Seller financing, more commonly called a VTB or vendor take back mortgage is simply where the seller (Vendor) of a property is willing to provide some (or all) of the mortgage financing on that property.
Most of the time you hear seller financing discussed as a way for real estate investors to buy investment properties without having to go to a bank for financing. But there are tremendous benefits to you as a seller if you’re selling real estate and offering seller financing to the buyer.
The benefits to the seller who offers a VTB can be:
- faster sale of a property in a slower market
- a higher sale price because most investors are willing to pay a premium for a property they don’t have to finance using bank financing
- a higher overall return for the seller because even if the buyer doesn’t pay a higher price, there is a usually a good interest rate offered on the deal which essentially equates to a higher overall sale price. For example if the home would have sold for $300,000 but there is a two year 80% loan to value VTB at 6% interest, the seller is essentially getting $328,800 for the property ($240,000 mortgage times 6% interest times 2 years).
There are also potential tax savings if the home was not the primary residence of the seller whereby they can defer some of their capital gains to future years which can help to reduce the income tax bracket the gain ends up being charged in. (of course, sellers should speak to their accountant to understand if this benefit applies to them and their situation).
The biggest benefit for a seller is gaining a higher return on the proceeds of the sale of the property than if the funds sat in the bank.
Why earn 2% in a “high interest savings account” at your bank when you can earn 6%, 7% or more on your VTB? It’s a property the seller is familiar with, and the worst case scenario is that the buyer defaults on the payment and the seller gets the house back to resell again.
What kind of security does a seller have who puts their sale proceeds into mutual funds or stocks? None.
VTB’s aren’t the solution for every seller, but many folks are looking for ways to reduce their tax bill and still dispose of a property. Others want to bring in secured income every month. For some other sellers, it is just a way to sell an otherwise tough to unload property. Vendor take backs provide an excellent solution for these types of sellers.
