It’s Good to Know – What is a Vendor Take Back Mortgage?

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.

As the purchaser, there are other potential benefits for you as a result of obtaining a VTB:

– Normally, there is no pre-payment penalty if you pay off the mortgage early (as with bank financing);

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

– The property will continue to provide monthly cashflow, even after they’ve sold it;

– 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;

– 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.