Category Archives: Blog

Make Sure Your Rent To Own Paperwork Stacks Up

Rent To Own Vendor FinanceWhen setting up a Rent To Own most of us focus on the transaction being a bunch of paperwork designed to get our tenant/buyers into home ownership.  While this is correct it’s also important to recognise that it’s made up of two separate documents, i.e. a Residential Lease and a Call Option.

A Call Option is regulated by Federal legislation and the Option paperwork drawn up by your solicitor normally needs no further input, other than:

  1. The tenant/buyer getting independent legal advice, and
  2. The tenant/buyer authorising the Option paperwork.

However a Residential Lease is regulated by State based legislation and does need your input in at least two important areas, other than just getting the tenant/buyer to sign the Lease.  The two important areas are Rental Bonds and Condition Reports.

Rental Bonds

It’s not compulsory to charge a Rental Bond anywhere in Australia.  However we believe there are two very good reasons why you should charge a Rental Bond.  They are:

  • Quite a number of Landlord Insurance policies will not pay out under certain sections of the policy unless a rental Bond has been lodged with the State’s Rental Bond Board (different names are used for this government department in each State), and
  • If something goes wrong with your tenant/buyer and you do end up in a Tenancy Tribunal, your Lease is going to look quite ‘non-standard’ to the Tribunal if a Bond has not been paid and lodged.  A couple of very experienced vendor financed solicitors have confirmed this as a good procedure to help ensure your Lease doesn’t stand out in the crowd.

Condition Reports

In NSW and Qld it’s compulsory to undertake a Condition Report and give two copies of this Report to the tenant/buyer before they move in.  In Vic it’s only compulsory to do a Condition Report if you take a Rental Bond but, if you do a Condition Report, you have to supply two copies to your tenant/buyer.  Condition Reports aren’t compulsory in WA.

Watching The Grass Grow

We’ve found doing Condition Reports to be less than exciting ;-) so it’s worth knowing that a lot of Property Managers have what’s generally called a Leasing Fee.  This Fee covers the cost of the Property Manager setting up the Residential Tenancy Agreement, up to and including the tenant moving in, i.e. they do the Condition Report as part of this service.  Talk with your chosen Property Manager, they’ll be able to give you a quote for what you need done.

CLICK HERE for details of Vendor Finance Management’s on-going management service.

Cheers,

Paul

Vendor Finance Institute

Balloon Payments

Ballon PaymentWith more and more people deciding to sell their properties with vendor finance Instalment Contracts or Deposit Finance, quite a few are opting for relatively short terms, e.g. 5 years, with a large ‘balloon’ payment at the end of the term.

Our discussion here does not include properties being sold with a Lease/Option (Rent To Own) as the National Credit Code (NCC) doesn’t regulate Lease/Options.  However both Instalment Contracts and Deposit Finance are credit contracts and therefore regulated by the NCC.  It’s these two forms of vendor finance we’ll look at here in relation to ‘balloon’ payments.

The following example is an extract from ASIC’s Regulatory Guide 209.68 and relates to a consumer’s ‘capacity to repay and substantial hardship’.

“Example 10: Balloon repayments

Some products involve a large ‘balloon’ payment at the end of the loan term. While a consumer may be able to manage the regular repayments under the loan, whether the product is suitable for them also depends on whether they will be able to make the final, much larger, payment. We would expect the credit licensee to satisfy themselves that the consumer understands, and has the capacity to cover the final repayment before offering this type of product to the consumer.“

A New Way of Looking At It

Since the original Balloon Payments newsletter last year, we’ve run across a number of ideas that attempt to make it clear to VF purchasers that the intent of the Instalment Contract (IC) is for them to refinance within 5 years.

One idea from Tim Hart, the owner of the Vendor Finance Calculator, has caught our attention.  It goes like this:

The IC is still written up for a term of 30 years but, it is clearly spelt out that the intent of the Contract is for the purchaser to refinance within 5 years.  Accordingly the purchaser agrees to a penalty payment of $??? if they do not refinance by the 5th anniversary of the contract.

However to make this penalty payable at the 5 year point would mean the penalty would need to be taken into account in the client’s serviceability calculations, when they apply for a loan.  Not great.

However, if we add this penalty payment to the payout figure, at completion of the loan, the penalty payment may not effect the purchaser’s serviceability calculations, during the application stage.  Just as the old “early payout penalties” did not have to be included in serviceability calculations.

Check With Your Vendor Finance Specialist Lawyer

This is just one of a number of options being considered by your local VF friendly solicitor ;-)   Please only regard the above as a personal opinion and ensure you get appropriate professional advice on this matter from your solicitor.

Cheers,  Paul

Paul Dobson
Vendor Finance Institute

Statements

Sending out a loan statement for an Instalment Contract or Second Mortgage would, on the surface, seem to be a pretty straight forward thing to do.  It is but, with the advent of the National Credit Code, these statements have got to contain a prescribed list of information and be sent out at regular intervals.

These and other requirements are set out in Division 5, ‘Credit provider’s obligation to account’, of the National Credit Code. Click here to read Division 5.  It’s worth the read because these eight pages list some ‘serious’ penalties for non-compliance.

A quick overview of the requirements for loan statements are:

1.  The Statement must contain:
Statement period
          Balances
          Credit provided
          Identity of supplier
          Interest charges
          Fees and charges
          Payments to or from account
          Amounts payable by debtor
          Insurance payments  (if any)
          Alterations  (if any)
          Other  (if any)

2.  For Instalment Contracts and Second Mortgages you are normally required to send out a Loan Statement at least every six months.

3.  The opening balance of a Loan Statement you are about to send out must not exceed the closing balance of a previous Statement.

As with rental properties, where a lot of landlords use property managers to manage tenancies, a lot of Vendor Financiers are now using management companies to administer their vendor finance transactions.  These management companies start administering the transaction upon the buyer taking possession and carry out a full range of services from setting up direct debits, to sending out Statements and even dispatching arrears notices as required.

As our portfolio grew, we found administering our loans started to slow down our vendor finance business, so we setup Vendor Finance Management Pty Ltd (VFM) to outsource our administrative burden.  Details of  VFM’s services can be viewed here.

Cheers,  Paul

A Consumer’s Requirements & Objectives

At a recent Vendor Finance Association meeting the topic of ASIC’s requirement for a ‘needs analysis’ of a potential Instalment Contract buyer was discussed.  More on this subject follows.

What ASIC say

ASIC Regulatory Guide 209 requires ACL holders and Credit Representatives to undertake:
“Reasonable inquiries about a consumer’s requirements and objectives”

It then goes on to say:

“Depending on the circumstances, reasonable inquiries about a consumer’s requirements and objectives could include inquiries about:
(a) the amount of credit needed or the maximum amount of credit sought (for example, the desired limit for a credit card);
(b) the timeframe for which the credit is required;
(c) the purpose for which the credit is sought and the benefit to the consumer; and  
(d) whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks.”
 

A simple way to comply

Based on this guidance from ASIC, the Institute has included a “Requirements & Objectives Questionnaire” in our Application Pack.  Details of this Pack are available at, Click Here

While ASIC don’t oversee Lease/Options (Rent To Owns) in the same way as they monitor Instalment Contracts and Deposit Finance (credit contracts), your Lease/Option buyers are eventually going to need a traditional home loan.  Putting your Lease/Option buyers through the procedures in the Application Pack will help set them up for a successful future loan application.

Cheers,  Paul

Australian Consumer Law – Watch Out!

In the first edition of N2P News I mentioned I’d cover the requirements of both the Australian Consumer Law and the National Credit Code in future editions. This edition does mention the National Credit Code briefly but its real focus is to make you aware to your obligations under the Australian Consumer Law, as it relates to selling your property with vendor finance.

Rent To Owns (Lease/Options) and the Australian Consumer Law

The requirements under the Australian Consumer Law when advertising your Lease/Options are pretty simple, i.e. When marketing a property you own, for sale with a Lease/Option, you need to make sure you don’t make false or misleading claims and/or statements.

Instalment Contracts & Deposit Finance and the Australian Consumer Law

The Tasmanian office of Consumer Affairs and Fair Trading, recently wrote this in regards to an ad for a property being sold with and Instalment Contract:

‘The Office of Consumer Affairs and Fair Trading in Hobart has received a complaint relating to the advertising of a property at [address removed], Tasmania on the website of [removed].com.au on [date removed], 2012. In the advert reference is made to “owning the property for $xxx per week. There is no reference to a single price which is an offence under section 48 and 166 of the Australian Consumer Law. In the event of a conviction for the breach of this section of the Act substantial financial penalties can be imposed. Please provide your response to the complaint that this office has received.’

The best description I’ve found of the relevant sections of the Australian Consumer Law is in the ACCC’s, ‘The Australian Consumer Law – A guide to provisions.’ It goes:

‘Section 48 of the ACL prohibits a person from representing a component of a price when making a representation about the price of a good or service, without also prominently specifying the single figure price a person must pay to obtain the good or service, to the extent that a single figure price is quantifiable at the time of making a representation.’

How does this effect our Instalment Contract and Deposit Finance advertising?

Check with your solicitor but the relevant sections of the Australian Consumer Law indicate:

  • You can still place an ad with no price information
  • If you include a regular payment amount in your ad you must nominate the sale price.

However the National Credit Code rules regarding Comparison Rates also need to be considered. In short these considerations can be summarised as follows:

  • If you insert your interest rate or regular payment amount into an ad, you must insert all the prescribed Comparison Rate information.

An example of a format I believe will work for both the Australian Consumer Law and the Comparison Rate rules is:

‘4 bed, 2 bath, double garage, brick & tile home with a great backyard. Seller will finance with Low weekly payment.’

This text would allow you to either have no price information or full price information and not have to insert Comparison Rate information.

The Vendor Finance Institute can assist you with compliance regarding these issues. Click Here to visit VFI.

Cheers, Paul

Welcome to the first N2P News

Hi ,Welcome to the first N2P News.
In the current market many investors are looking to convert their investment property from negative gearing to positive cash flow by selling with vendor finance (VF).  Interestingly a lot of investors have decided to undertake this VF sale on a ‘do it yourself’ (DIY) basis.Selling your own property with VF will normally involve a Lease/Option (Rent To Own), an Instalment Contract or Deposit Finance.  Lease/Options are regulated by the various State Residential Tenancy Acts.  Instalment Contracts and Deposit Finance are regulated by the National Credit Code.Selling with VF can be divided into three sections:
1.    Marketing & Qualifying,
2.    The Legal Paperwork, and
3.    On-going Management.Most DIY’ers are getting the Legal Paperwork done exceptionally well by our excellent VF specialist solicitors ;-) but some are forgetting about their compliance requirements in sections one and three.Marketing & Qualifying

When marketing a property you own, for sale with a Lease/Option, you need to make sure you abide by the Australian Consumer Law and don’t make false or misleading claims and/or statements.

When marketing a property you own, for sale with and Instalment Contract or Deposit Finance, you need to make sure you abide by Australian Consumer Law and the National Credit Code (NCC).

On-going Management

When managing a lease on a property you own that you’ve ‘sold’ with a Lease/Option you need to abide by your State’s residential tenancy laws.  As with standard residential tenancies, some landlords self-manage and some outsource the management to a licensed property manager.

When managing a loan that results from an Instalment Contract or Deposit Finance arrangement, you need to abide by the National Credit Code.  You, as the title holder, are the credit provider and may manage the loan yourself (in accordance with NCC requirements).

However, if you wish to outsource the management of this loan, you must choose a management company that operates within the requirements of an Australian Credit Licence.

Two easy ways to help with your Marketing & Qualifying and On-going Management are:

  • The Vendor Finance Institute sells their NCC Application Pack (Click Here) and their Qualification Pack (Click Here)
  • Vendor Finance Management Pty Ltd provides loan management services for both Instalment Contracts and Deposit Finance.  Click Here to visit VFM.

In coming editions of N2P News we will cover the requirements of both the Australian Consumer Law and the National Credit Code, including information regarding Australian Credit Licence coverage and whether your transaction is being undertaken ‘in the course of a business’.

Please let us know if you recommend negative2positive’s vendor finance selling service. We appreciate your support and will happily pay you for your referral.

Cheers,  Paul