When economic times are good (real estate is selling fast, employment is rising as is income, all is well), you often see fewer VTBs. This is because access to credit (obtaining loans/mortgages/lines of credit) is often “easier” and homes sell at a steady or rapid rate. Sellers are not as willing to take financing because it is not that difficult to sell your house. BUT, and this is a BIG BUTT, when the economy is slowing, access to credit is more difficult, and properties are not selling as quickly, providers may be willing to get more creative in getting rid of that property.

What is a VTB some of you may be asking? Simply put, a VTB is a vendor repayment mortgage or loan. It is simply when the seller (seller) of a property is willing to provide some or all of the mortgage financing for that property.

But, if you are selling a house, a potential VTB holder, it is important to understand Owning a VTB has many other advantages that make it attractive whether the housing market is hot or cold.

You will often see that investors are more likely to own VTB than a normal homeowner just trying to sell their house. This is because investors “get it.” They will probably know what a VTB is and know the advantages, both for themselves and for the buyer. In tough times, a VTB could make it easier to unload a property. But at any time, a VTB can allow a seller to earn some extra money on the home by charging interest on the loan, as well as potentially defer some taxes.

Why earn 2% on a “high interest savings account” at your bank when you can earn 7% or more on your VTB?

But, there is a risk of carrying “paper”.

VTBs are usually in 1st or 2nd position as a mortgage. If you, the VTB holder, are in the top position, you’ll get your money first (assuming you don’t owe the government anything, because the government gets your taxes first!). You can also often get closer to your asking price when you offer a VTB. This is because the buyer has fewer hoops to navigate, lower costs associated with the purchase (no appraiser required, no loan fees to pay, less time required to find financing), and often will be willing to pay a higher price.

The second position has some more risks. If you sell your property and your buyer assumes the current mortgage or brings in their own new lender, but the buyer wants to be more leveraged (increase the value of the loan), you may want a VTB in second position (behind the mortgage lender). first mortgage). ).

Now, if you (the provider) are willing to keep that VTB in second position, that means you will ONLY get your money AFTER the first position lender gets ALL of your money first. This is only really a problem in the case of default and foreclosure, but it certainly can happen! So you need to think carefully if you want to put yourself at risk.

So why would you occupy a second position VTB?

• You can’t sell your property any other way (i.e., the property is “ugly” and needs a lot of work, banks won’t make loans, the buyer can’t qualify for enough financing)
• There is enough equity in the property, even after owning a second, that you are somewhat “safe” and can get a good return.
• You know the property, because you used to own it, and you are comfortable making a loan secured by that asset.
• In the second position you can charge a higher interest rate because there is more risk in the second position. So instead of charging 7% on the first position, you can often ask for 8, 9, 10 or more percent interest. Of course, it all depends on the other terms, but you should earn higher interest than the first position mortgage charges.
• I’d rather lend to a Qualified Buyer at a good interest rate than put your money in a crappy low-interest bond, GIC, or unpredictable stocks/mutual funds
• You want to delay capital gains tax until the VTB is paid in full (you don’t pay capital gains tax on any VTB loan amount until it’s paid in full, but of course I’m not a tax accountant, so be sure to consult your accountant for the practicalities of that subject!).

So you see, there are many reasons why someone might have a second mortgage like VTB.

And in some markets where people are struggling to sell, it might be something to consider offering.

Of course, the lowest risk for you holding a VTB is first position, but the challenge with that is that unless you own the property free and clear of any current debt, you probably won’t have enough capital to offer the buyer a mortgage big enough to put you in 1st position. Which means that you will often have to be happiest with the second riskiest but most lucrative position.

VTBs aren’t the solution for all sellers, but many people are looking for ways to lower their tax bill and still get rid of a property. Others would like to find a way to generate guaranteed income every month. And for some other sellers, it’s just a way to sell an otherwise hard-to-sell property. Supplier returns provide an excellent solution for these types of sellers. And of course, they are wonderful to find as a real estate investor, so always ask sellers if they will accept any financing!