When the Vendor (aka the seller) of a property is willing to provide some (or all) of the mortgage financing on a property, it is referred to as a Vendor Take Back (VTB). As a real estate investor, I ask for a VTB on most of the deals that I am involved with. As there are significant benefits to both parties involved in the deal, it doesn’t hurt to ask the vendor if he/she would be willing to carry the mortgage – even if it’s only a smaller 2nd mortgage. Believe me- asking that one simple question could result in an additional $5,000 – $10,000 in financing for you!
Using other people’s money is a smart way to use leverage and enable you to buy additional properties- just be careful not to over-extend yourself. The extra money could be put toward renovating or refurbishing, or spent on ads to rent out your new unit.
As the purchaser, there are other potential benefits for you as a result of obtaining a VTB:
– As with bank financing, there is generally no pre-payment penalty if you pay off the mortgage early;
– Since vendors don’t often ask for all of the documentation that is required by banks, financing your property is quicker and easier; and
– The mortgage, and it’s value, will not show up on your credit score as is now becoming more common with the big banks and credit unions.
The benefits of a VTB for the seller (vendor) include:
– A way to make a distressed property or a difficult deal more attractive to a buyer (investor) by offering property financing;
– The vendor could increase the money they get from the property if they charge a higher than market value interest rate and collect it back over time;
– The property will continue to provide monthly cashflow, even after they’ve sold it;
– Currently, a vendor with a VTB can obtain a 5% or higher interest rate return on their equity in the property (the % will depend on the structure of the deal) rather than putting that money in the bank and getting a 2% or 3% savings interest rate;
– As the mortgage is secured against the property, the worst thing that can happen to the vendor is that they will have to foreclose on the purchaser and will get their property back (if it’s a first mortgage, that is).
Your real estate lawyer will create the VTB documentation, in most cases. Always ensure that your lawyer has thoroughly reviewed the Purchase and Sale Agreement and the mortgage documents and all of their associated conditions. You will also want to speak with the vendor to determine if the term can be extended (if required) when it comes due.
|
|