Vendor take back mortgage in Canada

[Damian LaGrange]

Hello fellow Canadian investors.  I’m trying to structure a vendor take back mortgage.  I’m guessing there must be differences in the terms in Canada vs USA.  I am planning on 20% down , then a fixed payment based on current typical rates for the next 5 years, then a balloon payout at the five year mark.  Does this sound right?  I will confirm with my lawyer and accountant when it comes time, but I thought I should hear what other investors suggest.  

[Stevo Sun]

It's referred to as VTB (Vendor Take Back) or Seller Financing. But it's not super common in Canada. Not many sellers are willing to do a VTB unless they cannot get the price they want in the market. Of course, there are some exceptional cases where the seller might consider it. But you have to understand the seller is taking on a significant risk of having someone else run the property and not knowing if they will get the final payout.

If you are getting typical rates, why would you not just buy the property outright with 20% down and obtain mortgage financing from a lender? In cases where VTB tends to work, the price the seller wants is higher than what the market will give them, so they are willing to take on some risk and wait but get the price they wanted.

[Damian LaGrange]

Thank you. In this case the current financials on the property aren't great(rents well below market value and the owners family living in several of the suites) so the lenders will likely not provide the funding based on poor NOI. The actual potential value of the property is disproportionately higher than you would expect based on current revenue. Also, the owner expressed concerns over the capital gains tax early in the discussion...so I am thinking the opportunity to do vendor financing will help me get a good purchase price and help the vendor with taxes. Also, I plan to put 20% down...rather than 25%...which will allow me to keep cash on hand to complete the needed rehab. I am assuming that most lenders require 25% DP.

[Stevo Sun]

Quote from @Damian LaGrange:

Thank you. In this case the current financials on the property aren't great(rents well below market value and the owners family living in several of the suites) so the lenders will likely not provide the funding based on poor NOI. The actual potential value of the property is disproportionately higher than you would expect based on current revenue. Also, the owner expressed concerns over the capital gains tax early in the discussion...so I am thinking the opportunity to do vendor financing will help me get a good purchase price and help the vendor with taxes. Also, I plan to put 20% down...rather than 25%...which will allow me to keep cash on hand to complete the needed rehab. I am assuming that most lenders require 25% DP.

 Sounds like you are talking about a commercial property. If the property is owned outright by the owner you can negotiate whatever terms you want. 

[Damian LaGrange]

Thank you!