Vendor Take Back Deals – VTBs Explained
Vendor Take Back Deals, also known as VTBs and Seller Take Back Mortgages and Reverse Mortgages, is a unique and rare type of deal in real estate. Though rare, it can be great for both the buyer and the seller in a transaction when compared to traditional real estate transactions. We’ll go through what a VTB is, how it works as well as show you an example of a VTB deal.
What Is A Vendor Take Back Deal?
A vendor take back, VTB, is a rare and unique deal where the seller of the home extends a loan to the buyer to secure the sale of the property. Without dealing with the bank for a loan, this type of deal allows the buyer to potentially purchase the property above what the bank would determine his financing limit and the seller gets their property sold.
How Does It Work?
The seller of the house extends a loan to the buyer for a portion of the sales price. The seller retains equity in the home and continues to own a percentage equity equal to the remaining loan until it is paid back in full. Instead of a financial institution or bank, the primary source of funding is often a second lien on the property. The buyer, like a traditional mortgage, continues to make regular payments to the seller. The interest rate is set by the seller and agreed upon by the buyer. It often is a higher interest rate than many traditional mortgages.
What Are The Benefits?
VTBs have a number of advantages for both the buyer and seller. As the current market can be difficult for many buyers to qualify for a traditional mortgage due to intense competition and stringent lending requirements, VTBs can be an alternate avenue for home ownership. Perhaps they can get away with a smaller down payment as a trade off for a higher interest rate? There are plenty of negotiations that can be made compared to a traditional mortgage. The buyer can have more options for financing and assistance and can qualify even if their credit scores aren’t up to traditional standards. For the seller, a VTB offers the option to get their home off the market. Interest can also generate income from the loan.
What Else Needs To Be Considered?
It may sound like VTBs are great and better than traditional mortgages. However, there are a number of considerations that sellers and buyers need to think about before entering into such an arrangement. Buyers need to be very aware of their monthly payments and the parameters of their VTB. They need to be clear on the conditions around closing costs, down payments and other fees associated with the transaction. For the seller, the VTB acts as a second mortgage. If the buyer defaults on payments, the onus is on the seller. Additionally, sellers will often need legal documents drawn up from an experienced lawyer which can incur heavy costs. Further costs associated with defaults can make VTBs a risky arrangement for some sellers.
Who Are VTBs Good For?
Investors often benefit from VTB arrangements. Sellers who own a property outright can have a VTB assist in deferring capital gains from the purchase price and enjoy tax benefits. The monthly income from the mortgage payments is also highly beneficial. For investors with poor credit, a VTB can act as a short-term financing solution.
Let’s Look At A Real VTB
Address: 345 Gladstone Ave
Property: 6-Unit Income Property
Description: Renovated, Purpose-Built Brick 6-Unit Income Property like no other situated in one of Toronto’s Most Rentable Neighbourhoods! Victorian-style building with each unit showcasing unique charm with modern finishes.
Competitive Financing and VTB Deals are an option for this property as long as the minimum down payment is available. This kind of opportunity is rare especially in the Toronto Real Estate market. For the right buyer, this income property could be the perfect deal to grab.
The units have large layouts and some have the original hardwood as well as stained-glass windows and exposed brick for aesthetic appeal. A true gem in Toronto!