Ever since my parents passed away, I’ve aspired to own my own property – not as an investment, but as a home. Consequently, I’ve spent many years squirreling money away to put towards a deposit and eagerly reading any information I could find on the financing of property deals. When I was younger, I assumed that I’d be taking the traditional route towards property ownership; to scrimp and save for a deposit, go to my bank, get a mortgage, then spend the next thirty years paying it off. As I considered the world of property further, I’ve met several interesting individuals who deal in providing creative funding for properties.
Rather than presenting the traditional model of financing offered by the banks, these individuals provide a source of financing which meets a range of unusual circumstances. As someone whose life story doesn’t exactly fit the traditional mould (if there is such a thing), this piqued my interest, so I did a bit of research into the types of deals these people can offer. Interestingly, they provide a similar set of funding solutions to those I came across when I worked for Field Associates; just for property rather than businesses.
Essentially, these sorts of deals boil down to vendor financing – basically the technical name for a financial transaction where the investor gets the property in advance of paying the full value for it. So why would anyone agree to do this? When I asked, I was told a quick story to illuminate the concept.
How The Joneses used creative funding for their property deal
Mr and Mrs. Jones (not their real names), had purchased a three-bed house for around £300,000 in 2008. It was in a reasonable condition, had a £250,000 mortgage, and the Joneses had spent another £10,000 making improvements. The property appreciated in value over several years, but then the credit crisis struck. The property plummeted in value to just £275,000, leaving the family with the unwelcome prospect of paying more for the property than they could sell it for.
The family had two children living with them and an elderly grandparent who they wanted to move in. As this meant acquiring a larger property, they wanted to sell up and use the cash to buy a four-bed property in the local area. If they did however, they’d crystalise £35,000 in losses, plus professional fees. Obviously unwilling to do so, they turned to the bank, who were also unwilling to extend their mortgage further as they only owned a minor stake in their current property and credit markets were tightening.
In the end, they set up a deal with a local financier who agreed to take on their mortgage payments for the life of their mortgage and pay £5,000 upfront (enough to boost their savings and allow them to take on a second property). The property also held potential to rent at around £1500 a month – with the mortgage only being worth about £800 a month. This gave the lender reasonable cover to continue paying off the mortgage and hold the property until values improved and they could sell the property on for a profit. As a final sweetener, the financier agreed to repay the family their equity stake plus £10,000 when the property was eventually sold.
So the question is, why didn’t the Joneses simply rent out the property themselves? The answer is simply circumstance. The grandparent was ailing fast, meaning that they family needed to upsize quickly to move them in. They didn’t have the luxury of waiting another 3 years whilst the market recovered and if they sold now, they would incur tens of thousands of pounds in losses. This deal helped give them access to the cash they needed to put down a new deposit, removed the burden of carrying two mortgages whilst at the same allowing them to keep the equity stake they’d already developed along with any future upside.
These deals aren’t for everyone; the can be costly to set up and as always, you should ensure that the requisite legal protections are in place before moving ahead. Having not run a deal like this myself, I’m not sure whether the property would remain in the name of the bank, the Joneses or have been transferred to the financier. Presumably, the mortgage would have remained in the name of the Joneses, but an agreement would have been put in place to ensure that the financier was liable for payments.
This sort of deal isn’t the only source of alternative finance for property and it’s made me realise that the traditional ‘save for deposit, go to bank, pay off debt for 30 years’ model isn’t the only way to go. Ultimately, I believe that cash is king – no matter what the situation, having a substantial cash float allows you to pursue opportunities and prevents you from incurring unnecessary costs and financial losses.
My first property purchase isn’t going to be an investment – it’s going to be a home. Some people might disagree with this view, but some things are more important than money. The reason I penned this article was to give people a flavour of the other financing options available to them when it comes to property – don’t be afraid to look outside the box and seek alternative finance for your property deals.