A few frequently asked questions regarding risk minimisation for this type of project.
1. What happens if the property can’t be sold with Vendor Finance
In seven years we have never had a property where we didn’t have buyers to choose from, i.e. there have always been more buyers for these properties, than properties available. The major risk minimization factor in this whole transaction is that you, our JV Partner, own the property.
2. What happens if the new buyers, i.e. the purchasers who buy with Vendor Finance, default
Things do happen in people’s lives. Most of the time defaults are caused by relationship breakup but there are a lot of reasons why people don’t continue with the purchase. The great thing about this type of transaction is the title of the property is in your name. When a new buyer wants to move on, or defaults, the Vendor Finance contract is terminated and we get the property back. Normally we then on sell the property again, usually at a higher price and receive another deposit.
3. Are the new purchasers tenants
No. The reason we favour this type of Vendor Finance transaction is because it is in no way associated with the various Residential Tenancy Acts around Australia. This type of Vendor Finance transaction is controlled by the National Credit Code. A Code we find easy to work with and a Code that gives our new purchasers confidence that the transaction is above board. This leaves us with new purchasers that have a “buyer’s mentality” not a “tenant’s mentality”.
4. If I get a number of these properties won’t my Land Tax bill be horrendous
No. For Land Tax calculation purposes, all States of Australia deem you to have disposed of the property upon exchange of contracts. This removes your Land Tax liability from this property.
5. If I buy the property and on sell it at a higher price with Vendor Finance, won’t I be liable to pay a large Capital Gains Tax bill, before I’ve received my profit
No. The ATO has a ruling (ATO ID 2004/407) on this type of Vendor Finance transaction that allows for CGT to be paid on an “emerging profits basis”, i.e. you only become liable for CGT on this type of transaction as you receive it.
NB. It is important that you do not rely on the above information. Talk with your accountant and solicitor about the above questions.
Our systems also ensure:
a. We get it right from the start, by undertaking thorough due diligence on all vendor finance buyers
b. All Vendor Finance buyers get independent legal advice
c. The whole transaction follows the requirements of the National Credit Code as specified in the new National Consumer Credit Protection Act.
d. There is a clear understanding of the roles and expectations of each JV Partner
e. All project cash flow management is undertaken by a specialist Vendor Finance Management company
f. Payment problems are minimised by utilising the services of a specialist direct debit company to collect all payments.