A Vendor Take Back Mortgage Explained
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!
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 out your new purchase.
There are other potential benefits from obtaining a VTB (for you, the purchaser):
- Normally, there is no pre-payment penalty if you pay off the mortgage early (as with bank financing);
- Vendors rarely ask for all of the documentation that banks require so it makes it quicker and easier to finance your property; and
- The mortgage (and it's value) will not affect your credit score, as is now becoming more common with both big banks and credit unions.
The potential benefits for the seller (vendor) from obtaining a VTB are:
- A way to make a difficult deal or a distressed property more attractive to an investor by offering financing on the property;
- 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;
- Monthly cashflow from the property keeps coming in, even after it's been sold;
- 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).
In most cases, your real estate lawyer will be responsible for creating the VTB documentation. Be sure that your lawyer has also thoroughly reviewed the Purchase and Sale Agreement and the mortgage documents (and all associated conditions). It is also a good idea to discuss with the vendor whether the term can be extended when it comes due. - 23229
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 out your new purchase.
There are other potential benefits from obtaining a VTB (for you, the purchaser):
- Normally, there is no pre-payment penalty if you pay off the mortgage early (as with bank financing);
- Vendors rarely ask for all of the documentation that banks require so it makes it quicker and easier to finance your property; and
- The mortgage (and it's value) will not affect your credit score, as is now becoming more common with both big banks and credit unions.
The potential benefits for the seller (vendor) from obtaining a VTB are:
- A way to make a difficult deal or a distressed property more attractive to an investor by offering financing on the property;
- 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;
- Monthly cashflow from the property keeps coming in, even after it's been sold;
- 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).
In most cases, your real estate lawyer will be responsible for creating the VTB documentation. Be sure that your lawyer has also thoroughly reviewed the Purchase and Sale Agreement and the mortgage documents (and all associated conditions). It is also a good idea to discuss with the vendor whether the term can be extended when it comes due. - 23229
About the Author:
Find out How to Retire with Real Estate with Dave's free Real Estate Investing Starter suggestions Guide. Find out how to build financial freedom, extra monthly income and massive wealth with suggestions like: How to find quality rental properties, finding and keeping great tenants, and easy ways to finance your real estate purchases with Vendor Take Back financing.
posted by X - Men @ 2:50 AM
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