In a housing market where many buyers continue to sit on the sidelines, can home owners take a page out of the commercial property playbook to get deals over the line?
The vendor take-back mortgage (VTB) is a financing deal in which the seller acts as the lender and takes payments from the buyer over a specified period of time.
The loan could cover the full amount of the sale price, but more commonly it is used as second mortgage to get a buyer over the finish line.
The unusual transaction is not taking over the market, but Daniel Foch, chief real estate officer at Valery.ca, said he is seeing an increasing number of VTB deals to get transactions done.
“If you go back to the (housing downturn in the) 1990s, what happened was lenders were the ones that were obstructing deals,” said Foch. “That is kind of what is happening right now.”
When there is that type of credit crunch, Foch said the onus is on buyers and sellers to try to make deals work.
“This was super common in the 1990s because you had the trust companies going under and the banks trying to absorb them , and the only deals getting done were super triple-A deals,” said Foch.
One reason sellers agree to a take-back loan is to secure the price they want, even though it likely carries more risk and is not as clean as simply being clear of the property after a deal closes.
Ron Butler, a Toronto mortgage broker, said one major obstacle is that banks are reluctant to accept them, even if the seller is second in line in the event of a default.
“Banks have gotten out of the business of allowing second mortgages,” said Butler, adding they will “never go behind the vendor” on such a deal.
So why would you want to do a VTB? Butler says it happens in the commercial sector when there is a need to spur interest in a property.
“The guy selling says, if you give me $200,000 for this $800,000 property I had no (purchaser) interest in, I will give you a reasonable $600,000 mortgage for three years,” said Butler. “It’s a system to allow for a higher-price sale.”
If the buyer eventually defaults? The logic is that the seller would have received two years of interest payments, and by the time they retake possession of the property, the price has hopefully risen.
This logic might make some sense to a beleaguered condo seller who can’t find a buyer, but Butler estimates that only about 1 in 800 residential sales involves the vendor taking back some form of mortgage to close the deal.
“I wouldn’t want to be the buyer because in every vendor take-back I have ever seen, the seller got a higher price than they normally would have otherwise in a competitive market,” said Butler, adding that the buyer making the deal is often just making a mistake most of the time on price.
As a seller, it’s clear you need to be more sophisticated and consider the credit of the person you are loaning money to and that is likely going to create more legal headaches and costs. All of which is why a VTB is not for everyone.
Mark Goodman, a principal broker at Vancouver-based Goodman Commercial Inc., said vendor take-backs can bridge the gap between buyers and sellers, but said he still doesn’t see them happen much.
“We try to bring it up, but either the buyer or seller doesn’t want to do it. In theory, it is an elegant way to solve a problem when lending has tightened up,” he said. “In the last 200 deals, we have not done one or an assumed mortgage.”
Sellers like the deals because they can still get their price, they get some interest from the mortgage and their capital gains are spread out over a long period since they are not realizing the full price due to the mortgage at the time of sale.
Goodman, who sells land and multifamily buildings, said buyers who think they can turn around a property but can’t get a loan from a bank that focuses on current income can be motivated to do a deal.
“But that type of buyer is gone now,” he said, adding that restrictions on the rental market just have people shying away from any purchase.
Phil Soper, chief executive of Royal LePage, one of the country’s largest brokerages, said he sees an increase in alternative financing arrangements.
His company launched a new business line in some cheaper secondary markets, including Winnipeg and Edmonton, called Requity Homes, a rent-to-own business.
“It tries to do the same thing essentially (as a VTB). Take someone who is self-employed and doesn’t have traditional T4 income or a first-time home buyer, and allow them to get into ownership over time,” said Soper.
The idea is that a certain percentage of the rental payment goes to equity, and eventually, there is enough equity in the home for a traditional mortgage.
Soper said ultimately, sellers are really mostly repositioning their property either through a price or a cheaper interest rate, but it’s all money at the end of the day.
“A realtor can say one way to make your condo stand out is to offer below-market financing,” he said, noting it’s not a lot different than a car company offering financing deals. “You are moving the purchase price of the car onto the financing.”
If none of this sounds like the ideal way to sell your house that has been sitting on the market too long, you are probably right. But the problem is, this isn’t an ideal time to sell your house.
• Email: gmarr@postmedia.com
