The magic bullet to substantially increase your deal leverage
I often find that vendor finance is at once under-utilised and the Holy Grail. It’s crazy how many times complicated or protracted financial tools are used where a simple vendor finance mechanism would be the obvious choice. I guess people avoid it because they think it’s a tough negotiation or that the vendor will flat out reject it.
I use vendor finance – or at least an element of it – all the time when buying properties, businesses… anything really! It’s almost like your way of enforcing warranties should something go wrong or just differently to how you anticipated it. The trouble is, in the property world it’s pretty much “what you see is what you get” – but this isn’t always the case.
Purchase lease options
Anyone who’s familiar with me in the property arena will know me for my work using property options and purchase lease options. This is where you agree an option (not a deferred completion) to purchase a property at any time within a specified timeframe. Then, with a lease option, you agree to lease the property during this time, so that you can make use of it whilst you wait to purchase it. If carried out correctly – and legally – this can give you all the benefits of ownership without strictly owning the property. For example, you can benefit from rental profits as well as any appreciation of the value of the property because you will buy it for the pre-agreed amount, even if the property is worth more when you come to exercise your right to purchase.
I’ve made a lot of money using these methods, but you must be careful. Whilst this is a financial tool touted as a way to get into property with little money and experience by many of the gurus out there, it’s actually an advanced purchase mechanism that requires some degree of property knowledge, skill and business acumen to get right; yes, you’re benefiting from the perks of ownership, but you need to bear in mind that you’ll also have all the responsibilities of ownership…
This is another method that I’ve had success with in the past. Whilst similar in nature to purchase lease options, private finance – or more commonly referred to as private mortgages (one form of vendor finance) – is where the seller becomes your ‘mortgage company’, allowing you to pay off the purchase price over time. This works particularly well when buying from corporate entities, even better when the transaction is for a commercial property.
It can also be a great way to push struggling deals over the line if the finance you’ve arranged falls short, or if there are legal or planning issues you need resolved that can’t be sorted pre-completion. Saying, “let’s put this last £150,000 of the purchase price into a vendor finance arrangement where I pay you X amount per month over three years, that way we can complete…” can be a very powerful thing. Maybe even say to the seller: “imagine the monthly payments as a kind of deferred income – take a break from work and go on holiday for six months…”
Another great way to use this method is to get better rates on finance, as refinance tends to be easier and somewhat cheaper than arranging purchase finance. So, for example, why not put the property in the buyer’s name with zero payment, but agree to a vendor finance arrangement with the seller and make interest-only payments to them, with them having a charge over the property, until you can refinance. This then pays the seller off in full. Of course, in this situation it would require the property to be unencumbered (have no mortgage), but your creativity here is the only limitation.
How to find these deals
Direct-to-vendor is usually the key. When I was more active in property before becoming a lender, I would spend anywhere between £1,000 and £2,000 per month on advertising directly to individuals who were looking to sell their property, but hadn’t yet approached estate agents. You can do this in a variety of ways, Facebook, Google, industry media, even bandit boards… again – how far does your creativity stretch?
Vendor finance is such a handy thing to have in your toolbox. I wouldn’t rely on it solely to execute deals, but it can certainly hammer out troublesome properties or give you the leverage you never thought you could have.
The author is not an accountant or finance professional. You should always discuss your personal circumstances with an accredited finance professional