Not that I’m a developer but I’m told two, time critical parts of a residential development’s sales process are:

  • Presales, and
  • Sales of slow moving ‘end stock’.

Presales usually need to be in place to allow a project’s finance to be approved and an unsold handful of ‘units’ can hold back a developer from starting her/his next project.

Can Vendor Finance Help?

As my original vendor finance coach used to say, “if you make a property easy to buy, you make it easy to sell”. With this in mind, let’s look at the idea of a developer financing a limited number of purchasers’ deposits, i.e. use the vendor finance technique called Deposit Finance to get the time critical sales needed.

There is no doubt in my mind that Deposit Finance makes a property ‘easy to buy’ and, if Meriton use vendor finance as part of their sales strategy, it’s worth considering.

A Deposit Finance Overview for Developers

In the scenario we’re looking at, Deposit Finance is where the developer finances a buyer’s 10% deposit, or enough of the deposit to bring the buyer’s deposit up to 10%. Depending on the State the property is in, the Deposit Finance loan is normally secured by a registered second mortgage or a second mortgage protected by a caveat.

The remainder of the purchase price is provider by a traditional 1st mortgage loan. A comprehensive article on Deposit Finance is available at: CLICK HERE

Lending Your Profit

Obviously, with a ‘normal’ sale the developer would receive the deposit in cash. With a Deposit Finance sale, the developer receives his/her deposit in the form of an interest earning loan contract with the buyer, for that percentage of the deposit the buyer doesn’t have.

Such an arrangement allows the deposit to be shown as paid on the Contract of Sale for the ‘unit’. Thereby allowing for an attractive sales offering to the marketplace, i.e. the potential for 100% financing. Only, of course, if the buyers qualify for 100% finance as per ASIC’s, Responsible Lending requirements.

Example

In this example the buyer has a $5,000 deposit and access to the $15,000 FHOG. The 1st mortgage provider is a second tier lender that allows deposits to be borrowed. Their risk fee is 2% for LVR’s from 81% to 90% and 4% for LVR’s from 91% to 95%. Hence, in this example, we’ve limited the 1st mortgage to 88% LVR with a capitalised 2% risk fee. The purchase price of the unit is $439,000.

The result of this structure is the second mortgage loan from the developer lends the buyer 12% of the purchase price, over 20 years at 6.5% variable. The first mortgage is provided by the second tier lender, at 88% LVR plus a capitalised 2% risk fee.

Licensing

The result of this structure is the second mortgage loan from the developer lends the buyer 12% of the purchase price, over 20 years at 6.5% variable. The first mortgage is provided by the second tier lender, at 88% LVR plus a capitalised 2% risk fee.

To provide these second mortgages to numerous consumer buyers, the lender must hold an Australian Credit Licence (ACL) that contains the authority to “engage in credit activities as a credit provider”.

Licensing isn’t in the scope of this article. Please email me if you have specific questions around compliance with licensing as it relates to Deposit Finance.

Administering the Second Mortgage

Consumer second mortgages must be administered in accordance with the National Credit Code. If you’d like to experience the convenience of out sourcing the administration of your second mortgage(s) CLICK HERE.

 

Cheers,

Paul