The advantage to the purchaser of such an arrangement is that they don’t need to approach a bank or traditional lender to get a home loan approved. This can mean the difference between being able to buy a property and forever staying in the rental market. This is particularly relevant if the potential purchaser has a poor credit history, an unreliable income source or a low income, and would find it difficult to get a traditional loan as a result.
The seller of the property continues to benefit from rental income without the stresses of tenant turnover or the risk of getting bad tenants who cause damage to the property. At the same time, the seller can sell their property over time (sometimes at a highly inflated price) without having to put it on the market or declare capital gains tax in a lump sum. There can be additional tax advantages involved in a rent-to-buy or vendor purchase scheme for a property owner (if the home being sold is an investment property).
However, vendor finance home loans come with very serious risks. Such agreements gained popularity in Australia after the introduction of the First Home Owners Grant in 1998, but have since gained a bad reputation due to their lack of regulation. These agreements are often highly complex and can cause confusion and disagreement over the ownership model of the property, as well as leaving buyers at a loss when selling due to the inflated price they’ve gradually paid.
Extreme caution is needed if you’re considering a vendor loan, and you should never enter into such an arrangement without seeking independent financial advice from a trusted source (not a lawyer or conveyancer connected with the vendor finance scheme). It’s absolutely essential to seek independent legal advice if you’re considering a vendor finance loan arrangement. A report from the Consumer Action Law Centre in Victoria in 2016 stated that “these deals typically do not result in successful home ownership and in some cases financially destroyed hopeful buyers.”