In a slow housing market where many buyers remain on the sidelines, some homeowners are turning to a commercial property strategy to get deals done: the vendor take-back mortgage (VTB). This financing arrangement allows the seller to act as the lender, taking payments from the buyer over a specified period.
How Vendor Take-Back Mortgages Work
The loan can cover the full sale price, but more commonly it serves as a second mortgage to help the buyer bridge the gap. Daniel Foch, chief real estate officer at Valery.ca, reports seeing an increasing number of VTB deals as a way to close transactions in the current credit-tight environment. "If you go back to the (housing downturn in the) 1990s, what happened was lenders were the ones that were obstructing deals," Foch said. "That is kind of what is happening right now."
Historical Context and Current Relevance
Foch notes that VTBs were "super common in the 1990s" when trust companies were failing and banks were absorbing them, leaving only super triple-A deals getting done. Today, a similar credit crunch is pushing buyers and sellers to find creative solutions. Sellers may agree to a take-back loan to secure their desired price, but it carries more risk and is messier than a straightforward sale.
Bank Reluctance and Commercial Parallels
Ron Butler, a Toronto mortgage broker, points out a major obstacle: banks are reluctant to accept VTBs, even if the seller is second in line in a default. "Banks have gotten out of the business of allowing second mortgages," Butler said, adding they will "never go behind the vendor" on such a deal. In the commercial sector, VTBs are used to spur interest in a property. Butler explains: "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. It's a system to allow for a higher-price sale."
Risks and Considerations
If the buyer defaults, the seller would have received interest payments for a period and could retake possession, hoping the property value has risen. However, Butler cautions that only about 1 in 800 residential sales involves a VTB. He warns buyers: "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." The buyer often ends up overpaying, he says. Sellers need to be sophisticated, assess the buyer's credit, and accept potential legal headaches and costs. A VTB is not for everyone, but it remains an alternative in a challenging market.
