Over the past seven to 10 years, it seemed as if the market had forgotten how to spell VTB. With interest rates as low as they were, the vendor takeback mortgage was essentially an unnecessary device that sat unused.
But the vendor takeback, or VTB, is a specific tool that is particularly useful when markets are a little volatile. It works to bridge the gap between purchasers and vendors – exactly the gap that many are experiencing right now.
Vendors still expect higher prices, but borrowers are not able to finance as much as they used to because of the higher interest rates. The VTB is the tool that can overcome this.
It was much more common maybe 15 years ago and we are now seeing it come back into play with lenders showing more openness to this option.
For the vendor
For a vendor feeling pressured to sell, the VTB allows them to maximize the value of their property instead of accepting a lower price to get the deal done.
While they won’t receive the full purchase price straight away, they know they will receive it over time – and with interest.
For the buyer
For a buyer who needs to hit a certain yield on the property but who can’t get that yield based on the first mortgage being offered by the bank, they can suggest a VTB.
In that case, the vendor would take back a second mortgage at a lower rate than the bank. Now when they blend the first and second rate, the buyer is able to achieve their desired yield and the deal can go forward.
VTBs
In terms of what interest rate you might expect on a VTB, this can vary widely, depending on the needs and circumstances of the buyer and seller and just how far either party is willing to go to get the deal done.
We have seen VTBs with rates ranging from zero to 10 per cent.
This is a variation from typical VTBs where the seller offers a higher-rate VTB and the main aim is to give the purchaser a way to complete the deal.
Here what we are suggesting is some give and take on the part of both buyer and seller to make the deal feasible; the purchaser goes up in price and takes on more debt, and the vendor perhaps accepts a mortgage at a lower rate than the bank but also sells their property at an agreeable price.
When you are considering this option as a seller, you should be thinking of it as a conventional mortgage in terms of the legal considerations.
You should be involving legal counsel in the drafting of these documents to ensure you are well-protected.
Your VTB should address default and remedies, inspections and insurance. While you may not need to act on many of these provisions, you want to at least have the option available to you.
While a seller will want their VTB to be registered in first position, it is most likely going to be in a second-place position after conventional financing.
Our best advice is to include the requirement of a VTB in the purchase agreement so your lawyers have time to properly address it rather than including it as a last-minute addition to get the deal done.
Another aspect to consider is the liquidity of the VTB. As a buyer, you don’t want to be stuck with an asset that you cannot sell if the need arises.
Make sure the VTB is structured such that it is a saleable commodity in the marketplace.
We’ve been seeing a complete disconnect between expectations of purchaser and vendors. The good news is there are tools available out there to bridge the gap.
In the price discovery process, the VTB is a tool to use to bridge the gap between bid and ask and address that disconnect in the market.