Vendor Finance: So they want you to be the bank!?

Vendor Finance: So they want you to be the bank!?

What to look out for when selling your own home (Part II)

In my previous post I talked about the risks and what to look out for when Wrappers show an interest in your house or property. No I don’t mean Jay Z or Snoop Lion (aka Dogg) have seen your home online and have come calling to make an offer. I mean the Wrappers who want to own your home with almost no money down and promise to pay you over time from the money they receive from tenant/buyer they install in your home. This is not a highly recommended method to sell your property. This post is about another ‘buying’ practice that is sometimes offered to home sellers, and by, at times, well-intentioned buyers. This purchase method is called ‘Vendor Finance.’

Vendor Finance

Vendor finance is favoured by buyers who may have been rejected by traditional finance means – banks, are a short time away from qualifying for finance, or their financial capabilities fall short of the price required to obtain the property they are very keen to buy. The latter being the most common example of a vendor finance arrangement.

Whilst vendor finance carries less risk than wrapping, it still comes with a fairly serious warning label. If you are approached by a buyer who is offering to purchase your property under the terms of a vendor finance arrangement, before even considering it, seek detailed advice from a trusted legal adviser and or an accountant.

In effect, the buyer is asking you to loan them the difference in the purchase price. You are in effect becoming a secondary bank or lending institution, with the buyer as your client.

For example, your home is on the market for $500,000 and you meet a buyer who goes head over heels for your home and wants to buy it. The buyer informs you that they can immediately finance the purchase up to $450,000 and would you be open to receiving the balance, $50,000 over, say, two years. They may offer payments monthly, or every six months – this all comes down to what you are comfortable with and what the buyer is capable of.

Initial discussions with the buyer could be quite open and friendly, and you might think the buyer is a great person and seems very genuine, but that is where you must stop and start thinking in ‘worst case scenario’ terms:

“What if we go ahead and the buyer stops making payments on the balance after a couple of months?”

“What happens if they don’t make any payments after they take possession of my home and have moved in?”

This is where your lawyer or solicitor becomes an integral part of any such deal. They will explore worst case scenarios, potential penalties should the buyer be late with any payment or fail to make payments – basically inform you of where you stand legally and the risks you may encounter if you proceed with a buyer under a vendor finance agreement.

If faced with this type of offer from a buyer when selling a house by owner, take a breath, ask yourself whether the whole scenario feels right, seek sound legal advice and proceed with caution – make no agreements unless you are 100{5be8b5650852dcf96a34828ba5a88d9285f6c7439f02c8133f6b05e7d943eaff} sure and feel legally secure. And remember, don’t put all your eggs into the one basket, continue to entertain other buyers who show interest in your home.

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Craig - Agent in a Box

Sharing 18 years of frontline real estate sales experience to help you be better prepared to sell your own home.