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One challenge for property investors can be raising the deposit needed to secure their next purchase. In some circumstances a Vendor Gifted Deposit could be utilised, potentially allowing an investor to purchase a property without putting in their own cash deposit.
This can be a powerful strategy when used correctly, but there are important pieces of criteria and limitations investors need to be aware of.
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What Is a Vendor Gifted Deposit?
A Vendor Gifted Deposit is where a property is being sold genuinely below its true market value, and the difference between the agreed purchase price and the market value effectively acts as the buyer’s deposit.
For example:
- Agreed purchase price: £140,000
- Surveyor’s market valuation: £180,000
- “Gifted equity” from seller: £40,000
In this scenario, the £40,000 difference can be used as the 25% deposit requirement (against the purchase price of £140,000), meaning the buyer wouldn’t need to provide any cash deposit.
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The Biggest Challenge: The Valuation
The main obstacle with these deals is usually the valuation.
The lender’s valuer will be informed of the agreed purchase price, so they will naturally question why the property is being sold below market value.
The success of the application often depends on whether the surveyor is prepared to confirm that:
- The property is genuinely worth more than the agreed purchase price
- The reduced price is legitimate
- The sale is not linked to any financial distress – the lender would class this as any vendor having financial difficulties or a sudden illness
If the valuer does not support the higher market value, the deal may no longer work from a lending perspective. The only way to proceed with the purchase in this scenario would be for the buyer to put down their own cash deposit.
It is also important to note that lending options are very limited for these types of deals meaning the rate available are typically higher than the mainstream lenders. The vendor would also be required to sign a gifted deposit form as part of the application.
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How Is This Different From a Concessionary Purchase?
This can sometimes be confused with a concessionary purchase, but they are not the same.
A concessionary purchase is restricted to transactions involving:
- Family members
- Landlords selling to tenants
With a Vendor Gifted Deposit, the seller and buyer can be completely unrelated parties.
That makes this structure particularly interesting for investors sourcing genuine below market value opportunities.
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Ability to Refinance Later
Once the property has been owned for a period of time — often 2 to 3 years depending on lender criteria, investors may then be able to refinance onto a more mainstream product with a wider range of lenders available.
This can provide greater flexibility and potentially access to improved rates in the future.
If you’re considering a below-market-value purchase and want to understand whether a Vendor Gifted Deposit could work for your situation, professional advice is essential.
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How can Advocate Finance help?
If you’re considering a below market value purchase and want to understand whether a Vendor Gifted Deposit could work for your situation, please get in touch.
We provide a FREE assessment on all our services.
Please contact me directly for more information, or use the Get in Touch With Us Today feature at the bottom of this page.
