What is a VTB and how can you benefit from it? By Roberto Sanabria

A Vendor Take Back Mortgage or more commonly referred as VTB, is usually one of the “creative” financing options in a buy-sell Real Estate transaction, where the seller provides the buyer an amount as financing in second position to the main lender to help facilitate the purchase of the property. The take back mortgage usually will have a lien on title on the property until it is discharged. 

It is very important to note that in Canada (unlike the USA), main lenders request that buyer has own stake in the deal, so no 100% financing is allowed.
Usually, VTBs are part of the Purchase and Sell Agreement, and not all lenders will accept them. The lenders that will accept will do with some restrictions, and in all cases, will want to see the buyer come up with more % than the actual % of the VTB, for example: Say Mr. Seller wants to sell his condo in Down Town Toronto to Mr. Buyer for full price of $255,000. Mr. Buyer who has 650 beacon has arranged a mortgage with a B-Type Lender for 70% of the Purchase Price. Mr. Buyer has 20% down payment from own funds but it is short 10%, so the buyer asks Mr. Seller if he would provide a VTB for the remaining 10% ($25,500 with a term of 2Yrs at 8% per yr payable monthly). Mr. Seller accepts the deal and  puts a second charge on the property for $25,500 and will start receiving $170 per month for 24 months, and at the end, Mr. Buyer will pay out the $25,500 by refinancing the property.

What are the benefits of VTB to the Seller?
The most significant is to facilitate the sell of the property for top dollar. The second major benefit is that seller will continue to receive income stream of $X/ month during the term of the VTB, and the interest is around market value for a 2nd mortgage (between 8% and 15%), and that there may be tax benefits to the seller (depending on the circumstances and structure, please consult with your accountant).

What are the benefits of VTB to the Buyer?
Buyer could have lower than average beacon score, be able to acquire and control property with low down payment (not zero down). After the term, the buyer can refinance and payout the seller. During the time of the VTB, buyer can re-establish his credit.

Although VTBs have great advantages for both parties, it should not be entered lightly without having a Mortgage Broker and a Real Estate Lawyer look at the drafted Purchase and Sale agreement that includes the VTB clauses. For example, financing terms, rates, amortization, exit clause, “due on sale” clause, etc..You need to plan ahead for all sorts of situations: if the vendor dies, and their estate (including your mortgage) needs to be 'liquidated'; etc.

Referral fees - Legal or Not?

Real Estate agents, Mortgage Brokers, Lawyers and many other professionals are “must have” members of any investor’s power team. And through we try to structure our deals such that they earn commission, it is not always possible. Occasionally we want to compensate them directly for the help, effort and/or referral. At the same time they might be in the same position. For example a realtor who referred a client to a mortgage broker or lawyer. But have you ever wondered about the legality and ethics of referral fees?

Realtors, mortgage brokers and lawyers have to be licensed and by paying a referral fee to their “Bird-Dogs” they introduce unlicensed person to their Trade, which is against the rules. So agents with different license can’t pay each other for the help received. The form of the referral fee (e.g. a bottle of wine, a cash payment, etc.) would not matter.

A realtor, mortgage broker or lawyer is, however, capable of receiving a referral fee from a third party (like an investor who doesn’t need to be licensed) provided that fees are disclosed to the client and the client agrees (preferably in writing). Referral fees are only acceptable when being paid to a registrant, through their brokerage, who (after taking a healthy bite) would in turn pay the agent.

 However, agents can pay a referral fee for something not related to a transaction. So an agent can pay for a service to provide leads so long as the fees are for the leads not the transactions. This means no percentages and it has be paid whether or not the leads buy, sell or lease a property, gets a mortgage or closes with the given lawyer. Referred client must have given permission to have their information shared or else the Privacy Act steps in.

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. For legal details consult your lawyer and read following documents:

• ss. 30(b) and (c) of the Real Estate Business and Brokers Act, 2002 
• Rule 2.08(8) of the Law Society of Upper Canada’s Rules of Professional Conduct
• Law Society of Upper Canada’s Practice Management Guidelines

Toronto Market Watch: August 2012

Greater Toronto Area REALTORS® reported 6,418 sales in August 2012, representing a year-over-decline of almost 12.5 % compared August 2011. One might say that decline is do to stricter mortgage lending guidelines, which came into effect in July but the number of new listings reported in August was down also by 5.5% compared to the same period in 2011.

In the City of Toronto, the additional impact of relatively higher home prices coupled with the upfront cost associated with the City’s Land Transfer Tax led to a stronger annual decline in sales compared to the rest of the GTA.

The average selling price for August 2012 transactions was $479,095 – up by almost 6.5% compared to August 2011. The annual rate of price growth was driven by the low-rise home segment in the City of Toronto, including single-detached homes with an average annual price increase of 15%. Condo prices in 416 area continue to decrease (down 4% to $349 489)

“While sales were down year-over-year in the GTA, so too were new listings. As a result, market conditions remained quite tight with substantial competition between buyers in the low-rise market segment,” said Jason Mercer, TREB’s Senior Manager of Market Analysis. “The trends for sales and new listings are moving somewhat in synch, suggesting that the relationship between sales and listings will continue to promote price growth moving forward.”

The clock may be ticking on bank-offered cashback

The announcement comes as federally regulated lenders begin to announce that they will stop offering cashback mortgage product in compliance with new OSFI guidelines. 

Many banks have been slowly winding down their cashback offerings, although the first of the official deadline starts October 31.

This week, Scotiabank was the latest to announce it will drop its Free Down Payment program 
on September 15.

Credit unions have not yet received any directive on the matter from DICO, but the general consensus is that the provincial regulating body will follow its federal counterpart eventually.

No changes to prime rate!

The Bank of Canada has left interest rates at 1% due to the continuing worldwide slowing of economies.

According to the Bank, “the economic expansion in the United States continues at a gradual pace, Europe is in recession and its crisis, while contained, remains acute.” The Bank of Canada also stated “In China and other major emerging economies, growth is decelerating somewhat more quickly than expected from previously-rapid rates.”

 No change is expected in the near future.

Your Financial Options

Not too many people know that there are different options to finance your property.

Generally lenders categorized by “A”, “B” and private money categories. They are different in terms of: the geographical focus, the property types, the number of rental properties one can own, some lenders have good products for self-employed individuals or clients with challenged credit. They also differ in terms of supporting of documentation required from the client to close the deal.

“A” lender include banks and bank-like lenders. These are lenders with the most strict mortgage qualification criteria to clients.  Usually to qualify you need to have income and good credit history. These financial institutions require full documentation. Most of the time it is owner occupied property in locations with strong economic fundamentals. On the other hand, they offer the lowest rates to client and possibility of a small down payment.

“B” lenders deal with lending situations that A lenders typically wouldn't accept. For example, people with bad credit history: bankruptcy, consumer proposal, or low credit score most likely will be accepted. They maybe clients who are self employed and do not show the income to qualify with A lenders. People who invest in real estate find this lending very useful because B lenders are more flexible with locations and number of rental properties. In many cases, it is a short-term solution until the client either gets their credit back in line or has the income to qualify through A lender. 1 to 3 year fixed terms are common with this type of lending.   

Often the last resort for those who cannot receive mortgages from other sources is private money lend on equity in the property. The lender is not concerned with credit or income but will review it to get an overall feel for the applicant. Also larger down payment is required. 

Construction financing for small and large projects is popular in private lending because the lenders do not impose the stringent guidelines that A lenders do on the client. The terms are usually short and do not exceed 1 year period. Interest rates and fees are higher than B lending.

New Member of Our Team - Mortgage Broker

Please welcome the newest member of 5 Corners team - Natalya Bobylyova.

Natalya is a mortgage agent and will offer you advice on Real Estate financing options as well as tips and tricks to make your investment more profitable.

You will find her articles under "Financing your Real Estate" and "mortgage trends" labels.