Within 18-24 months of purchasing their first home, many people think of selling the house if rates appreciate or if they aspire to buy a bigger property. With the average residential project taking anywhere between 30 and 36 months to get completed, many homeowners face the predicament of how to sell an under-construction property.
It can get even more complicated if the under-construction property has an outstanding loan. Also, what if the new buyer is buying the property with a home loan? The process can be quite smooth if all the parties involved are aware of ‘Vendor Takeover.’
Let’s look at all the parties involved in such a transaction: the homeowner, the new buyer, the builder, the homeowner’s lender and the new buyer’s lender. Each of these entities have their own objectives to be fulfilled and interests to be protected.
While the buyer and seller’s intent is clear, the developer has the primary objective of being paid in full for the property sold. The homeowner’s lender aims to ensure that they are paid back, with accrued interest, on the existing mortgage. The new buyer’s lender needs to ensure that their financial interests and relationship rest only with the new buyer. To ensure that every entity’s interests are protected, the process of Vendor Takeover needs to be followed in a strict and disciplined fashion.
The first fundamental step towards this is that the builder, the current homebuyer and the new home buyer sign a tripartite agreement. This agreement officially and legally certifies that the three main entities involved have their interests protected. It also lists out the financial responsibility of each with respect to each other. This process can go forward only after this agreement as it confirms each other’s approval to go ahead with the transaction.
After the tripartite agreement, the new lender will first clear off the existing dues from the previous lender to close this mortgage and, then, disburse any payments to the builder based on the demand letters raised and pending.
The new lender would then make the payment to the old homeowner, based on their current equity in the house and any appreciation on the property, based on the financial amount agreed upon by the old homeowner and the new buyer.
It is important for the old owner to collect a ‘No Dues’ and ‘Loan Closure’ document from the lender to ensure that he is safe from any liability claims in the future. It is also the old owner’s responsibility to collect the property documents and hand them over to the new owner, who, in turn, will submit them to the new lender. After making these payments and following these processes, vendor takeover is officially completed.
This type of transaction can be highly complicated, and it is important that the current and the new owners understand that every bank may not offer Vendor Takeovers. In such a case, careful due diligence is needed by both parties before taking the agreement ahead.
The writer is founder & director, RetailLending.com
