Buying any property in any manner carries some risk. Whether you are a first home buyer or a seasoned investor.
With risk comes reward. If you as a buyer have been denied the opportunity to purchase a home through a bank, what are you prepared to do to achieve that dream?
Even when buying with a traditional bank loan there are risks and you need to be aware of them.
For example, if you don’t do your due diligence, or haven’t planned your finances you may find that down the track you are struggling to make ends meet and this could impact your repayments and your lifestyle.
Other risks cannot be foreseen, such as illness or injury or losing a job or spouse. Any of these can prevent you from earning the income needed to make the repayments.
If repayments are not made to the lender, ultimately you could lose your house.
When you buy a house without a bank using Vendor Finance, all these risks apply, but there are also other considerations to be aware of.
Since the lender is a private individual or a business, the contract you have with them will most likely not be the same as a contract you would have with a bank. It is imperative that you understand your responsibilities and obligations and use an independent lawyer that understands Vendor Finance to help you with the contracts.
The terms of the contract are determined by the seller, and since they are taking on their own risk by providing finance to the buyer, they will want to build in security to protect them if the buyer defaults, misses payments or cannot complete the transaction.
Do the right thing
Most vendor finance sellers just want to do the right thing by providing opportunities to buyers that have been rejected by the bank system. They want to help people own homes, they do not want to rip buyers off or cheat them. However not all sellers have the same level of knowledge or experience to cover all aspects of a clean vendor finance transaction. It can, and has happened that a contract is not set up correctly and problems do occur.
Experts such as lawyers and finance brokers that understand vendor finance and are familiar with the risks and rewards, will help ensure that contracts are set up correctly and adequate planning for future finance is conducted.
In most cases, the buyer’s lawyer will ensure that a caveat is placed on the property. This provides security for the buyer by ensuring that even though the title has not yet transferred, the seller cannot sell the property unless the caveat is lifted. Most sellers will agree to this as they understand the risk that the buyer takes as well.
It is also advisable for the seller to use a reputable vendor finance management process and payment collection record keeping. The buyer should also keep records of all payments and written records of all agreements.
In recent years government regulation has been introduced to help protect buyers and ensure that homes that are sold using vendor finance is done so professionally. Vendor finance businesses are required to hold either an Australian Credit Licence or a Real Estate Agent Licence, or both.
This helps ensure that transactions are conducted according to responsible lending principles and real estate laws.
There are guidelines relating to responsible lending that help a seller determine if the buyer is a suitable candidate. This includes background checks on the buyers finances, credit history, savings and employment. This is no different to a bank. The seller will need to “screen” the buyer before they agree to sign a contract.
Often a mortgage broker will be involved to help map out a plan to get bank finance down the track, and credit repair companies can be employed to remove blemishes from a credit file, so the buyer can qualify for bank finance in the future.
Depending on the type of contract, there are process that must be followed regarding hardship and dispute resolution.
However, if the buyer does not provide true and correct information, or if they do not understand the terms of the contract they put themselves at risk.
A buyer has a responsibility to pay back the finance provided by the seller. If the buyer is not truthful about their income, credit history, or does not get adequate financial or legal advice, they risk finding themselves unable to make repayments.
Buyers need to commit to a long term process of buying a home and be sure they are able to afford it. They also should make an effort to maintain a good relationship with the seller, so that if problems do occur it is easy to sit down for a chat and work things out.
The cost of opportunity
Buying a home without a bank is a great privilege that is given to a buyer that has been unsuccessful obtaining bank finance. There is always going to be a cost for this privilege and it should be considered to be the price one must pay to be given the opportunity to own a home.
You can compare to the LMI (lenders mortgage insurance) that a bank will require you to pay for their own security, if you cant come up with more than 10% of the deposit before they provide you with a loan.
So it is fair to expect a private home seller to have some insurance against the contract falling apart. Because if the contract is not completed, they then have to start from scratch and find a new buyer for their house.
What can happen if it goes belly up?
If you have defaulted (not paid or breached the contract in some way), you should expect repercussions. You can’t change your mind on a contract or decide that you don’t want to buy the house anymore, and not expect the seller to want to be compensated for the inconvenience this will cause.
Most house purchases involve paying some money upfront. This is no different to a bank, although the vendor finance deposit is usually much lower. This is usually for the sellers security and in many cases it will probably not be refundable if the contract falls over.
Depending on the type of contract and the reason for default, a buyer can potentially lose all money paid to the seller and any equity gained over time or through improvements and renovation.
However, if set up correctly, the contract should clearly state what happens in case of default and the buyer should understand and acknowledge this.
Who can help if there is trouble?
If your contract has been set up properly and the buyer meets their obligations, there should not be any problems. However, occasionally disputes do arise, as in any contract or rental agreement.
The best thing to do is talk to the seller and find a compromise. The seller usually does not want to go into dispute unless they feel you are not fulfilling your own obligations. But if you feel you have been treated unfairly and cant find a common solution, various dispute resolution processes can be applied. This may include involving organisations such as the Financial Ombudsman Service or Credit and Investments Ombudsman.
In all cases it is best if an amicable solution can be found between the buyer and seller, as these process can take a long time and if lawyers are involved, they can be very expensive.