(VTB is for Investors, Sellers & Non-Bank Qualifiers Alike)
It is a common Canadian desire to acquire real estate for stability; whether it be an savvy investor looking to acquire with minimum cash output or if you’re a renter looking to get into the market with bruised credit, lacking traditional income verification, or simply do not have 20% down payment or more to meet your banks requirements based on your specific situation.
This was enough of a challenge before the mortgage crisis of 2008, but now with a new age of Covid, it will only become more difficult. With more speculation of the minimum down payment requirement being 10% or greater, it will only require more creative ways for buyers and sellers to make a deal happen. As on now the rules that banks have for investors are even more stringent. The due diligence takes a lot longer, and you must have much better metrics – credit score, assets and revenue stream – if you’re going to use a bank to finance your full-time real estate investments. Therefore, so many investors join up with partners in a joint venture or turn to private lenders to find their capital. For buyers that have had a few credit hiccups in the past, you will have your own hurdles with respect to credit and meeting the banks criteria… and the mortgage insurer (CMHC, Genworth, Canada Guaranty).
Another way to go is vendor financing. Basically, this involves the seller of your investment property carrying all or part of the financing for the purchase.In the past only some sellers would consider this, but with some property owners needing to sell to have more cash on hand or some simply looking to avoid foreclosure, it will now be a strong consideration. Finding a VTB seller is tougher to find when the market is hot. In a slower market, sellers are having to take prices that are below what they wanted. Some sellers will consider creative options to get a deal done.
So just what is vendor financing?
Also known as owner financing or a vendor take back (VTB) mortgage, this type of note simply means that a property seller (or vendor) will help out with the financing of the deal. This can involve financing the whole mortgage, or it can involve a percentage of the deal. Sometimes sellers are willing to provide a second mortgage (which means a different lender has first position) to cut down on the amount of money that an investor must put into the transaction. This is the type of financing our Direct Lending Group can assist with.
A VTB mortgage doesn’t have to be an officially registered loan on the property, either but for the protection of all parties involved, it is highly recommended that it is. A VTB mortgage is a contract in which you, the purchaser, promise to pay a set amount of money to the vendor/seller at a certain point in time. The property acts as security. The Borrower and the Vendor can structure the repayments in the traditional combination of interest and principal, interest only with a lump sum payment at the end of a predetermined time, or payment schedule using your own amortization calendar.
Advantages of VTB Financing for Sellers
You might wonder why anyone would want to provide VTB financing on a property that they were trying to sell. There are some situational advantages that make this a good idea:
- Quicker sale in a soft market
- Higher offering price from investors and buyers willing to pay more if they can avoid a bank mortgage
- Higher overall return on the basis of a higher price and/or a higher interest rate that sellers can ask as a premium for avoiding bank financing requirements
If the seller doesn’t live in the property as a primary residence, they may be able defer the capital gains. This can lead to a lower tax bracket on future income. So the lower tax bracket leads to an effective higher return on the property proceeds. A seller should always speak to an accountant on their specific situation.
Think about it. If you get $500,000 in cash, and you stow it into a savings account at 2%, why wouldn’t you want to bring in 6% or 7%, or even 10%, on a VTB mortgage? The worst thing that could happen is default – in which case you get the property back. That’s a lot more security than the bond or stock market – which offers no security. Mortgages are a highly secure form of debt.
How can you find properties likely to come with VTB financing?
Occasionally, you will see a listing that includes a seller’s willingness to provide some or all of the financing. However, you’ll also find that many more sellers are willing to provide financing than those who list it. If the MLS listing indicates that the property has no outstanding liens, that it is a rental property that the owners have had for at least a decade, or that sellers are willing to work privately and use creative terms – or that the seller is a retiree that doesn’t need the cash out of the situation. Also, a big drop in a price on a property shows a motivated seller. If you are an investor, one great place to look for a VTB mortgage is a real estate investing club. You’ll network with other investors – and other potential sellers who have the equity in place to make borrowing work.
Are you looking to purchase a property using creative measures? A VTB loans may be an option for you. We can consider providing you with a private 1st position mortgage, and the seller can provide a complimentary 2nd position VTB mortgage.
Below is a simply example of how a VTB.
- Property Value $400,000
- less $250,000 – 1st Position Private Mortgage
- less $40,000 – Buyer Down Payment
- equals $290,000 – Total Paid to Seller
- shortfall of $110,000 due to Seller – This amount would be registered as a 2nd Position 2nd Mortgage
Note 1: The Amount being paid to the Seller must exceed the amount owed on the property.
Note 2: Applicable Fees & Closing Costs are deducted from teh $250,000 mortgage; therefore the actual funds required from the seller would be their down payment plus the applicable fees.
If you have found a Residential, Commercial, or Agricultural property and the Seller may be willing to provide a 2nd Position VTB (Vendor Take Back) Mortgage, get in touch with us.
More on Vendor Take Back and the Potential Profits
Most home sales in Canada take place the same way: an owner lists a property for sale and engages a realtor to complete the process. Potential buyers come and look at the house, and one of them eventually makes an offer that is to the seller’s liking. The buyer takes out a mortgage, and then a lender finances the purchase, and the seller receives a check in the amount of the agreed purchase price. Then, the seller pays off any remaining mortgage debt.
However, some people don’t want to go through a realtor because they want to save on the commission, so they list the house as “FSBO” — or “For Sale By Owner.” There’s an a better alternative to make additional money off the sale of your house, though — particularly if you have paid the house off and own it “free and clear” — financing the mortgage yourself, or financing a second mortgage to get the buyer where he needs to be to finance the larger mortgage through a bank or other lender.
Here’s how it works. Let’s say you’re selling your house for $500,000. A buyer is interested, but he only has $75,000 to put down – however, due to not meeting bank requirements due to credit or being self-employed he cannot qualify for the full mortgage. He has more than enough income to qualify for the loan, but the lender only qualifies him for 65% of the purchase; $400,000. There is a shortfall of $100,000. You, as the seller, can make some extra money by financing a second mortgage loan. This is referred to as a vendor take back mortgage. Your note is the second mortgage lien, which means that in case of default the bank gets paid first. You can work out the terms with the buyer as to the rate and terms of this vendor take back mortgage.
How much money can you make this way? Well, you are out of pocket that $100,000, but you will get it back with interest. The purpose of this calculator is to take you through the different home purchase scenarios so that you can decide whether it’s worth the hassle (and the associated legal costs and risks) of serving as that secondary lender. If this is something you’re interested in — and if the numbers work — we recommend working with a realtor that has a connection with Amansad Financial, as they are familiar with the paperwork and regulations involved with this blended loan. That way you can get the most out of your home sale, working with professionals who are experts in the process.
Traditional Sale vs Vendor Take Back Sale without a Realtor
$500,000 – Agreed Sale Price / Funds Received from Purchaser
Less – $20,0000 – Estimated Realtor Commission
Less – $5000 – Estimated Legal Fees and Discharge Costs
= $473,000 – Net Funds Received
(For Illustration Purposes Only)
Vendor Take Back Sale
$500,000 – Agreed Sale Price
Less $325,000 – First Mortgage Financing from Purchaser
Less $75,000 – Down Payment from the Purchase
Less – $5000 – Estimated Legal Fees and Discharge Costs
= $395,000 – Initial Net Funds Received
$105,000 Owed to Seller to be registered as a Second Position Mortgage
- Assuming 10% interest only is charged per month for 24 months, the total amount due in 24 month $126,000.
= $521,000 – Total Net Funds Received
* A Positive Difference of $48,000.
(For Illustration Purposes Only)
There are many ways to structure. We foresee that this will be much more common moving forward to allow the Canadian Real Estate market to flourish.
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Amansad Financial Services | 2nd Floor, 5303 91st, Edmonton, AB T6E 6E2