A Vendor Take Back Mortgage Explained
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!
Using other people's money is a clever way to use leverage and enable you to buy additional properties (as long as you aren't over-extending yourself). Or, the extra money could be used to renovate, refurbish, or spend on the marketing required to rent out your new property.
For you, as the purchaser, there are other potential benefits from obtaining a VTB:
- As with bank financing, there is generally no pre-payment penalty if you pay off the mortgage early;
- Since vendors don't often ask for all of the documentation that is required by banks, financing your property is quicker and easier; 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:
- 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).
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. - 23200
Using other people's money is a clever way to use leverage and enable you to buy additional properties (as long as you aren't over-extending yourself). Or, the extra money could be used to renovate, refurbish, or spend on the marketing required to rent out your new property.
For you, as the purchaser, there are other potential benefits from obtaining a VTB:
- As with bank financing, there is generally no pre-payment penalty if you pay off the mortgage early;
- Since vendors don't often ask for all of the documentation that is required by banks, financing your property is quicker and easier; 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:
- 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).
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. - 23200
About the Author:
Learn How to Retire with Real Estate with Dave's free Real Estate Investing Starter suggestions Guide. Learn 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 @ 2:51 AM
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