We figured there had to be a better way than the ‘cap-in-hand’ approach most people are forced to adopt. So with some expert guidance, study, training and a dig around in the history books . . . here we are . . . Vendor Financing advocates . . . taking home ownership to
ALL!
(We think it might be in our blood!)
2. Is this legal?
Don’t feel lonely . . . this is the number one question we get from almost everyone interested in Rent & Own or other Vendor Finance initiatives.
Let us reassure you here and now . . . YES IT IS!
Vendor Financing has been around waaaaaay longer than the current method of selling houses using the ‘Offer and Acceptance’ favoured by most Real Estate Agents.
In fact, you could say, Vendor Financing was the original way of selling real estate. It was used frequently right from the original settlements in
Australia up to the 1980’s. Then the deregulation of the Banking sector led to greater freedom for the banks in their lending procedures which evolved into the variety or products available today.
However, Vendor Financing for Commercial and Rural properties has always been used and continues strongly today.
One of the common Vendor Financing initiatives is listed under section “14. Terms Contract” in the “Joint Form of General Conditions for the
Sale of Land” booklet (compulsory for all property Sales in WA).
It was also officially recognised in the 2006 Census where question 56 asked . . .
“Is this dwelling: … Being purchased under a rent/buy scheme?”
So, obviously, it IS legal … and popular enough to become part of the Census!
3. What is Vendor Finance?
Vendor Finance is: finance offered by a Seller (a Vendor) ... to finance the sale of ‘property’ (which may or may not be real estate) ... to a Buyer (a Purchaser).
Vendor Finance is currently most commonly used in the sale of Commercial Businesses and Rural properties. But a return to it’s use in the sale of residential property is growing again rapidly. Real Estate sold with Vendor Finance is attractive to purchasers who are unable or unwilling to obtain finance from a Bank or Financial Institution.
Vendor Financiers accept purchasers with lower deposits and minor black marks on their credit files. They provide the stepping stones between renting and owning your own home . . . initially by Vendor Finance and eventually via the banking system.
They encourage purchasers to obtain mainstream finance as soon as they have established a good track record of making payments and have built sufficient equity in the property.
Vendor Financiers are willing to accept the risk of what the banks term “a less than perfect purchaser” because they personally assess each individual purchaser’s commitment and ability to purchase . . . and balance the risk they take.
4. How can you help us Own Our Own Home?
We’ll coach you from the start right through to home ownership.
We’ll get you into a suitable and affordable home so you can stop paying dead rent and start making payments toward your own home. Your payments attract rent credits which can directly reduce the ‘loan/purchase price’ of your home.
All you need is to be employed and/or have an income suitable to cover ‘rent/repayments’ and have some getting started money . . . usually $10,000 to $15,000 or more . . . although we do very occasionally get homes only requiring $5,000. Rent/repayment rates currently range from $500 to $2,500/week.
5. How does the Rent Credit work?
Rent credits accrue and may be used to reduce the purchase price of property under an option. They’re calculated in a similar manner as the banks calculate the apportionment of the principle and interest amounts that make up their fortnightly or monthly loan repayments.
The 1Option Price for the property you have chosen … LESS the 2Deposit/Option Fee you pay up front … leaves you with what is deemed to be a 3Virtual Loan Balance Amount … just like a bank loan.
e.g. 1Option Property Price $350,000 (usually fixed for 2, 3 or 5 year Option Period)
less 2Your Deposit/Option Fee - $15,000
leaves 3Virtual Balance Payable = $335,000
The payments you make are deducted from the 3‘Virtual Balance Amount’ (e.g. $335,000) in the same way it would be if you were paying bank loan repayments - A portion will cover interest and a portion will reduce the principal loan amount.
When you’re ready to get external finance, your accumulated rent credits will be taken off the price as part of your deposit … and you’ll need bank finance for the balance.
6. Does all the money I’m paying come off the purchase price?
The payments you make are treated similarly to loan repayments and reduce the total purchase price in the same way. Part will pay ‘interest’ and part will reduce the ‘principle’. [See also Q.5 above]
7. Can I make extra payments?
ABSOLUTELY! Like all home-buyers, it’s always good to pay down the amount you owe as quickly as possible. It reduces the overall interest you pay on your home. So if you get a tax refund, bonus or just have a little money left over one month . . . by all means, pay it in to increase your rent credits and reduce the amount you’ll eventually have to get financed. There is no minimum for this. $5, $10, $20 or $50 all can make a difference to your interest expense. And so you don’t even have to ask . . . there are NO PENALTIES and NO FEES for doing this!
8. Do I need permission to make changes to the house?
NOPE! It’s your home . . . you can drill a hole and hang a picture wherever you like! You can do anything that any reasonable person would see as adding value to your home. However, if you want to go as far as knocking down a wall . . .
PLEASE check with us first!
9. How often are property inspections?
Property inspections are not usually done. Rent & Own home buyers are working toward purchasing their own home so it is not deemed necessary.
However, if the property is being mistreated, or the owners have some reason to request it, an inspection may be organised. If this is the case, you will receive a written request for an inspection giving you reasonable notice.
NB. There has recently been an issue in relation to Insurance that may make property inspections necessary. Please ask for the latest update on this.
10. When do we refinance?
You can refinance at ANY time within your option period. Options vary in length usually from
2 to 5 years and you MUST refinance within this time. Examine your paperwork and ensure you KNOW when your option expires. You should start seeking to refinance within the last 12 months of your option. Do NOT leave it later than the last 6 months or you may run out of time.
11. How do we refinance?
You will have accrued rent credits toward the purchase price of the house. These, together with any savings you have, plus the increase in the value of the property, will form your contribution and percentage of the sale amount. A bank or finance company will need to provide the balance.
When seeking finance, your share of the value of the property would usually have to be at least 20% and the bank or financier usually provides finance on the balance of 80%. Sometimes its possible to get up to 95% finance from a bank, but this is becoming rarer and rarer since the world financial crisis and the knock on effect to
Australia. They’re mostly only available to public servants, long term employees, or others similar.
You MUST also have enough to cover the Stamp Duty and Legals associated with the purchase of the property. Most banks will not cover these.
When your finance has been confirmed, you send us your Notice of Exercise of Option form - provided as part of your Option pack when you first sign up. We’ll organise the Contract of Sale for you to sign and set up a suitable settlement date.
We have a few Mortgage Brokers who understand Vendor Financing and work with our clients to obtain finance. When you are ready, you are welcome to arrange an appointment with one of them, or to use a broker of your own.
12. If I change my mind, will I get my deposit back?
The Law is quite specific about this and does not require the deposit or ‘Option Fee’ to be refunded. However, as founding members of the Vendor Finance Association (VFA) in WA, we have specifically included in our member’s Code of Conduct sections dealing with this issue.
“Members agree to assess each instance and/or case on its own merit and give the buyer . . . fair and reasonable consideration . . . net of any costs and/or arrears . . .” [VFA Code of Conduct 4.3 & 4.4]
Consequently, we will negotiate strongly on your behalf with the owner and decisions are made on a case by case basis depending on the circumstances involved.
13. What is the VFA?
The VFA is the leading Association for professionals in the Vendor Finance industry. The Association has the following principal objectives and aims:
ü To promote and safeguard the interests of vendor financing
ü To provide balanced and accurate information regarding Vendor Financing to the public, the media and the government
ü To develop and maintain a code of ethics by which association members will adhere whilst vendor financing
ü To lobby the government and all other statutory authorities regarding Vendor Financing legislation and to become a recognized source for consultation prior to legislative changes
Members of the Association abide by a strict Code of Conduct.
The Code of Conduct sets out the standards and principals all members of the VFA agree to uphold. Its purpose is to set a very high standard of good practice and fair dealings between VFA members and consumers.
It is not a part of any legislation or Act of Parliament. However, it is binding on all VFA members. Any action contrary to the Code of Conduct results in deregistration from the VFA.
14. How does YOU being a member of the VFA help ME?
We are committed to the Code of Conduct governing the Association. Indeed we were instrumental in establishing the VFA in
Western Australia and formulating and setting in place the Code of Conduct. We are the WA contacts for the VFA. Consequently, we will always work to ensure we provide you with the best possible service at the highest standard achievable.
15. Are you qualified to do this?
We spent 1 year attending a Vendor Financing course to learn all the ins and outs and legal necessities involved in Vendor Finance. Our training also involved hands on experiential workshops and A LOT OF HOMEWORK!
