By now, the financial crisis has touched most players in the real estate market.
Even some high-end buyers in Toronto who were scheduled to close home sales have run into an unforeseen glitch.
The banks’ lending policies are currently tightening up so that some buyers are having trouble getting the full amount of financing they require.
As a result, some buyers have started borrowing from the sellers themselves in the form of a “Vendor Take Back” (VTB) mortgage, also known as “Seller Take Back” (STB).
Here’s an example of how a VTB works:
Sale price:$1,500,000
Buyer’s down-payment:$500,000
Mortgage required:$1,000.000
If the bank is willing to advance the buyer only $800,000 of the required $1,000,000, the buyer still needs $200,000 to close the sale. Solution? Ask the seller to hold a second mortgage for $200,000, and the sale goes ahead.
What are the risks of holding a seller-take-back? Provided the seller does not need the entire $1,500,000 in cash, then everything can work out fine for both parties. Typically, VTB mortgages are held by the seller for one to five years. At the end of the term, the buyer must pay the full balance owing in cash or ask to renew the mortgage with the seller for an additional one to five years.
What happens if the buyer fails to keep the monthly payments on this second mortgage? This is not a likely scenario, since the buyer is able to keep payments on the $800,000 mortgage and the $200,000 mortgage payments are a relatively small amount.
But if the buyer does default, the seller’s only solution is to exercise a “Power of Sale” outlined in the mortgage agreement (unless both parties can work it out beforehand).
Nevertheless, with financial institutions making it increasingly harder to borrow, VTB’s are proving to be a clean, viable and generally safe way of “bridging the money gap”.
Rosalin Smith-Carr is a Sales Representative with Royal LePage R.E.S. Ltd., Johnston & Daniel Division. Rosalin can be reached at rsmithcarr@sympatico.ca or visit www.primetorontoneighbourhoods.com
