Is Vendor Finance New, Or Is It A Sleeper?

by Sheree Becker on May 1, 2011

Is Vendor Finance New, Or Is It A Sleeper?

Is Vendor Finance New, Or Is It A Sleeper?

Vendor finance is not new. It has been used for a very long time for the sale of real estate in Australia. But its popularity goes through cycles – there are times when it is very popular, and other times when it is hardly used.

Question – At what times is vendor finance popular?
Answer – When the banking system is rationing loans for homebuyers and investors.

Question – Does vendor finance work better at times where there are lots of properties on the market, and buyers are hard to find?
Answer – Yes. When everyone else is advertising real estate on price like motor vehicles For Sale $X – Make us an offer! And dropping the price to meet the market, vendor finance stands out because it is advertising on terms For sale on affordable terms to attract buyers who do not have a deposit or bank finance to pay for a property advertised at any price.

Allow me to give an example of a time when vendor finance was popular because bank credit was tight and home loans were hard to get –

>>  In the 1950s, 1960s and the early 1970s, the banks rationed home loans. This was the
process that homebuyers had to go through to own their own home at that time –

  1. Buy the land from the subdivider using a terms contract, where they paid the subdivider for the land by price instalments over 2 to 5 years (reason? – banks did not lend for the purchase of housing land); and
  2. Build the new home using loan funds provided by a bank secured by first mortgage over the land that they had paid off;or
  3. Buy an existing home using a 20% deposit saved, borrowing bank funding/ life insurer funding/ credit union funding/ building society funding / private funding for up to 65% of the price, and borrowing another 15% from a finance company at an interest rate of up to 5% pa above the bank rate from companies such as ASL, CAGA, ESANDA, FCA, Custom Credit and IAC (because the maximum the banks would lend was 65%).

This changed when deregulation of the financial markets from the 1960s onwards led to the banks loosening their lending policies and becoming the dominant players in the residential lending market. This dominance by the banking system has continued until the present day.But clouds are forming which will affect this dominance and which are resulting already in a steady revival of vendor finance for real estate.

One cloud is the Basel II implementation in Australia of tighter financial controls for the banking system, resulting in less home loan money being available. Another cloud is that the wholesale lending market is not providing banks the cheap and easy funding that it provided before the GFC (the 2008 Global Financial Crisis) to make 95% of value loans any longer.

There is another reason why vendor finance is experiencing a revival which is that other sources of housing finance, namely the non-bank and low doc lenders which had a 20% share of new home loans have not made home loans since their securitised funding dried up with the GFC in mid 2008. Remember Bluestone, Pepper, Wizard Home Loans, Seiza, Challenger, GE Money and Liberty?

Need help with Vendor Finance? Give us a call at We Buy Houes 4 Cash for all your help. Remember we are licensed by ASIC and are here to help you put the pieces together.





Content care of Cordato Partners