Vendor Take Back (VTB) mortgages are becoming an increasingly favorable and popular tool with certain Sellers in the Multi Family real estate market. While traditional bank financing remains the standard, offering a VTB can provide some sellers with a distinct strategic advantage over other sellers. VTBs can help secure higher valuations while at the same time generate ongoing income.

Let’s take a look at how VTB mortgages work and why property sellers should at least consider leveraging them in their next transaction.

What is a Vendor Take Back (VTB) Mortgage?

Let's start by looking at what a VTB is.  At its core, a VTB is an arrangement where you, the seller, essentially turn into the bank for the buyer. Rather than the buyer securing the entire loan amount needed for the purchase from a traditional financial institution, you provide a mortgage directly to them. You negotiate the interest rate, term length, loan amount, and down payment just like a bank would.

As long as the buyer provides a comfortable down payment and you take steps for your own protection, your risk is heavily mitigated. In the absolute worst-case scenario where a buyer gets hit by a bus and defaults, you simply regain ownership of a property you already know intimately and trust.

Strategic Advantages of VTBs

Maximizing Your Sale Price:

Traditional lenders are inherently risk-averse. If your building has deferred maintenance, problem tenants, or rents that are significantly below market value, a bank may appraise the building lower than your asking price or offer a reduced loan-to-value ratio. By offering a VTB, you can bridge this financing gap and achieve a higher purchase price for a property that the market or traditional banks view as challenging.

Generating Interest Income:

When you act as the lender, you collect the interest payments that would otherwise go to a commercial bank. Often, VTBs are structured as "interest-only" loans rather than principal and interest. This yields higher total interest for you while giving the buyer the vital cash flow needed to fund property improvements.

Optimizing Tax Liabilities:

Selling a large multi-family asset outright results in an immediate, lump-sum payout, which is often swiftly followed by a substantial capital gains tax bill. Because a VTB spreads the receipt of the purchase funds out over a period of years, it can potentially allow you to defer and offset capital gains taxes. (Note: It is highly recommended to consult with your accountant and lawyer to understand the specific tax deferral benefits for your situation.)

Sidestepping Risky Finance Conditions:

Deals often fall through during the conditional financing period. By acting as the lender, you completely bypass risky finance clauses, ensuring a smoother and more certain transaction.

Preparedness and Due Diligence: Structuring a Safe VTB

My approach to commercial real estate is rooted in data-backed decisions and transparency. Loaning millions to an unproven novice is highly risky; partnering with an experienced investor who has successfully managed numerous buildings makes for an excellent VTB candidate. To protect your investment, prepare and do your due diligence:

• Evaluate the "Personal Covenant":

  We must rigorously assess the buyer’s credit, track record, and history with other properties.

• Understand the "Repositioning" Plan:

  Many buyers utilize VTBs to "reposition" a property—investing capital to upgrade the building, navigate tenant turnovers, and raise rents to market value. Check this.  What is the plan?  How often has the buyer done this in the past? How many tenants can realistically be turned over?  Where is the money coming from to renovate and how will that affect, if at all, the ability to service the VTB?  

• Define the Term Length:

  You typically do not want to hold a VTB indefinitely. The standard timeframe is one to five years, with the majority sitting in the two to three-year range.

• Maintain Oversight & Lien Position:

  We will negotiate your right to inspect the building and monitor its financial statements to ensure the asset is being managed properly. Furthermore, establish exactly where you will stand in the "pecking order" of debt repayment (e.g., second or third position) should the property face a power of sale.

Ready to Optimize Your Real Estate Portfolio?   

Your investment needs are unique, and you deserve an advisor who will give you a candid opinion and a personalized strategy. Whether you are looking to acquire a new property or reposition your current multi-family assets for a premium sale, I am here to help.

Let's discuss how we can leverage tools like VTB mortgages to increase your returns.

Contact me directly to schedule a consultation:

Terry Riddoch

Phone: c. (519) 591-1725 or o. (226) 741-3895 Email:[email protected]