Normally I would get maybe one query about vendor finance every couple of years but I have had two queries about vendor finance in the last few weeks. This is probably a reflection of the fact that the property market is more of a buyer’s market. So what is vendor finance and is it good for vendors?
What is vendor finance?
Vendor finance is where the vendor effectively lends money to the purchaser in a sale and purchase of property transaction to help the purchaser buy the property. The vendor finance loan is made by the vendor stating that part of the purchase price does not need to be paid at settlement and is instead payable at a later date.
What terms apply to vendor finance?
The terms of the vendor finance are a matter of commercial negotiation. The parties will need to consider aspects such as:
- the amount of vendor finance
- amount and timing of repayment instalments if any
- the final repayment date
- interest rate and any fees
- security for the vendor finance.
Advantages of Vendor Finance for Vendors?
Some of the advantages of vendor finance are that:
- it helps a purchaser to buy the vendor’s property where they may not otherwise have been able to do so and for a price they may not otherwise have been able to pay;
- the vendor may be able to earn a greater interest rate on vendor finance than if they had reinvested the money elsewhere say in term deposits.
Disadvantages of Vendor Finance for Vendors
There are numerous disadvantages of vendor finance for vendors:
- vendors can only provide vendor finance if they have sufficient equity in the property;
- the amount of vendor finance is tied up in the property sold and is not available to be reinvested in other property deals;
- there is a risk of lending to the purchaser. The purchaser often seeks to borrow from the vendor as they cannot borrow sufficient funds from a bank and vendors will need to ask why the purchaser was not able to do so and how that affects the risks of the deal;
- security may be difficult to obtain for the vendor because if the buyer is borrowing most of the purchase price from a bank and needs to top that up with a loan from the vendor it means the bank will have most if not all of the security value of the property under its mortgage leaving nothing for the vendor loan.
Conclusion
Vendor finance deals normally favour buyers more than vendors so vendors will have to carefully weigh up whether a sale of property with vendor finance is a worthwhile deal for them. If vendors are looking at providing vendor finance they will have to ensure that the terms of the loan and in particular the interest rate and fees reflect the risk of the transaction.
By Allister Doo, Partner at Blackwells Lawyers, Email adoo@blackwells-law.co.nz, Web www.blackwells-law.co.nz
