Ottawas Condos Team Blog
The 411 on VTBs
Thu 5th Feb 2015
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Kevin
Thu 5th Feb 2015

A VTB, or Vendor Take-Back is when the seller (vendor) of a property provides you with some or all the mortgage financing for purchasing his or her property.  A VTB can also entail the seller covering one or more of your closing costs such as land transfer tax, appraisal and survey or application fees. 

The maximum VTB that you can get from a seller truly comes down to what you can negotiate.  If you are arranging a VTB in a second position, meaning that you are going to an institution for your first mortgage, then the maximum you can use in a VTB is 10 percent of the purchase price.  Not all lenders do allow VTBs, so be sure to check with your mortgage specialist on who does and does not allow them.

The rate and terms on a VTB are negotiable as well.  In most cases, however, the seller will charge you an interest rate higher than what you would typically get through your bank.  This reflects the higher risks that the lender is willing to accept.  The terms on a VTB can vary from interest only payments with one balloon payment at the end of the term, or interest and principal payments.

VTBs offer many advantages to both the buyer and seller.  From the seller’s perspective the benefits of a VTB can include:

  • Monthly cash flow
  • Obtaining a higher price for their property
  • Tax Deferment
  • Ability to sell in a slow market
  • Avoiding pre-payment penalties on existing locked-in loans.

From a buyer’s perspective the benefits can include:

  • Ability to buy non-conventional and distressed properties
  • Increasing the return on investment
  • Ability to buy larger properties with the same amount of funds or less
  • Saving on the costs and time associated with traditional financing

Obviously, a VTB mortgage should always be entered into with caution.  It is complicated, and a lawyer should always be consulted to review all documentation and perform the necessary due diligence.  From a seller’s perspective, he or she is dealing with the risk of default.  From a buyer’s point of view there may be a risk of having to pay off a VTB mortgage in a lump sum if the seller dies, goes bankrupt or needs to liquidate his estate, if not drafted correctly.