What is Vendor Finance?
- Vendor Finance occurs where the Seller (Vendor) helps the Buyer to purchase the property by allowing a proportion of the price to be paid off over time;
- Traditional home loan lenders are not normally involved in a Vendor Finance transaction until the buyers build up some equity in the property and confirm they’ll get a more competitive financing offer from a traditional lender;
- While most Vendor Finance arrangements have a term of 20 to 30 years, the average Vendor Finance buyers stay in a Vendor Finance arrangement for 4 to 7 years before transferring to a traditional lender;
- The most popular Vendor Finance technique, the Instalment (Terms) Contract, uses a standard Contract of Sale with additional schedules added to structure the Vendor Finance arrangement;
- The Instalment (Terms) Contract is regulated by the National Credit Code. This means, if you’re structuring a vendor finance agreement for a property you don’t own, there are Licensing considerations;
- For the remainder of this article, I’ll be referring to the Instalment (Terms) Contract.
The 8 Step Process
The Licence coverage needed to structure a vendor finance arrangement, where the Vendor Finance Broker isn’t the owner of the property, is as follows:
- Listing – entering into an agreement to assist a property Owner sell her/his property with Vendor Finance. (Real Estate Agent Licence coverage);
- Marketing – ensuring all marketing meets the requirements of the Australian Consumer Law and National Credit Code. (Real Estate Agent Licence coverage);
- Application – conducting the application process according to ASIC’s Responsible Lending requirements. (Australian Credit Licence coverage);
- Qualifying – qualifying a prospective buyer in accordance with ASIC’s Responsible Lending Requirements. (Australian Credit Licence coverage);
- Legals – instructing a solicitor to draw up the Vendor Finance Sales Contract in accordance with Federal and State legislation. (No specific Licence coverage required);
- Possession – ensuring the pre-possession checklist has been completed, prior to the Purchaser taking possession, (No specific Licence coverage required);
- Administer – ensuring the Vendor Finance arrangement is administered, for its entire duration, in accordance with all applicable legislation. (Australian Credit Licence coverage);
- Completion – giving assistance to the Purchaser to complete the purchase, by selling the property or refinancing into a traditional home loan. (Australian Credit Licence coverage if refinancing or Real Estate Agent coverage if assisting with a sale).
3 Licensing Alternatives for Your Vendor Finance Brokerage
- Build your brokerage so it holds an Australia Credit Licence and a Real Estate Agent Licence. Or, become an Authorised Representative of an Australian Credit Licence and Real Estate Agent licensees;
- If you already hold an Australian Credit Licence, or Authorised Credit Representative status, build a business arrangement, possibly via Representative status, with a friendly Real Estate Agent;
- If you already hold a Real Estate Agent Licence, or Representative status, build a business arrangement, possibly via Representative status, with a friendly Australian Credit Licence holder (Mortgage Broker).
I’ve gone into further detail on the costs involved in a separate post.
Client first, always.