Seller finance is when the owner provides finance to a buyer. Legal experts believe this form of finance may have been in Australia for a long time-some believe since settlement in 1788. The banking system in Australia developed quickly and in the 1850s it was helped along by the gold rush as the banks started lending. Prior to that finance was only accessible to merchants, not every day people. As the economy expanded people wanted to buy property, so the owners started offering the property on payment terms.
In antique shops today, it's still possible to find historical real estate flyers promoting seller finance. For example, in the 1880's standard investment terms for a house and block of land involved paying the purchase price over four payments: 25% up front, 25% after six months, 25% after 12 months and the final 25% after 18 months. The purchaser had to pay 6% per annum interest on the outstanding amount. In that way the seller could get the price they wanted in exchange for offering finance.
This type of transaction was beneficial for both the buyer and seller. The seller was able to receive 12 pounds per block of land instead of the cash price of 3 pounds. Also, the buyers were able to purchase the land immediately instead of waiting and losing the opportunity to purchase. Another benefit was the buyer was able to pay the purchase price off over time out of their earnings-making it more affordable as cash was often scarce.
Seller finance continued through out history coming in and out of favour, depending if credit was easily available or difficult. For example, during World War II, because most of the available funds were used for the war, it was quite common for a seller to offer finance to a buyer because it may have been the only available avenue if they wanted to sell.
During the 1960's this system continued kick started the Great Australian Dream. Buyers would first purchase their house block on vendor terms and once they paid off the land, the bank would then provide finance to build their house. This was the start of the "Great Australian Dream" to own your own home.
Seller finance started decreasing from the mid-1960's because the banks made home loan finance more readily available. Prior to that time, banks gave loans for houses but not for land. In the mid-1960's banks began to offer loans on land and home packages for the first time. In the past, seller finance would come and go in and out of fashion based on the banks availability to lend. Now seller finance is becoming more popular due to the Global Financial Crisis and the new credit reporting system that Australia has recently adopted.
It's an interesting part of Australian history that sellers and buyers have been mutually benefiting from seller finance, some believe since settlement. The appeal of seller finance is that a seller achieves the sales price for their property and it's easier for buyers to buy, because finance is in place. There is no waiting or concern if the buyer is eligible for a bank loan. Of course the buyers must qualify and be able to afford the payments. They buyers are happy for the convenience of not qualifying for a new bank loan. The seller is happy to achieve their price and have piece of mind.
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and listen to Rick Otton's free, popular property investing podcast, Creative Real Estate.
Australian property investment specialist and best-selling author, Rick Otton, has been investing and teaching his innovative real estate strategies for 23 years. As the founder and director of We Buy Houses Pty Ltd, his goal is to empower people with knowledge through his cutting edge investment strategies
Disclaimer: while due care is taken, the viewpoints expressed by contributors and/or sponsors do not necessarily reflect the opinions of Your Investment Property.
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