Property Purchase – The Alternative Options – Rent To Buy; Installment Contracts; Vendor Financing

Property Purchase Alternative Options

Investing in property or any other asset, is a financial commitment that is dependent on forecasts and assessments of future growth, based on current trends. Past performance can be used as a guide but is not a certified predictor, as any investor will tell you.

Alternate investment options are designed as a short-term solution for those whose goal is to eventually own a home; bridging the gap if you do not fit the lending criteria of standard lenders.

It’s a timeless argument – to rent or buy. This is the question many potential home owners face as they hunt for the perfect home.

Many investors are of the view that the tangibility of a property makes it a worthwhile investment as history shows it will grow in value. This is not guaranteed but it certainly is worth taking into consideration. Judging by the upwards climb of property prices across all Australian capital cities in recent times, this would be a safe assumption. On the other hand, can the market sustain such gains as we have seen?  Some areas or property styles may recoup their value faster than others following a market downturn.

The decision to rent is often maligned with statements like, ‘Why pay off someone else’s mortgage?’. However jaded this opinion may be, it is based on the notion that renting is a choice. Whereas for some, renting is a forgone conclusion, as they struggle to meet deposit requirements. So, what are they to do?

Well, all is not lost. With the savings made by opting to rent (think legal fees and charges, taxes, strata levies, utilities etc) you can divert this money into an alternate investment portfolio. This may include shares or joint venture scenarios, where the outlay is not determined by a minimum deposit. As with any investment, these have their pros and cons but at least you don’t have your house on the line.

There is a lot of talk of vendor finance in property circles and from those ‘in the know’. So, what is it? And how can you leverage it for your situation? Well, let’s dive in and dig up the details.

There are 3 varieties of vendor finance. Instalment plans, rent to own or buy and financed deposit.

Instalment Plans

In Australia, this is the most common vendor finance option. Whereby a home buyer who doesn’t have the financials to purchase a home (whether that be trouble raising capital for the deposit or a tainted credit rating) engages the help of an investor to buy the home on their behalf. The investor makes a purchase and subsequently sells the property to the end-buyer at a higher price, with the advantage of a longer settlement period, often years rather than the standard settlement period of 4-6 weeks. This is all done with the proviso that the buyer will qualify for a loan in the future and refinance the property into their name.

Rent to Own or Buy

This scenario is perfect for those who are renting their dream home. They strike a deal with the owner to pay a higher rent with the promise of having the option to buy the property in the future for a set price.  A portion of the rent amount is attributed to the deposit, allowing renters time to save their deposit.

Deposit Financed by Seller

This option effectively commits a buyer to 2 loans. One from a finance provider, applying for a maximum of 80% of the property value. The other from the vendor, covering the remaining amount, with the view that it will be fully refinanced in the next 2 to 5 years. Large repayments are necessary in this case to repay the vendor loan speedily.

Using these as a ‘way in’, prospective home owners should be aware of the costs, risks and legalities associated. In each scenario, you should expect to pay 10-20% above current market value for your home. Interest rates are generally 1 – 4% higher, depending on the risk assessment made by the vendor.

It goes without saying that contracts are a necessary part of any financial agreement.

In the case of Vendor Finance, the agreements are made between the lender and a private investor, and they will vary to suit the specific terms of the arrangement. The National Credit Code (NCC) outlines some rules to give each party an understanding of their obligations and responsibilities. This will help you to establish a fair contract and ensure the terms and conditions comply with the code.

When it comes to investing, whether it be traditional in the form of property or exploring alternatives, there is no outright superior strategy. What works for one investor may not for another. It’s a matter of the outlay you have, the risk you are willing to take and the longevity you can withstand a housing crisis or interest rate hike. The underlying message is don’t be disheartened. There are alternate opportunities to open up your investment portfolio and broaden your perspective.



DISCLAIMER – Alleura recommends each individual seek the services of a qualified service provider before undertaking any financial investment. The information provided here is for general information purposes only. It is not intended as financial or investment advice.

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