These are mortgages where the seller also lends all or part of the funds for the purchase to the buyer. The process really is based on what you can negiotate with the seller. CMHC defines a vendor take-back mortgage as “The vendor, not a financial institution, finances the mortgage. The title of the property is transferred to the buyer who makes mortgage payments directly to the seller.”
You can get an overview of VTB’s by listening to this 15 minute audio with Andrew Brennan Right Click to Download.
The benifit to the buyer is that you would have to produce a lower down payment to purchase the property, and qualifying for this financing would be more flexible than a bank or financial institution. This would also increase you return on your investment because you have less money tied up in the property.
The benifit to the seller of using a VTB relates to enable them to sell a property that requires lots of renovations, still provide cash flow from the property, they could potential sell the property at a hgigher price because of they are offering financing, sell a property in a slow market, and this could give the seller the ability to defer taxes to a later date and delay the tax consequences of the sale (if it is an investment propert)y. You are more likely to get a VTB on an investment property than a personal residence.
There are a few A Lenders that will allow you to use vendor take back mortgages, but B lenders are more likely to allow you to use VTBs. The lenders allow you to top up their financing to a maximum loan-to-value that is determined by the lender. For example Home Trust might provide you with a 75% First mortgage and allow you to use a 15% VTB on the purchase, so that you would have a 90% LTV on the purchase. Knowing what amount that you can utilize with the lender is key before you negoiate the VTB with the seller. There is no pint getting a 25% VTB at a higher rate than you can get with a traditional first mortgage.
Otherwise you could add the VTB after closing, but you would want to make sure that this meets the lending criteria for the lender.
The key is to always ask for a vendor take back mortghage whether it is through a Realtor or to the seller directly. If you are working with a Realtor you will have to teach them how to position a VTB. If they aren’t willing to do this then you should be looking for another Realtor. You can use multiple offers in order to accomplish this, so that you can have a different amout offered when a VTB is included in the offer and when it isn’t.
You can structure VTB’s in a number of different ways – Interst only payments, Principal only payments, Amortized, No interest with a balloon payment. A majority of cases the VTB is simple interest only payments. You will need to define for yourself what would be an acceptable interest rate, payment terms, maximum LTV, that the seller is willing to accept.
Here is an example of a cover letter that you will find in the Vender Take-Backs Video Course:
Dear Ivo and Jesse
I had the pleasure of viewing your property today and have prepared the attached offer.
You will see that I have requested a vendor take back as part of the offer. By accepting the vendor take back you will be able to:
Still profit from the property in the form of interest payments at a rate of 7% for the next 3 years. The interest payment amount would be in excess of $7,000 over the next 3 years.
You are able to defer capital gains and the applicable taxes until the vendor take back amount is paid off in 3 years. This can reduce your total taxes paid on the profit and sale of the property.
Your vendor take back loan would be secured by the property with the same rights as any other lending institution.
I have selected the closing date of October 27th. This will allow time for the waiving of conditions and enough time for the lawyers to close the transaction. I do realize that a property sitting empty can be costly so I can be somewhat flexible with this date if needed.
I hope that you find my offer fair and acceptable.
Sincerely,
Andrew Brennan
In the purchase agreement you would add a clause similar to the one below, in the Schedule A of the Purchase and Sale Agreement. Please make sure to have a lawyer review this clause before you use it.
The Seller agrees to take back a 2nd Charge/Mortgage for ten percent (10%) of the purchase price bearing interest at the rate of 8% per annum, interest only with blended monthly payments. The term of the mortgage shall be 3 years. This mortgage shall contain a clause permitting the Mortgagor, when not in default, the privilege of prepaying all or part of the principal sum outstanding at any time or times without notice or bonus.
Remember, similar to B lenders, you should have an exit strategy when you have a VTB, and preferably more than one exit strategy.
There is a more in-depth course on Vender Take-Backs located at http://www.educationrei.com/. If you are a coaching client you will be able to access the audio, 5 hours of video and documents from this course.
Where would you be able to find VTB and Seller Financing opportunities in the area where you are looking? Think about the type of seller that you would need to target. What city or town would you target?
Describe a profile of the seller. Then create a kijiji and craigslist ad based on this profile, and post it online.
Plan your response and compile a list of questions that you get from potential sellers. Research responses to the seller based on your network or discussions with other investors, mortgage brokers, etc.