Its a great feeling to finally buy a home of your own, but most purchasers typically do not have sufficient funds to make an outright purchase. It would be great to have that kind of money as spare change, but most of us don’t. While a many of buyers will look towards mortgage lenders and other conventional lending institutions to get the necessary funds, they can sometimes find their loan application rejected for many different reasons.

This usually happens when the buyer does not have the minimum required funds to make them qualify for the mortgage or if the purchaser has earlier defaulted on a previous loan. In such cases, the buyer has another option for funding the purchase of her new home and that is to take a loan with the owner. This is called deposit funding by the vendor, in other words - vendor finance.

How Does Vendor Financing Work?

To help us understand how this transaction works, we will draw an analogy from a vendor who may want to sell their home to a potential purchaser. If the purchaser does not have the ability to purchase the house outright, he or she may agree with the owner that the purchase price will be based on a set of terms and conditions that both the buyer and seller agrees to be fair.

Very often the contract of sale will state that the title to the property will remain with the vendor and will only pass when full payment of the amount outstanding is paid by the purchaser.

Normally, purchasers can expect to get vendor financing of up to 80 percent of the purchase price. It is very similar to lay-by purchase from a variety store. The difference with vendor finance is that the purchaser can actually live in the home while making the repayments to the seller of the property.

Generally an investor will purchase the property at a discount market rate and negotiate with a home buyer who will purchase it at above market rates. The whole idea is that the investor will earn a little extra money from interest and the higher sell price. The biggest issue we see with this is the fact that most investors don’t know how to buy houses at a large enough discount to sell the property at a fair market price to the new purchaser.

The industry name for this technique is called wrapping where all the homes expenditures are passed on to the purchaser. This can be compared to charges or mortgages as forms of securities used by banks. Discharge of these charges or reconveyance of these mortgages depends on the repayment of any outstanding loans. Just like in these two, the interests of the parties are protected by well laid out legal instruments including caveats and inhibitions and right to sue on covenant. Just make sure you have a good conveyancer who can find clauses in these instalment contracts, to make sure you are not going to be disadvantaged in any way.

We always prefer to see this kind of purchase happen directly with a seller and purchaser so that investors are not even in the middle of the deal. It just means there is more money left for the new buyer and the seller. For the new buyer, they can now look to add value to the home so that they can achieve equity much faster, and look to pay out the owner much quicker. Just make sure you don’t skip the legal aspects and you will find yourself in a great deal.