Will you hold the mortgage?
A VTB or Vendor Take Back, is simply where the seller (Vendor) of a property is willing to provide some or all of the mortgage financing on that property. A VTB is generally a lot more common on commercial properties than it is on residential, however, residential VTB’s do exist. In fact, we have had VTB’s on 3 of the 11 properties we have purchased. In one case noted above (Nanaimo B), the seller gave my business partner and I an 80% loan to value mortgage at a 5.5% interest rate with a 3-year term! Not bad considering we didn’t even have to go to the bank! VTB’s usually are held because of one or any of the following reasons:
- it’s a distressed property, and to make it more desirable the vendor offers a VTB to the potential purchaser;
- the purchaser is unable to obtain standard financing from the bank;
- the seller knows (and trusts) the purchaser and is willing to help them out on this purchase;
- the purchaser can obtain some financing from the bank, but doesn’t have the capital to close – so the seller will hold a smaller 2nd mortgage on the property; and
- the vendor may make considerably more money on the property by charging a higher than market value interest rate and collecting it back over time (sometimes there may be tax benefits for the vendor as well).
As there are many benefits to both parties, it never hurts to ask if a vendor is willing to hold a mortgage on the property. Even if it’s only a smaller 2nd mortgage that just allows you to not put in an extra $5000 or $10000. As long as you aren’t over-extending yourself too far, then using other people’s money is a great way to use leverage and enable you to buy other properties. Or, to have money left over to renovate, refurbish, or spend on marketing to rent your new purchase.
For you, as the purchaser, there are other potential benefits from obtaining a VTB:
- generally no pre-payment penalty if you payoff the mortgage early as with bank financing;
- vendor’s rarely ask for all the documentation (T4’s, Pay stub, Employee letter, etc.) that bank’s require; 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.
Keep in mind, however, that a VTB is not always a great plan. Ensure your real estate lawyer thoroughly reviews all of your VTB documentation including the Purchase and Sale Agreement and the mortgage and it’s conditions. Also, make sure you speak with the vendor to determine if the term can be extended when it comes due.