Vendor finance is a method of financing the purchase of either property or a business.
The vendor (seller) effectively leaves a percentage of the sale price 'in' the property or business. This in effect becomes the purchaser's deposit, allowing him to raise finance against the property or business asset in a situation where they do not have sufficient available deposit. An agreement is reached regarding how and when the purchaser will pay the vendor the balance.
For example, if the purchase price of a grocery shop is $500,000.00, banks or other lenders may only be willing to lend say, 50% of it's value. If the purchaser does not have the other $250,000.00 available then the vendor might agree that the purchaser only has to come up with $250,000.00 on settlement day, and will then pay the balance off over perhaps 2 years from the cash-flow of the business. If it is thought that the business will increase in value, then the purchaser may wish to pay interest on the balance and then re-finance when they have added that value.
There are no end to the variations of vendor finance. It's really a case of what you can dream up and agree upon.
It is a very creative method of financing and could be used a lot more in New Zealand to good effect. Unfortunately, a lot of vendor finance deals fall over before settlement. This is usually due to the vendor trying to take too much advantage of the purchaser's perceived weakness. Often, it is not so much the vendor, but their lawyer, who will tend to over represent a vendor in this situation, perceiving that there is a risk in allowing the purchaser to take title of the property before full payment has been received. They then try and introduce onerous clauses to the contract which can make it unworkable.
If all parties are acting in good faith and communicate clearly, these kind of deals can be done. There are mechanisms through which the vendor can protect their interests without lawyering the deal to death.