Vendor finance under the microscope
Imagine a scheme that brings struggling first-home buyers and desperate sellers together and solves problems for both.
This is the selling point for vendor finance schemes (also promoted as rent to buy , rent to own , buy a house/no bank and we buy houses ) which promoters claim are win-win . However, the truth is that while they may make money for the promoters, there are significant risks for buyers and unwary sellers.
There are various structures used for these deals, but the most common are:
Vendor finance: The buyer pays a deposit, then makes payments to the vendor over 25-30 years or two to five years and is then required to refinance with a mainstream mortgage;
Rent with purchase option: The buyer signs a tenancy agreement but also pays an up-front fee and ongoing fee in addition to rent, which gives the buyer the right to buy the house for a set price usually after two to five years.
Intermediaries seek buyers who can t get into the market and sellers who are desperate to sell (often due to financial problems). The intermediaries may receive a percentage of monthly payments, a large part of the deposit as well as a lump sum if the sale is eventually completed.
I have seen buyers and sellers who have suffered as a result of these schemes. So what are some of the risks?
The price is usually higher than market value sometimes by a lot. This makes it harder for the buyer to build up any equity and qualify for finance;
The buyer s name isn t on the title, and there is no foolproof way to fully protect the buyer s interest in the property. For example if the seller is sued for debts (such as credit cards or tax) or goes bankrupt, others can make claims against the property;
Some intermediaries require sellers to give them a Power of Attorney, giving over the power to deal with the property;
The contract period may be too short for the buyer to build equity to qualify for a mortgage loan. In some cases this is foreseeable. The period may be extended, but this often incurs higher costs.
The term of the contract may be too long for desperate sellers, who can find themselves stuck with the property and unable to move forward with their lives;
Although the industry claims that buyers will take better care of the property than tenants, criminals can take advantage of a lower level of vigilance (such as a lack of adequate property management) and I m aware of some sellers finding their homes used for drug manufacture;
After attending short seminars or bootcamps , some intermediaries are negotiating complex arrangements with little, or no, experience, lacking the technical expertise to minimise risks and, in some cases, to comply with the law.
If the buyer defaults, or doesn t qualify for a mortgage loan at the end of the term, the deposit and all payments may be lost. This is likely to represent the buyer s entire savings .
Of course people need to do their homework before signing any contract, but the future consequences of these deals can be difficult to weigh up.
Despite industry claims, current laws credit, tenancy, property and estate agent regulation are inadequate to deal with all the issues this unusual form of home purchase can create.
Even those in the industry don t always agree on which laws apply, and the types of licences intermediaries should hold.
So can these deals ever work? I hear that some do. However the contracts are complex and risks numerous. Add desperate buyers and sellers to this mix and win-win outcomes are anything but certain.
Carolyn Bond was co-CEO of the Consumer Action Law Centre, and has worked on consumer policy and law reform for more than 30 years. She blogs at www.thenaysayer.net.
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