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:
- Generally there's 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.
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;
- 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% 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. - 23226
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:
- Generally there's 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.
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;
- 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% 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. - 23226
About the Author:
Find out How to Retire with Real Estate with Dave's free Real Estate Investing Starter information Guide. Find out 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 @ 12:41 AM
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