Vendor Finance. I’ve Heard Of It But What Exactly Is It?

Vendor Finance is when the owner of a property (the vendor or seller) decides to sell it directly to a buyer leaving a bank or building society out of the transaction.

The owner agrees to get their money bit by bit over time rather than in one big lump sum, rather like the bank does when you take out a loan from them.

Why Would A Vendor Be Happy To Get Their Money A Bit At A Time?

Not everyone needs all of their money right now. A payment plan may appeal to an owner for a lot of reasons. For example:

§         the vendor may be retired and looking for a long term income stream,

§         they may want to sell the property at a higher price than those properties on the market competing with each other for a cash sale, or

§         they may just like the idea of giving someone a helping hand to get into the property market earlier than they otherwise could.

Are There Different Types of Vendor Finance?

Yes. Vendor Finance can be done a number of different ways. Three of the most popular types of Vendor Finance strategies these days are Rent to Own, Instalment Plans and Deposit Finance.

Is This Some New Idea?

No this concept is not new. In fact it’s the old fashioned way of doing things.

Vendor Finance has a long history in Australia and was used originally to sell Chatswood and most of North Sydney as well as Maitland and many other areas.

The Australian Government has for a long time, and still does use Vendor Finance to give Department of Housing tenants the opportunity to purchase their rental properties. Meriton sells their apartments every day using Vendor Finance.

On the last Government Census question 56 asked if you are buying your home using a Rent to Own program.

How Does Rent To Own Work?

When you Rent to Own a home, you use a normal Rental Agreement and at the same time you put some paperwork in place that gives you exclusive rights to purchase that property within a certain period of time, for a price that is set now. You pay for the exclusive rights by paying a small deposit at the start and building on that every week.

The weekly payment is made up of the rent plus this weekly ownership payment, the total of which is similar to what you would pay if you had a mortgage.

For example,

You rent to own a home for two years with a purchase price of $350,000.

You pay a deposit of approx 3% or $11,000.

You pay rent of $390 per week and ownership payments of $130 per week making a total of $520 per week.

This would be around what you would pay for a bank loan if you could get one.

The weekly ownership payment along with the initial deposit you paid will go towards the price of the property when you buy the home. After two years in this example, that would be a total deposit of $24,520.

How Does Rent to Own Benefit Me?

1.      Rent to Own offers you the opportunity to live in the property while you become ‘bank ready’. Getting ‘bank ready’ means getting all the details right that will allow you the opportunity to get a bank loan down the track.

a.       Things such as showing a long term savings history, having a good sized deposit, cleaning up your credit report, and showing a good history and capability of regular payments.  

2.      The purchase price is fixed from the start. During the period that you have the exclusive right to purchase the property the price doesn’t change. That means any growth in the value of the property ultimately benefits you. If the property value goes up during this time, you may not need to come up with as much deposit because the house is worth more.

3.      You can buy with a much smaller deposit. Since the Global Financial Crisis banks are finding it much more difficult to get funds to lend out. They therefore are wanting bigger deposits from borrowers, and they want those funds saved at their bank for at least six months. They say that it is to show a savings commitment which is partly true, they also want it in their accounts so they have more funds available to lend out to other borrowers.

4.      You can improve the value of the home while you live in it. When you Rent to Own you can make cosmetic improvements to the home because its going to be yours. That includes painting and decorating, putting up your precious photos, paintings and clocks, improving the yard and any other improvement that would add value. Research shows that homes with an owner occupying value higher than properties with just tenants. Any improvements you make to the home will mean the home is more valuable which will be to your benefit.

5.      Rent to Own is much faster. You can move into your home in a week. There is no long delays in waiting for approval from the bank which can take 8 weeks or more. By the time you get a loan approved, if you qualify, the property you were planning to buy would be sold long ago.

6.      You can live in the home while you are saving your deposit. Avoid all the usual renting hassles such as the owner deciding to sell, the rent going up, maintenance issues not being addressed and so on. With Rent to Own you can live in the home as if it was your own, the payments are fixed for the rent to own period and there is no possibility that you have to move at short notice. You can quickly and easily fix any small problems without having to wait for the owner or Agent to deal with them.

7.      You’re no longer paying dead rent money and paying off your landlord’s house. This Rent to Own is benefiting you because its giving you the opportunity to own a home and the opportunity for long term security for yourself and your family.

Who Is Rent to Own Good For?

The Rent to Own opportunity is great for people who can afford a bank loan but can’t get one. There are many circumstances that cause people to be rejected by the banks such as

• Those who can’t save $50,000 or more in deposit
• Those who are self employed and don’t have enough tax returns to satisfy the bank
• People who are new to Australia and don’t have Permanent Residency
• Those who have had a partnership breakdown and lost everything
• Those who had a dispute over a bill and got a black mark on their credit report
• People who have not been employed long enough to satisfy a bank
• Someone who wants an easy way to buy a home.

What about Vendor Finance by Instalments?

In simple terms the purchaser pays a deposit then pays regular payments (instalments) building up a history of credit worthiness to show a good enough track record to get bank finance at a later date. Instalment plans can go for 30 years but usually are completed within 5 years. The documentation for a sale in this instance is an Instalment Contract.

What is an Instalment Contract?

An Instalment Contract takes the form of a Standard Contract of Sale of real estate which has been modified to provide for the payment of the price by instalments over time. Every contract is a little different and flexible enough to meet the needs of the parties involved.

How is an Instalment Contract Different From a Rent to Own?

With an Instalment Contract the purchaser buys the property from the outset. They pay a deposit, contracts are exchanged and then the property is paid off with instalments. There is no rental agreement or plan to purchase the property at a later date.

What are the benefits of an Instalment Contract over a Rent to Own?

An instalment contract is better than a Rent to Own because:

• You can use your First Home Owner Grant as part of your deposit if you are eligible,
• It is easier to refinance with a bank after a couple of years than it is from a Rent to Own,
• You can sell the property at any time if you wish.

How can I find out more?

 You can call us to get clarification about Vendor Finance. Please feel free to ask as many questions as you like and we will include them on this page for everyone to benefit.

Contact us by phone on 02 4981 8833

Dianne’s Mobile 0438250594

Drew’s Mobile 0417323699

Or by email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it