FOR RETIRING FARMERS AND THEIR FAMILIES
What does vendor finance cost the buyer and the seller?
By Sam Marwood
Both sides pay something. There's no set interest rate, only whatever the two of you agree, and the seller's capital stays tied up for the whole term. The buyer lives with that rate, and with a debt to someone they know.
For the seller: your capital is tied up
You can't get at your capital for the whole term. If something changes and you need a lump sum in year 3, the arrangement doesn't give you one.
Think hard about that before you sign, because the thing you can't predict is exactly the thing that will happen.
For the seller: the risk a bank declined
You're taking on the risk a bank declined. If the buyer defaults, you may have to take the farm back, and that's hard emotionally when it's someone you chose.
What can you actually do, and how long does it take? That's a question for your solicitor before you sign.
For both: where you sit in the queue
If a bank holds the first mortgage, the seller's security ranks behind it. That's a real exposure, and it needs to be understood before it's agreed, not after.
For the buyer: the rate over the full term
The rate is whatever the two of you agree, and there's no standard and no going rate. Some sellers price for the risk they're carrying, since they're lending where a bank wouldn't.
Others price low on purpose, because getting the right person onto the farm matters more to them than the return. Both happen, and neither is wrong.
Whatever rate is agreed, a buyer should run it over the full term rather than look at the monthly figure. On a 10 or 15 year loan, a difference that looks small each month compounds into real money, so work out that number before agreeing to it rather than after.
For the buyer: owing someone you know
A bank doesn't come to the local show. A missed payment to a bank is a phone call, but a missed payment to the family who sold them the farm is a conversation they'll have in front of other people.
What the seller gets in exchange
An income stream instead of a lump sum, and a say in who ends up on the place.
Before you sign
Two questions for your accountant. How is the interest treated for each of you, and when does capital gains tax fall on a sale paid over years? Will you need cash for the tax before the buyer has paid you out?
The rest of the questions are here: What to ask your solicitor, accountant and bank before vendor finance.
Read more: When does vendor finance work, and when doesn't it? and What has to be in a vendor finance agreement?.
This is general information, not legal or tax advice.
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