• Last week a colleague and fellow investor called me seeking a mortgage for a property she wanted to purchase in Amherstburg, Ontario, which is just outside of Windsor.  As part of her financing, she wanted to include a VTB (Vendor Take Back).  A VTB is when the seller offers financing on their own property they are selling.  For instance you might have 75% LTV from the lender or bank; a 15% VTB from the seller and 10% from your own funds.

    Sellers do this in a tough market, or as an incentive when they can’t sell their property or even to help the buyer when they have a shortfall in funds.  Most of all a seller looks for tax deferral as they don’t have to pay capital gains until the portion lent is fully repaid.

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    For the buyer, It’s a great way when you have a shortfall in funds.  The VTB acts as a second or third mortgage, depending on the financing structure.  However, you as the buyer must make sure that the seller agrees to subordinate the mortgage.  This means that the VTB will agree to go in behind other lenders and will recoup funds in the event of a default in that position.  If for instance you have to get a HML (Hard money lender), they will always want to come in before the VTB – without a subordination clause, it would be difficult to do this and you would not get the HML to lend to you.

    On the other side of the coin, the seller who offers the VTB must be aware of the risks.  As the mortgage holder in second or third position, if the borrower defaults on the first mortgage, the other lenders have to be prepared to  accept the risk of not recovering the loan if the first mortgage lender sells for less than the amount of the first mortgage plus legal fees and real estate commissions.

    The probability of a default happening is greater in highly leveraged properties or in areas that are non-appreciating.  Windsor in case! It is advantageous for both the borrower and the seller to do their due diligence in both taking on a VTB in their financing structure and in becoming a second or third mortgagee.

    Here are some tips to if you do take on a VTB in your financing structure:

    1.Only do “interest only” payments
    -look for 6% or below
    -ask for no payments for first 6 months

    2.Look to assume a mortgage that is being foreclosed by the bank

    3.If you are looking at a vendor’s property and want a VTB,
    -you let the vendor take the lead on the financial discussions

    To Your Wealth!
    Amina

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