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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.
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.
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:
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:
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.
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.
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:
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.
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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