In a market where traditional financing can become difficult to secure, especially when interest rates are high or lenders have tightened their criteria, creative financing can provide a key to closing deals. Vendor take back mortgages, assumable mortgages, or other alternative financing options allow investors to structure deals that work for both buyers and sellers when conventional financing falls short.
It’s always important to seek professional financial advice before committing to a transaction.
Vendor Take Back Mortgages (VTB)
A VTB occurs when the seller of a property provides financing to the buyer. Instead of the buyer securing a loan from a bank or mortgage lender, the seller acts as the lender, agreeing to a repayment schedule and interest rate. This can be a win-win situation, particularly when interest rates are high, as a motivated seller may offer more favourable terms than a traditional lender, making the deal more attractive to the buyer.
VTBs can also be advantageous to sellers who need to sell a property but struggle to find a buyer because of market conditions. By offering a VTB, sellers expand their pool of potential buyers and can also secure a higher purchase price, as they are providing flexibility in the financing.
Assumable Mortgages
Assumable mortgages are another alternative financing strategy. In an assumable mortgage, the buyer takes over the existing mortgage of the seller, including the interest rate and terms. This can be especially beneficial when the seller secured the mortgage at a lower interest rate than what’s currently available in the market.
The challenge with assumable mortgages is that they often require lender approval, and not all mortgages are assumable. However, for buyers, stepping into an already-established mortgage at a lower rate can offer significant cost savings over the life of the loan.
VTBs, Assumable Mortgages, and Distressed Sellers
A distressed seller is a property owner who is motivated to sell quickly due to financial difficulties or personal circumstances, such as foreclosure, bankruptcy, divorce, or urgent debt obligations. Having difficulties finding a buyer for a property can further add to their concerns. These sellers are often willing to negotiate on price or terms to expedite the sale and alleviate their financial burdens. They may also then be willing to assist a buyer through flexible financing options, including VTBs and assumable mortgages, so they can get out of their difficult situation.
These financing options are particularly strategic for buyers in such cases, providing buyers with the ability to purchase the property at a favourable price.
An example would be if a seller with a multi-family property who secured a mortgage at a low fixed interest rate five years ago now needs to sell quickly. Assuming, in this example, that market rates have now risen, and the seller is struggling to attract buyers who can afford the higher rates, a smart buyer might offer to assume the existing mortgage at its favourable rate, taking a huge financial burden off the seller and securing a better deal for themselves in the process.
Negotiating Favourable Terms with Distressed Sellers
When negotiating creative financing with a distressed seller, communication is key. Sellers in distress are often motivated to close a deal quickly, but it’s important to understand their specific pain points and needs, so you can suggest flexible financing options as a solution. You can then structure a financing offer that aligns with their needs. A VTB with a competitive interest rate might appeal to a seller who doesn’t need an immediate lump sum but would benefit from cash flow over the next few years. Alternatively, a buyer offering to take over an assumable mortgage would allow a seller to walk away from their debt without penalty.
A key takeaway is that buyers have the ability to create more flexibility and opportunities for themselves. By thinking outside of the box, buyers can negotiate better terms and find solutions that suit both parties, especially in challenging markets. Being aware of and open to alternative strategies can open doors to options that might otherwise be out of reach.