Vendor finance agreements

How to safeguard your assets when you're buying or selling a home or business.

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Vendor finance can be a useful option for those who struggle to get a traditional mortgage. It can also grease the wheels on a business sale that might otherwise have been difficult to get over the line. However, this type of deal can be a risky one, especially if you don't have a thorough vendor finance agreement in place.

Read on to learn how to create a vendor finance agreement, the way this type of finance works and why it's so crucial for buyers and sellers to be on the same page from a legal viewpoint.

What is a vendor finance agreement?

Vendor finance, which is commonly known as owner finance or seller finance, is an alternative method of lending to fund the purchase or sale of a home or a business. Effectively, a buyer borrows money from the seller to help pay for the asset without the buyer having to get a traditional loan, such as a mortgage from a bank.

A vendor finance agreement is a document that oversees this financial exchange, outlining the terms and conditions for both the buyer and seller involved. Read more about how vendor finance works.

How to create a vendor finance agreement

Using an editable template from a reputable online legal brand as Sprintlaw can be a great starting point to ensure that you create a vendor finance agreement that's legally sound.

Other websites who offer a wide range of customisable and downloadable templates, either for free or for a fixed- or subscription-cost, include as follows:

  • Wonder Legal. For $49.99, you can input your information into Wonder Legal's form builder, and download a loan agreement with your exact specifications.
  • Lawpath. Lawpath is home to a huge range of customisable templates that can be downloaded for a small fee. In fact, your first document won't cost you a cent.
  • Legal Vision. While Legal Vision doesn't have a specific vendor finance agreement template, their expert team can help negotiate terms between the buyer and seller and draft up a vendor finance agreement document on your behalf.

Alternatively, you can hire the services of a lawyer to create the document for you. Or you might use a legal template as a starting point for a draft, and then get your document checked over by a legal professional.

You can find these service in a matter of clicks with the following brands:

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When might I use a vendor finance agreement?

Vendor finance is most commonly used when an individual who is buying a home or business cannot get a traditional lender, such as a bank, to help finance their purchase. This may happen to individuals who have a low credit score rating, who are recently self-employed or are struggling to put together a deposit.

Therefore, you'll want to use a vendor finance agreement for any deal you're involved in where a buyer can't get a bank to finance the major purchase of a property or business.

Understand the difference between vendor finance and a home loan

Purchasing a property using a home loan is one of the most common ways to buy a house. Also known as a mortgage, a home loan is when you borrow money from a bank or a lender to purchase your home. In this case, you'll enter into a home loan agreement that states the details of your mortgage including your loan term, interest rate and monthly repayment.

Vendor finance is in some ways similar to a home loan, in that it is a type of finance that often requires an initial deposit and a loan that must be paid back in instalments over an agreed period of time. However, in the case of vendor financing, you won't be utilising a bank or a traditional lender, but the finances of the property owner themselves.

What's included in a vendor finance agreement?

Committing to vendor finance is notoriously riskier that securing a home loan. For this reason, it's important to take time to write up your agreement and to ensure that you've covered all bases to protect both the seller and buyer involved.

Here's a general outline of the key sections you can expect to find in a vendor finance agreement:

  • Personal details. You'll want ti include the names, addresses and contact details of all parties involved to confirm who the contract refers to.
  • Property information. To safeguard your loan or property, it's important to include a detailed description of the property and its value.
  • Repayment. Just like a traditional mortgage, your vendor finance agreement needs to include the key financial details. This includes stating the deposit amount, loan amount and repayment terms such as monthly repayment amount and loan duration. Find out tips and clever ideas for saving up for a deposit on a home.
  • Interest. As you'd expect with a loan, you must decide on an interest rate and state this in your agreement along with the type of vendor loan you have chosen. For example, terms finance, mortgage-backed finance or lease option finance.
  • Terms and conditions. Aside from the financial terms, a vendor finance agreement template also includes a list of the buyer's responsibilities. For a house sale, this should address things such as whose responsibility it is to maintain the property and garden.
  • Default terms. A key section in a vendor agreement is addressing what will happen if the buyer can't make the loan repayments. Most agreements will include a statement of the seller's right to evict and foreclose.

Do I need to go through a lawyer?

Writing any type of legal contract on your own can be tough going, especially when there's so much riding on it, like a business or property. As you'll be agreeing on terms and conditions privately with the vendor, you'll want to ensure you have a watertight vendor finance agreement in place. To that end, an experienced lawyer can be worth their weight in gold. What's more, they can help with other important duties along the way, such as changing property ownership.

How effective is a vendor finance agreement?

Market risk, higher prices and murky regulating laws make vendor finance a high-risk investment compared to more traditional finance options such as home loans. That's why it's so important to take the necessary precautions, such as by writing a comprehensive vendor finance agreement, to safeguard both parties involved. Should any disputes arise in the future, a vendor finance agreement document can be held as evidence in court and used to hold one party or another liable.

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