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Vendor Finance...another way in!

April 16, 2020

What is Vendor Finance? It is a way of buying property without relying on the fickle nature of the present day banks. When they start checking your not so private bank statements only to discover a $10 a month subscription to Netflix and decide you are too big a risk to back ... then it's time to turn your back on these over the top institutions. There are other methods and vendor financing is but one.

It works this way...someone buys a house and then onsells it to you, however, they might pay $500K for it but sell it to you for what is called a 'strike price' which is usually 20% higher than what they paid for it. This is done because they are selling it for a future value. You will also pay marginally more interest than they do so their profit will be residual monthly profit as well as backend payment.

Is it safe?  It is but don't just jump into it. You must do some background checks on the vendor and make sure that they are trustworthy and hopefully have a good record with this type of transaction. Ask for references. There must be a contract in place acknowledging you as the buyer and all the terms that both parties have agreed to. The title will not be in your name until you make the final payment. You may sell the house with the agreement of the vendor as long as they get paid out their strike price.

The benefits of this type of purchase are many: you can get into it with a relatively small deposit, you will be saving thousands by not paying lenders mortgage insurance and instead of paying rent, your money will be paying down your house saving you thousands in rental payments you won't be making.

Usually the vendor will try to get you to refinance within 3 years as this is a fair stretch for the equity growth to cover the strike price payment, however, the term of the contract can be as long as 25 years. Know your terms and negotiate before you sign anything. Check the contract with a lawyer familiar with instalment contracts.

Another advantage is that if you do not have a clean credit file so you have time to repair this before you refinance through a bank.

So...this is yet another way to laterally approach home ownership.

Please contact me if you would like more information or are interested in purchasing a vendor financed property.