A Vendor Take Back Mortgage Explained

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!

Using other people’s money is a smart way to use leverage and enable you to buy additional properties- just be careful not to over-extend yourself. The extra money could be put toward renovating or refurbishing, or spent on ads to rent out your new unit.

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;

– As vendors rarely ask for all of the documentation that banks require, it is easier and quicker 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 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;

– 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;

– 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 create the VTB documentation. But, ensure that your lawyer also thoroughly reviews the Purchase and Sale Agreement and the mortgage documents and it’s conditions. Also, speak with the vendor to determine if the term can be extended when it comes due.

Know How to Retire with Real Estate with Dave’s free Real Estate Investing Starter suggestions Guide. Know how to plan for 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.