Thinking of buying or selling a home in the British Virgin Islands? Securing a mortgage for a property in the BVI can be time-consuming and difficult for foreign purchasers. Many find that their home bank is unwilling to extend credit on BVI property for reasons completely unrelated to the particular transaction or buyer. For example, natural disasters, the economic climate, or regulatory restrictions can all play a role in whether a bank can—or wants to—finance a transaction. If you are acquiring the property in a corporate entity or trust for tax, estate, or financial planning advantages, the mortgage situation becomes even trickier.
Further, well-qualified buyers who are self-employed and have a variable income—instead of a fixed monthly income documented by paystubs—find it especially difficult to obtain a mortgage on foreign property. Such buyers are likely to be asked to provide a number of additional documents such as tax statements and audited financial statements—personal or business—as well as credit references and the like before a bank will even consider their application, all of which extends the time frame for completion of the sale and purchase for the buyer and seller. For example, a buyer's offer is less attractive to a seller, if obtaining the financing takes a protracted amount of time.
However, absent an established relationship with a BVI bank that would issue a mortgage, alternative methods are available. Foreign buyers can sometimes arrange for vendor financing, where the seller allows the buyer to pay for the property over a period of time. Vendor financing essentially cuts out the middleman and saves significant time to close the sale.
What is Involved in a Vendor Financed Sale?
The best use-case for vendor financing is where a well-qualified buyer has difficulty obtaining a mortgage for reasons mentioned above, which are typically unconnected to the buyer's financial soundness. With vendor financing, the seller allows the buyer to pay for the property over a period of time, effectively extending a loan to the buyer.
Several basic steps are involved in setting up a vendor financed sale.
- Agreement for Sale– The sale agreement sets out the terms of the sale and refers to the ancillary documents, such as the financing agreement and the security documents.
- Financing Agreement –This agreement defines the terms of the financing, including payments, schedule, interest rate, default conditions, and default consequences.
- Security Document – The security document provides evidence that the seller retains an interest in the property as security for the buyer's payment of the full sale price of the property. One type of security document is called a Charge over the property being sold, which basically functions as a mortgage.
- Non-Belonger Licence (NBL) for Buyer (if applicable) – Persons who are not BVI citizens or belongers need this license to hold land or any interest in land in the territory.
- New NBL for Seller as security holder (if applicable) – Likewise, if the seller is not a BVI Belonger, he will require an NBL in order to hold a Charge over a property. However, many types of enforceable instruments can secure repayment other than an outright Charge, for example, a promissory note. In any event, if the buyer needs to obtain an NBL, both applications can be considered together, (i.e, the buyer's application for an NBL to hold title to the property and the seller's application for an NBL to hold the Charge), avoiding additional time to complete the transaction.
- Closing Documents– The central closing document is the Transfer of Land. However, depending on how the property is held, or will be held, and how the vendor financing will be secured, a number of other documents such as corporate resolutions, promissory notes, etc., may be required at closing.
What are the Benefits of Vendor Financing?
Vendor Financing can be fast, flexible, and focused. Because the financing is done directly between the buyer and the seller, the parties can zero in on how best to finance the specific transaction and its elements. For example, if additional assets are involved, such as a vessel or marine rights, the parties can tailor different forms of financing and security for specific assets, taking into account the importance of each asset to either party and individual risk appetites. In some cases, a seller may want a shorter repayment period for the portion of the selling price that relates to a boat rather than for the house being sold.
Because the parties set the terms, vendor financing has other significant benefits where flexibility is needed. Here are some examples:
- The repayment period is not dictated by industry standards of 20- or 30-year mortgages. Parties may provide for a five-year repayment period or any other repayment period that is workable for them. Balloon payments can be agreed upon, as well as contingent payments.
- The percentage of the total purchase price that is paid as a deposit can be adjusted.
- If the property is rental property, the parties might agree that the seller will retain income rights for a fixed period.
- The BVI has no interest rate restrictions, thus, parties are not hampered by institutional prescriptions. They can choose the rate or rates that work for them, although penalty rates are not permitted.
- The parties can route the transaction through a corporate structure that allows the seller to retain control until full repayment of the sale price is received and defines the rights of the buyer. The parties can also use corporate mechanisms for ease of repossession in the event of default.
- The parties can enter into a lease-to-own arrangement.
- Because vendor financing reduces the number of parties involved in a property sale and purchase, the transaction can move faster than a deal that is contingent on third-party financing. Thus, the seller's carrying costs in maintaining the property until financing is available is reduced.
What are the Disadvantages of Vendor Financing?
For the seller in a vendor financing transaction, the sale proceeds are distributed over the agreed time period rather than in one lump sum at closing. However, the seller's security interest may be sold to someone else and the seller could receive the balance of the value of the property at such time. Also, if time is of the essence to the seller, if the seller cancels the transaction and seeks a new buyer, there is no guarantee that a new transaction will move faster.
For the buyer in a vendor financing arrangement, they can expect higher interest rates, a larger down-payment, and greater repayment installments.
How Do I Know if I Should Offer—or Ask For—Vendor Financing?
The answer to this question is that each party should consult with their BVI attorney and financial advisors to see if vendor financing is appropriate for the transaction. Such professionals can provide guidance that will protect your interests.
At O'Neal Webster, our Property & Business Group attorneys have guided numerous individuals, companies, and trusts through all types of property financings, including vendor financing. We can guide you through each step of the transaction and recommend the optimal structure. While not common in the BVI, vendor financing is not unusual, nor prohibited. Each party should ensure that they fully understand how vendor financing will work for the particular transaction and that they are comfortable entering into such an arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.