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 1^st 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 2^nd  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.