Financing Your Real Estate with Vendor Take Back Mortgages
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.
For you, as the purchaser, there are other potential benefits from obtaining a VTB:
- 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 show up on your credit score as is now becoming more common with the big banks and credit unions.
For the seller (vendor), the benefits of a VTB include:
- By offering financing on the property, a way has been found to make a difficult deal or a distressed property more attractive to an investor ;
- By charging a higher than market value interest rate and collecting it back over time, the vendor could make considerably more money on the property;
- Even after they've sold the property, it continues to provide monthly cashflow;
- 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;
- The mortgage is secured against the property so the absolute worst thing that can happen to the vendor is that they will have to foreclose on the purchaser and they will get their property back (if it's a first mortgage).
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. - 23162
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.
For you, as the purchaser, there are other potential benefits from obtaining a VTB:
- 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 show up on your credit score as is now becoming more common with the big banks and credit unions.
For the seller (vendor), the benefits of a VTB include:
- By offering financing on the property, a way has been found to make a difficult deal or a distressed property more attractive to an investor ;
- By charging a higher than market value interest rate and collecting it back over time, the vendor could make considerably more money on the property;
- Even after they've sold the property, it continues to provide monthly cashflow;
- 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;
- The mortgage is secured against the property so the absolute worst thing that can happen to the vendor is that they will have to foreclose on the purchaser and they will get their property back (if it's a first mortgage).
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. - 23162
About the Author:
Learn How to Retire with Real Estate with Dave's free Real Estate Investing Starter Tips Guide. Learn how to plan for financial freedom, positive cashflow and massive wealth with tips like: How to find quality rental properties, finding and keeping great tenants, and easy ways to finance your deals with Vendor Take Back financing.
posted by X - Men @ 4:04 AM
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