Here are 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
Since 2003 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 minimisation factor in this whole transaction is that our JV Partners 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 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 important thing about this type of transaction is the title of the property is in our joint venture partner’s 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.
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 in the transaction. 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. One of the great advantages of this type of Vendor Finance, from our JV partners’ point of view, is Land Tax disappears. When you sell a property with our legal paperwork, the Land Tax liability moves to the new buyers. And happily, most of our new buyers are buying their primary residence, so they too have no land tax liability.
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 Australian Tax Office (ATO) has a ruling 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 alone. Talk with your accountant and solicitor about the above questions.
Our systems also ensure:
a. We get it correct right from the start, by undertaking thorough due diligence on all properties purchased and all incoming buyers
b. That all Vendor Finance buyers must get independent legal advice
c. The whole transaction follows the requirements of the National Credit Code
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.