Vendor finance provides new approaches to owning or selling a house in a difficult market

The world of property ownership is changing. The GFC and its aftermath have caused traditional methods of buying and selling the Australian home to come under scrutiny. The Australian public is proving increasingly receptive to new and less expensive strategies to buy and sell property.

Housing market predictions are subject to much spin doctoring. In an attempt to talk up the market, real estate agents would have us believe that the worst is over and things are on the up. The Australian Bureau of Statistics (ABS) however, tends to be a reliable source of information that often paints a different picture. Its recent figures reveal the following:

• a 1.1% national fall over the March 2012 quarter
• average Australian house prices have now fallen 6.1% from their last peak

The fact is that property prices have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS. 

Why is the market tough at present?

Tightened lending practices have been bought in by lenders in an economy where their cost of funds is high and the global economy has ongoing challenges. Additionally, the Australian Securities and Investment Commission (ASIC) brought in stringent lending criteria and the new National Consumer Credit Policy (NCCP) is making both brokers and lenders more cautious in their lending practices. These forces have made it difficult for many potential home buyers to borrow and, in turn, made it difficult for property vendors to sell their properties. 

What is the impact of this tough market?

Borrowers often simply don’t have a 20% deposit (plus stamp duty costs) for a house or unit purchase that may be costing them $400,000-$600,000 at the lower end of the sought-after capital cities markets. The discontinuation of the government grants for stamp duty exemptions for first-home buyers has caused a rapid reduction in the numbers of first-home buyers seeking properties at present.

Increasing numbers of self-employed and contract workers have particular challenges in qualifying for a home loan. Frequently their incomes are not packaged in a way that presents well to credit assessors despite the fact that their actual incomes are robust.

Fewer buyers means fewer properties sold. Many sellers are going through the agonies of waiting months for properties to sell and are being forced to lower their sale price well below expectations. Of course when the property does sell at a lower rate they are still having to pay real estate agents 1.5-2.5% commission on top of the marketing costs.

Investment properties and negative gearing that looked so attractive a few years ago have, for many people, become a painful liability. With little hope of a quick sale in a slow property market and the possibility of negative equity looming, the viability of a negatively geared property often looks questionable.

These are tough real estate market conditions, and those of us wanting to reduce debt and gearing levels by selling a property have often faced difficulties. Those of us wanting to buy into the market or with grown children seeking their first homes have often been challenged by lenders who will not lend money and valuers who seem to routinely undervalue the properties we offer as security for our loans.

Seller or vendor finance?  What is it?

It’s timely that we look at some lateral solutions to these challenges. Chan & Naylor Finance has been discussing these issues with an associate who specialises in vendor finance. We present the benefits and the new thinking around processes involving the use of vendor finance when selling or acquiring property. Strategies such as “rent to buy” are rapidly gaining acceptance and provide an attractive alternative to the traditional approach to buying and selling houses and units.

Here is some information from them on how the process works.

SELLERS
There are several reasons why owners may want to sell their property quickly:

• real estate agent hasn’t found a buyer
• cannot keep up with their home loan repayments
• have a negatively geared investment property and want to reduce gearing and debt levels
• have a property with negative equity
• have been retrenched
• need to relocate
• have a property that requires work or is unattractive
• have acquired a deceased estate property that they don’t want to keep
• are going through a divorce

Example
Here is an example to demonstrate how “rent to buy” works for sellers:

John has an investment property he bought for $450,000 two years ago with a $380,000 mortgage.
He wants to sell quickly as its market value is dropping below $400,000. The house has failed to sell over a four month period and has cost John $6,000 in marketing and will cost him another $6,000 in real estate agent’s commission when it does sell.

Fast Home Solutions (FHS) agrees to purchase the house at the market value of $400,000. The transaction takes only days. The transaction is similar to buying equipment through Harvey Norman, where you pay for the goods 24 or 36 months later. A deposit is paid to the seller, John, and monthly payments to cover the home loan repayments are made from rentals paid to John by FHS from that point on. John has the security of retaining ownership of the house until final payment is made. After 24 months the balance is then paid to John, the mortgage is replaced and ownership on title is transferred.

Benefits for the seller

• quick sale in days, not months
• seller doesn’t have to pay the $6,000 real estate agent’s commission
• seller receives sufficient monthly rental to cover the mortgage payments
• receives market value for the house

BUYERS
How does the bendor finance process work for a buyer?  Many home buyers are finding it difficult to achieve home ownership because the banks are making it difficult to qualify for a home loan.

Key reasons for failing to qualify are:

• newly arrived in Australia
• are contracting, self employed or receive cash payments as income
• the buyer may have black marks on their credit record
• the buyer may not have a stable employment or rental history, or
• they simply don’t have a big enough savings for the deposit and costs required – up to 25%  in most cases

Example
Here is an example to demonstrate how “rent to buy” works:

FHS has purchased a house from a seller for $400,000. They introduce a buyer, Sam. Sam is an IT contractor with $30,000 savings for a deposit and costs of a purchase. This is insufficient to complete the purchase. Additionally Sam doesn’t qualify for a home loan because of an irregular employment record, despite the fact that he is earning $130,000 per year. Sam is presently renting and paying $500 per week. He agrees to buy the house. It takes only days to organise and sign the legal paperwork.

Sam will pay rent plus an additional amount to save for a deposit over a period of around 24 months or less until his employment record is more stable, his rental history is good and he can qualify for the home loan he needs. At Chan & Naylor Finance we can work with FHS and a buyer to prepare them as quickly as possible for the purchase loan that they will need to complete this purchase.

The seller has the security of retaining ownership of the house until final payment is made. The original home loan is then retired and the property title is transferred.

Benefits for the buyer

• the buyer can get to own a property without having a full deposit saved or a bank loan
• the buyer gets into a property with an agreed price
• FHS works with the buyer to establish a savings routine for the home loan deposit
• Chan & Naylor Finance helps with advice to ensure the buyer qualifies for his own home loan in the shortest possible time
• should the buyer improve the appearance of the house (agreed with owner), any increase in value is retained by the buyer
  should the property market improve, any increase in the house value is retained by the buyer