What is a Vendor Deposit?

In essence a vendor deposit is where you get the vendor to pay your deposit for you.

For example:

Tony wants to buy a property for £100,000 but doesn’t have the 15% (£15,000) deposit needed to get the buy to let mortgage, all he has is £10,000. One thing that he could do, if the vendor agrees, is to get the vendor to sell him the property at an inflated price of £105,000 and give him £5,000 cash back.

In this scenario the vendor still gets the asking price of £100,000 and Tony still gets to buy the property because he gets the money back on completion.

This way of investing can be seen by people that don’t know much about it as being underhand or even illegal. Hence why some estate agents acting on the vendors behalf or some solicitor’s will not want to do business this way.

There are a couple of key things to keeping mind.

1. The vendor has to make sure that the inflated sales price is reported to the Inland Revenue. The disadvantage to them in this is that if they need to pay capital Gains tax that they may need to pay more with the inflated price.

   However, most of the people that investors buy off generally don’t need to worry about Capital gains tax as the property you are buying off them will be their principal private residence therefore in most cases, exempt from CGT.

2. The laws as regards to property investments change all the time. Hence don’t take it for granted that all the creative ways of buying property you come across are legal and above board.

   Just because something was legal and above board in 1992 doesn’t mean it is legal and above board today.

As always, we would strongly advise you to have a competent solicitor and mortgage broker working for you when considering creative financing methods, whether that be a vendor deposit or any other method.

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