Financing Your Real Estate with Vendor Take Back Mortgages
A Vendor Take Back (VTB) 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 the majority of the deals that I am involved with. It doesn't hurt to ask if the vendor would be willing to carry the mortgage - even if it's only a smaller 2nd mortgage. There are significant benefits to both parties involved in the deal. And asking that one small question could provide you with an additional $5,000 - $10,000 in financing!
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.
As the purchaser, there are other potential benefits for you as a result of obtaining a VTB:
- As with bank financing, there is generally no pre-payment penalty if you pay off the mortgage early;
- Vendors rarely ask for all of the documentation that banks require so it makes it quicker and easier to finance your property; and
- Your credit score will not include the mortgage and it's value (as is now becoming more common with the big banks and credit unions).
The potential benefits for the seller (vendor) from obtaining a VTB are:
- A way to make a distressed property or a difficult deal more attractive to a buyer (investor) by offering property financing;
- 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;
- The property will continue to provide monthly cashflow, even after they've sold it;
- 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).
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. - 23218
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.
As the purchaser, there are other potential benefits for you as a result of obtaining a VTB:
- As with bank financing, there is generally no pre-payment penalty if you pay off the mortgage early;
- Vendors rarely ask for all of the documentation that banks require so it makes it quicker and easier to finance your property; and
- Your credit score will not include the mortgage and it's value (as is now becoming more common with the big banks and credit unions).
The potential benefits for the seller (vendor) from obtaining a VTB are:
- A way to make a distressed property or a difficult deal more attractive to a buyer (investor) by offering property financing;
- 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;
- The property will continue to provide monthly cashflow, even after they've sold it;
- 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).
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. - 23218
About the Author:
Know How to Retire with Real Estate with Dave's free Real Estate Investing Starter information Guide. Know how to build financial freedom, extra monthly income and massive wealth with information 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 @ 2:20 AM
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