Financing Your Real Estate with Vendor Take Back Mortgages
When the Vendor (aka the seller) of a property is willing to provide some (or all) of the mortgage financing on a property, it is referred to as a Vendor Take Back (VTB). As a real estate investor, I ask for a VTB on most of the deals that I am involved with. As there are significant benefits to both parties involved in the deal, it doesn't hurt to ask the vendor if he/she would be willing to carry the mortgage - even if it's only a smaller 2nd mortgage. Believe me- asking that one simple question could result in an additional $5,000 - $10,000 in financing for you!
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):
- 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 affect your credit score, as is now becoming more common with both big banks and credit unions.
The benefits of a VTB for the seller (vendor) 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 may make considerably more money on the property by charging a higher than market value interest rate and collecting it back over time;
- Even after they've sold the property, it continues to provide monthly cashflow;
- 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 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).
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. - 23167
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):
- 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 affect your credit score, as is now becoming more common with both big banks and credit unions.
The benefits of a VTB for the seller (vendor) 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 may make considerably more money on the property by charging a higher than market value interest rate and collecting it back over time;
- Even after they've sold the property, it continues to provide monthly cashflow;
- 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 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).
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. - 23167
About the Author:
Find out How to Retire with Real Estate with Dave's free Real Estate Investing Starter Tips Guide. Find out how to build financial freedom, extra monthly income and massive wealth with tips 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 @ 1:42 PM
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