Have you ever wondered what people mean by Creative financing or vendor financing?

Well, here’s an example of a deal that I am going through at the moment that’s really quite exciting and something that I never thought I would see a product from a lender that would  allow you to do it.

It does illustrate the act of vendor financing.

Here’s  a bit of the background on the deal.

The property itself is part commercial, part residential.

That means, in this case,  it’s got a flat above a shop.

This helps in two ways in England with stamp duty because it’s part commercial and also gives you a little bit more flexibility with lenders as to what you can do.

I haven’t tried this with a pure residential property yet, but there is definitely an opportunity to think about this in the future.

So with this particular purchase we have agreed to buy the property from the vendor at a set price. The price is £250,000.

Now. When I looked at the deal I had a good long chat and this is the most important bit! Having a good long chat with the person selling the property, the vendor, to see what their situation is an exactly where they are and what they need for the money.

So for example,

Do they have a mortgage?

Are they selling because they want to go and increase and buy something bigger

Are they downsizing?

Are they selling because they just don’t want the business or property anymore?

All these are questions that should be asked at some point during your chat(s).

So that you can get an idea of where we are with the property.

Now it turns out after having a couple of chats with the seller of this property that they are actually selling because they have had enough of working their business in this property.

They’ve been doing it for many years and they are little bit jaded with the new staff rules and the new laws that have been introduced from the government for employees for employers. Things like  extra taxes, extra employment rights etc etc.

So they just want me to buy the property.

It also turned out that the property actually has no mortgage on it currently.

They paid the mortgage off over the time they’ve owned it.

They were talking to me about what they were going to do with the money once they’ve sold it.

Now there is obviously an Issue with some of the taxes that they have to pay and we discussed that and how they might be able to improve that situation and reduce the amount of tax they have to pay.

This is something I suggested that they could do better on and gave them links to professionals who can give them proper tax advice. I am not a tax advisor so I couldn’t really confirm the things I was suggesting, but I was giving them an indication of what they might be able to do if they got a good tax advisor on board.

Then we looked at what they were going to do with money.

Effectively they were going to go and use some of the money to pay off staff.

There was redundancy payments to be paid if you’re going to make your business staff. Redundant and close down the business ,Then you are going to have costs involved to do this.

Redundancy money for however long they’ve been working for you.

Some of the sale proceeds were going towards that.

Some of the sale proceeds were going to go towards purchasing a new small investment property that they could generate some income from.

It turned out that if you add all of those together, they only really needed £160,000 to get to this point. Which means there was still £90,000 that they were going to have that they weren’t sure what they’re going to do with.

At this point I had the conversation with them and said  “What if  You lend me that £90,000 for five years?

I will pay you some interest on that money over the five years.

In five years times I will pay you back that £90,000.

This means that I would only have to find £160,000 to purchase this property.

The remaining £90,000 would be loaned to me by the vendor.

So this is exactly what happened. I have an amazing mortgage broker who found me a company that will lend on this basis.

They will lend the £160,000. On the basis that I’m also borrowing £90,000 from the seller of the property for five years. They wanted to do a few checks and make sure that the rental income would cover both the £160,000 and the £90,000 before they would agree to lend me the money.

I have to put something into this deal because the lender was very worried about what they call me having “no skin in the deal”, effectively me having none of my money in the property.

Which is interesting because that’s what I was aiming to do. !!

And that’s what the whole point of trying to do the property investing professionally is all about

Not putting any of your own money into the deal. And lenders obviously don’t like that, so they insisted that I put in 10% of the purchase price, which is £25,000. So effectively they would only lend me £135,000. I would have to find £25,000 to make it up to £160,000 and then the vendor would be lending me £90,000.

Now you might ask, how am I going to pay this £90,000 back?

Well, in five years time this property will increase in value. It’s in a great location, a great town, sought after. In fact, the vendors had two offers made already by other people who want to buy the property. So, you can see it’s a great deal for me. And when the value goes up in five years time I should be able to refinance and pull out the £90,000 to pay them back.

This effectively is a vendor finance deal. With the exception of the £25,000.

Now, about £25,000 as it happens this is also coming from an Angel, but that’s another story and actually just goes to show that You can Purchase a property with very little of my own money.

Obviously, I have to pay some solicitors fees. And surveys, fees etc etc to purchase the property, but that’s very small compared to the actual purchase price of £250,000.

If you want to do a deal like this, or you’re interested in doing something in property investing , please get in touch, see if I can help you.

Maybe we can book in a chat and see what’s available or what’s possible for you?