It is estimated that the baby boomer generation in Australia owns around half of all residential investment property. As this age demographic moves into retirement (the BB’s started reaching retirement age in 2011) many will be seeking to sell their investment properties to fund their retirement. This was a subject I covered in a past blog post HERE.

Due to the current softness of the residential property market in many areas around the country, a significant number of BB residential property investors are wanting to sell their investment properties but are worried about the price they will get, the length of time it will take to sell the house, or even if they CAN sell the house.

Now unless you are an experienced property investment professional, and many of the baby boomers who invested in residential investment properties are not, you will be thinking that a sale of your investment property is the only option. However, this is not the case.

One strategy used by sophisticated property investors to transact their investment properties that you should consider is vendor financing. Vendor financing is where you as the seller also act as the bank for the purchaser. This style of buying is popular with those people who would struggle to get a bank loan because they are self-employed or have recently started a new job, they are a contractor, or perhaps they simply haven’t saved the required bank deposit of 10% or more. As you can see, these people are not necessarily bad credit risks, despite what the bank thinks of their situation!

Vendor financing works well for the seller if you don’t require the sale money immediately (vendor financing transactions typically take around 3-5 years to complete) or you need additional cash flow to fund your own loan repayments, property purchase or lifestyle. Furthermore, it locks in the purchase price at today’s value.

The way vendor financing works in practice is that the buyer enters into a standard residential property lease agreement with you as the owner for a period of time such as three years. The buyer rents the property from you for this time period and pays you a weekly amount that covers a component of loan interest and principal (just like a bank loan!), as well as the property costs such as rates, utilities and insurance. The actual weekly amount is whatever you can negotiate with the buyer, but is usually more than what they would be otherwise paying in rent on the property but similar or less than what the bank would be charging in principal and interest repayments.

A further contract called an “Option” is also executed with the buyer. The option can be structured in many ways, but it essentially gives the buyer the option to buy the house at an agreed price at an agreed time in the future. The objective for the buyer is to build up enough equity in the property through capital growth and principal repayments, so that by the end of the lease term they can re-finance the property through a proper bank loan and settle their purchase of the property from the seller.

Vendor financing works for the buyer because they get to buy a property now at today’s prices and are no longer paying rent to a landlord. This is a terrific way for the younger generations to get into the property market without waiting years to save up a 10% deposit.

It works for the seller because the method appeals to a wider range of potential buyers, they can execute a sale of their property in a soft market, their holding costs are covered, they retain ownership of the asset for the period of the agreement (important for tax depreciation and asset security) and they may also get additional cash flow for living expenses.

You can see an example of this kind of deal HERE.

Vendor financing is definitely worth considering if you are planning your retirement and want to off-load your investment property.