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. As a real estate investor, I ask for a VTB on most deals. Even if it’s only a smaller 2nd mortgage, it doesn’t hurt to ask if the vendor would be willing to carry the mortgage. There are significant benefits to both parties. And that simple question could provide you with an additional $5,000 – $10,000 in financing just for asking!
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):
– Generally there’s no pre-payment penalty if you pay off the mortgage early as with bank financing;
– As vendors rarely ask for all of the documentation that banks require, it is easier and quicker to finance your property; 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 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 may make considerably more money on the property by charging a higher than market value interest rate and collecting 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% interest rate or higher (depending on the structure of the deal) return on their equity in the property versus putting that money in the bank and getting maybe a 2% or 3% savings interest rate;
– The absolute worst thing that can happen to the vendor is that they will have to foreclose on the purchaser – and will then get their property back (if it’s a first mortgage). This is because the mortgage is secured against the property.
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.
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