Friday, October 26, 2012

Part 2 - VTB 2nds & Risks/Rewards

Generally 2nd mortgages have more risk than a 1st mortgage. For a Seller, the major risk is in the event of default. In a default situation, the equity position of the 2nd mortgage is behind the equity position of the 1st.  At the time of liquidation (either through a Power of Sale or Foreclosure proceeding), any equity would only be realized after the 1st lender is repaid in full (inlcuding any associated costs).  You may also be behind any unpaid property taxes, which have priority and can serve to squeeze your equity position even further.

Enough said on the negative risk side.  There may be a legitimate case to consider holding a 2nd - consider the following:

i) Adequate equity exists in the property to hold a 2nd and at the outset appears 'secure' position wise
ii) For the return it provides - often 2-3-4% higher than a 1st
iii) Property cannot be readily financed any other way - due to its condition, unavailable bank lending, poor market conditions, etc.
iv) Familiarity with the property and comfortable with its value overall
v) Confidence with the Buyer to be able to meet the total mortgaging obligations (both 1st & 2nd)
vi) Possible tax benefits on Capital Gains (see your accountant) and for the cash flow the mortgage provides

VTB 2nds are not the solution for every seller, but there may be sound reasons to consider them in certain situations. Most importantly, do your due diligence with respect to the Buyer - meaning are they a good credit risk, capable of servicing the total debt obligations of the property, have good intentions and the right plan for the property?...

As always, consult with
experienced commercial brokers in your area to learn more about the opportunities for VTBs.

Wednesday, October 17, 2012

Vendor Take Back Financing - Good Idea on Commercial Properties?

Lots of points to discuss on this subject -- but let’s begin by saying a VTB mortgage maybe a good idea for both Buyers and Sellers. In some cases, it may infact be the only way to finance a sale, given the lack of commercial funding available through institutional lending. 

The mechanics of negotiating a VTB are basically outlined in the Agreement of Purchase and Sale.  Meaning all terms are set out – including downpayment, mortgage term/amortization, interest rate, open/closed status, prepayment rights/penalties to discharge (if any) etc.  Other items may include – personal guarantee of mortgage, provisions to renew at the expiration of the 1st term, and any other special term(s) which may apply.

Why a VTB may benefit the Buyer:
i)                    Typically reduce the soft costs/fees associated with conventional financing
ii)                  Appraisal/Environmental expenses may be avoided
iii)                Terms (interest rate/term/downpayment) negotiated with the Seller
iv)                Ability to improve leverage or allowing to buy a higher priced property
v)                  Easier to finance ‘non-traditional’ or ‘distressed properties’
vi)                Avoid time involved in obtaining institutional approvals (several weeks to months)
vii)              If Open Mortgage (involves no penalties for early pay out)

Why a VTB may benefit the Seller:
i)         Provides a cashflow based on a set rate of return
ii)        Viewed as an investment option for your capital
iii)       Mortgage is held on a property which you have a vested interest in
iv)       May assist in achieving a higher sale price
v)        Can help in deferring capital gains tax in certain cases
vi)       Can help sell properties in a slow market, by built-in financing
vii)      Terms (interest rate/term/downpayment) negotiated with the Buyer

More on VTB mortgages in our next blog - including VTB 2nd  mortgages , other risk factors for Buyers and Sellers, and remedies for default.

Again, seek out experienced commercial brokers within your market, to best review the prospects for VTB mortgaging options within your market.   To learn more about our experience and background, click here.

Friday, October 5, 2012

Property Survey - Why do you need one?

Seems like any requirement that adds cost to a real estate purchase, is often met with reluctance. Survey costs generally fall into this category - but there importance on the Buy-Side should never be overlooked.  Outside of the actual deed, an ‘up-to-date’ survey is probably the 2nd most important document a Buyer needs when closing a deal.

Surveys are best described as ‘an overhead drawing of the subject lands' - in this case the property being purchased.  It should show not only the exact property boundaries, but any easements/encroachments/public right-of ways, which may affect the land. In addition, it identifies the exact location of all buildings/improvements on the property, revealing clearly the set-backs from the various lot lines. Other items which often appear include overhead lines, closed alleys, pools, fencing, porches and yard sheds.

Can we rely on an existing or original survey as provided by the Seller?  It all depends on how current the survey is today, and if no significant changes have occurred on the property. If an out-building has been built, fencing altered, building addition, etc, best practice is to order a new survey. Up to date surveys will and should reveal problem issues, which are always best rectified prior to closing any sale. 

Can we opt for Title Insurance vs. a Survey?  Best to ask your lawyer on this one – but in our view, better to have a current survey. Bear in mind that title insurance will be dealing with any problems ‘after the fact’, whereas a survey would have revealed any such problems prior to any sale.  This is only sound due diligence when buying a commercial property and should be viewed as such.

Again, seek out experienced commercial brokers commercial brokers within your market, to best represent your interests in acquiring any property.  To learn more about our experience and background, click here.