92307 per week.  Divide $0.92307 by 0.96 (adding 4%) = $0.9615. Say $1.
  • Therefore your buyer’s amended weekly payment is $655.

Instalment Contract

Here’s how to adjust your weekly Instalment Contract payment so Management Costs are included: 

Original Figures Without Management Fees

Loan amount $368,000; Term 30 years; Interest Rate 7%; Initial weekly payment $565; Outgoings $63 per week.

Management Fees

  • $565 divided by 0.96 (adding 4%) = $588.54. Say $588.
  • $4 per month = $0.92307 per week.  Divide $0.92307 by 0.96 (adding 4%) = $0.9615. Say $1.
  • $63 per week (Outgoings) divided by 0.96 (adding 4%) = $65.63, i.e. an extra $2.63 per week.

New Figures for Buyer

Outgoings – $63 per week

Weekly Loan Payment – $591.63 ($588 + $1 + $2.63). Say $592 per week

Buyer’s New Loan Details

Loan Term – 30 years
Loan Amount – $368,000
New Monthly Loan Payment – $2,565.33 ($592 per week)
New Interest Rate – 7.47%

Deposit Builder

Here’s how to adjust your weekly Deposit Builder payment so Management Costs are included:

Original Figures Without Management Fees

Occupation Fee (Rent in Qld):  $450 per week

Deposit Builder:  $300 per week

Outgoings: $65 per week

Management Fees

  • $450 divided by 0.96 (adding 4%) = $468.75, i.e. an extra $18.75 per week
  • $300 divided by 0.96 (adding 4%) = $312.50, i.e. an extra $12.50 per week
  • VFM Admin Fee – $4 per month = $0.92307 per week.  Divide $0.92307 by 0.96 (adding 4%) = $0.96, i.e. an extra $0.04 per week
  • Outgoings – $65 per week divided by 0.96 (adding 4%) = $67.71, i.e. an extra $2.71 per week.

Therefore Management Fees for the whole transaction = $34.00.

New Figures for Buyer

New Occupation Fee (Rent in Qld):  $450 per week + Management Fees of $34 = $484 per week

Deposit Builder:  $300 per week

Outgoings: $65 per week

NOTE:  Ensure your Deposit Builder payment, over the term, works out to be no more than 10% of the purchase price. 

To make this process work for all strategies, these ‘management costs inclusive numbers’ need to be used at the very beginning of your marketing campaign.

Cheers,  Paul