KEY POINTS:
Wow! Get $50k INTEREST FREE (for one year) plus a further $50k vendor finance on this property!!!"
That's the headline on a Trade Me listing for the sale of an apartment in central Auckland.
The owner, investor Keith Williams, is offering to help a purchaser buy the property - for which he is seeking offers over $640,000 - by lending up to $100,000.
Vendor finance, where the seller of a property lends money to the purchaser by accepting delayed payment on a portion of the asking price, has been used in New Zealand in the past. It may make a comeback in a cooling housing market, where mortgage finance is not as readily available as it was a year ago.
Williams says: "This is the first time I have tried it. The market was so slow and the banks getting so tight in lending criteria people [were] finding it difficult to come up with a 10 per cent deposit."
He will lend $50,000 interest-free for a year, and ask for a bank floating rate on the other $50,000. At the end of the year, the whole amount will be charged at the floating rate.
"The idea is that you are making it easy for the first year," says Williams.
"I want my money back eventually. If you have an open-ended arrangement there is no incentive for the person to pay back."
Jeff Cureton-Royle is a mortgage broker who specialises in arranging finance for borrowers who fall outside banks' standard criteria.
He has been involved in a number of vendor finance transactions recently and says it is being used as a marketing tool by sellers, including developers. In a slow market it can work to the advantage of all parties, provided they are all open about the arrangement.
Property lawyer Jonathan Flaws of Auckland firm Sanderson Weir, which specialises in advising the mortgage industry, recalls that vendor finance helped him buy his first property in 1970. "The bank lent an amount on first mortgage, the vendor left in the second mortgage and I provided a 12 per cent deposit. The vendor sold the second mortgage at a discount - a common process in those days.
"The benefit of the vendor leaving the second mortgage in was that it enabled me to borrow at a reasonable rate from a bank on first mortgage.
"A result of the current climate is that the clock is being turned back and many parties are looking at how property purchases are funded.
"It may well be that the vendor second mortgage provides some assistance to people who would otherwise struggle to raise money to buy a house in uncertain times."
The mechanics of the transaction are that the vendor leaves in finance as a second mortgage. The purchaser's solicitor would receive notices from the bank for the first mortgage and notices from the vendor's solicitor for the second mortgage, prepared by the vendor's solicitor.
Flaws says that for buyers going into a vendor finance transaction, it may be advisable to have a first mortgage set as a low proportion of the property's value, possibly interest-only for a period, and for the buyer to focus their efforts on reducing the second mortgage.
"From the vendor's perspective, if the second mortgage represents the equity gain on the property, it could well be a useful technique to enable the property to [sell] and for the vendor to reduce exposure to debt by selling the property."
Lindsay Lloyd, another specialist property lawyer and a former chair of the Property Law Section of the NZ Law Society, agrees that there is nothing unusual about vendor finance arrangements but says the biggest difficulty in getting them off the ground is usually obtaining the consent of the bank as the first mortgagee.
He cautions that purchasers need to be aware that vendor finance loans are often short-term, a maximum of three years perhaps, and that borrowers must consider how they will refinance at that time.
Mortgage broker Darren Pratley of Auckland Home Loans has found that lenders are wary of vendor finance transactions. The legal process is necessarily complex if it is to ensure that all parties' interests are protected.
Lenders are also looking closely now at the amount of money being put into purchases by buyers, says Pratley.
They want to see that there is a strong lending proposal, with, for example, the maximum of equity being provided by the buyer. The question in lenders' minds, he says, is: "What happens if the term of the vendor finance is up and purchaser isn't able to repay?"
Pratley says it is vital to obtain legal advice and to put the terms and conditions in writing so you can get clear documentation. "Unless you agree on how it is going to work from the start, it's difficult to make it up as you go on."
Cureton-Royle has not encountered major difficulties with first mortgage lenders but adds that no matter how carefully the deal is constructed, a vendor is at risk if the purchaser does not repay and the property goes down in value.
Most of the deals he has seen have involved first-time buyers but, in one, a buyer was expecting a promotion and moving upmarket. The main lender approved the arrangement subject to a confirmation of the promotion.
Ian Park, head of retail banking at ASB, says the bank has not noticed a marked increase in applications involving vendor finance but that it would look at applications on their merits. There are several factors the bank would consider:
* Whether the vendor was seeking a first or second mortgage.
* The priorities being requested by the parties involved.
* Whether the purchase price included a factor for the vendor finance. "For example, the price might be higher because the interest rate on the vendor finance is below market rates."
* The terms of the finance, including the interest rate and length of term.
* Arrangements to repay the vendor finance, particularly if property prices do not rise at a rate that would allow a mainstream lender to refinance on maturity of the vendor finance.
* The amount of equity within the property from the purchaser.
Maria Scott is a Christchurch journalist who specialises in personal finance.
