A Vendor Take Back (VTB) mortgage is one of the best ways to buy and sell real estate creatively, including structuring deals with:
- Lower down payments
- Freeing up cash,
- and more
Yet in my experience, so many people (buyers, sellers, and even real estate agents) seem to be afraid of what I (and other investors) consider to be a great creative financing strategy.
What is a Vendor Take Back Mortgage?
VTBs are also known as Vendor Financing, Seller Financing or Seller Take Back (STB) Mortgages.
A VTB is basically a special type of financing where the seller of a property holds a mortgage on the property they are selling to you.
And they receive payments over time for their money – just like a bank.
This can be done instead of (or in addition to) setting up the mortgage through a more conventional source such as the bank or other potential lenders.
A Vendor Take Back mortgage can be held as a 1st mortgage, a 2nd or even 3rd mortgage, depending on what both you and the vendor agree upon.
Why aren’t VTBs more popular?
The use of a VTB is very common in the United States which helps make purchasing investment properties much easier there.
It is certainly used in Canada as well, but Canadians tend to be more conservative and we tend not to attempt too many new ideas.
What most sellers don’t understand is that a VTB has many benefits for them and can work in their favour.
But because of their lack of knowledge or understanding of these benefits, their first and most common reaction is to say no.
I have also found that some Real Estate agents don’t truly understand what a Vendor Take Back is or how it can be of benefit to their customer.
Believe it or not, I have heard these same agents ask the question, “How will I get paid if there is a VTB?”
This just verifies that some agents are not educated about the true pros and cons of this type of financing.
To help you understand some of the benefits of VTBs, here are a 2 examples of how they can be used when buying and selling property.
Buying & Selling Hard To Finance Property
The first situation involves a business my wife and I operated for approximately 18 years.
If you’ve ever tried to purchase a business or commercial real estate, you will understand the challenges when trying to acquire suitable financing.
In our situation, the purchaser was able to provide enough cash down payment to satisfy our needs for our outstanding debt against the business, as well as the cash-in-hand we wanted.
We then agreed to hold a VTB in the form of a 1st mortgage at a very reasonable rate of interest.
So why was this a good deal?
First, the purchaser didn’t need to go to a bank for financing and therefore avoided all the red tape which would include the purchasers need to personally qualify for a mortgage and the need for the actual business to qualify.
Second, we were able to walk away from the transaction with a paper asset, which was the first mortgage, and it paid us a monthly cash-flow.
Most people will then say,
“Isn’t that risky? What if they don’t pay?”
We thought of this as well, but the reality is that as a mortgage holder, you have the same rights of foreclosure that a bank would have if the bank was holding the mortgage.
The way we looked at it, if the purchaser defaulted on the mortgage then we could foreclose on the property and sell it again.
Eventually, we sold this paper asset to a private investor because we realized that it was a depreciating asset, and we used the funds to purchase an appreciating asset instead – an investment property.
Lower Down Payments
Another possible scenario with a VTB is asking the seller to take back a 10 or 15% mortgage.
Let’s assume that you want to purchase a property listed at $400,000 and you have negotiated a deal where the seller is willing to accept $375,000.
With these numbers you will get financing of $281,250 (75% LTV or Loan To Value) from the bank and you will need to come up with the balance of $93,750 (the remaining 25%).
Suppose you agree to pay more than the $375,000 for the property, providing the seller holds a second mortgage equal to 15% LTV.
What could you do with this possibility? The numbers break down as follows:
Purchase price: $385,000
1st mortgage ($288,750)
2nd mortgage (VTB) ( $ 57,750)
Your investment $38,500
This means that you only need to come up with $38,500 at closing instead of the original $93,750. This becomes a win/win situation for both parties.
However, you need to make sure that the property being purchased can support the added debt load. If it can’t, this would not be a good strategy for your situation.
If the seller doesn’t want to keep the 2nd mortgage, then he has an option to sell the mortgage paper to another investor.
And because he received an extra $10,000 on the sale price, he can even discount the mortgage in order to help sell it quickly (the mortgage buyer would be getting a larger return).
As you can see, Vendor Take Back Mortgages are very powerful tools, and these are only a couple of examples of what can be done with them.
There are many more scenarios available to you, but to understand them and use them effectively, you need to spend time learning and investing in your real estate investing education.
The cost is insignificant compared to the returns you will earn on just one creatively financed deal.