Seller Financing
- Thread starter Seankm21
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To buy a property you need cash. Cash comes from two sources: from your own jeans, and from that of others.
Others could be:
a) bank, via a mortgage in first position (i.e. most secure, thus cheapest sub 4% these days)
b) seller, via a mortgage, frequently a second mortgage, also referred to as a VTB (Vendor Take Back mortgage)
c) joint venture partner (via RRSP, debt or equity stake)
d) a private (" hard money") lender, usually also in second position, or possibly in third.
In Canada banks lend up to 80% LTV (loan-to-value) by law for an investment property. Thus to get less than 20% from your own jeans you need a partner b) to d).
The seller might be the cheapest source, at 0% to 5%, whereas c) and d) is usually more expensive.
Keep in mind that banks may not lend 80% if other parties are involved, or they ask for add'l personal guarantees / collateral from you or other sources, say your JV partner.
Fine tuning this approach take a while to learn and a few deals to master.
Others could be:
a) bank, via a mortgage in first position (i.e. most secure, thus cheapest sub 4% these days)
b) seller, via a mortgage, frequently a second mortgage, also referred to as a VTB (Vendor Take Back mortgage)
c) joint venture partner (via RRSP, debt or equity stake)
d) a private (" hard money") lender, usually also in second position, or possibly in third.
In Canada banks lend up to 80% LTV (loan-to-value) by law for an investment property. Thus to get less than 20% from your own jeans you need a partner b) to d).
The seller might be the cheapest source, at 0% to 5%, whereas c) and d) is usually more expensive.
Keep in mind that banks may not lend 80% if other parties are involved, or they ask for add'l personal guarantees / collateral from you or other sources, say your JV partner.
Fine tuning this approach take a while to learn and a few deals to master.
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- Feb 18, 2008
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- 1,284
Seller financing can be thought of as an IOU. It's sometimes called Vendor Financing or a Vendor Take Back (VTB) Mortgage.
Say you're buying a 100,000 property. You get a new mortgage for 70,000. You put in $15,000 of you own cash and agree to pay the seller the remaining $15,000 over the next five years plus 10% interest.
Another common variation on that $15,000 you owe them (i.e. they're lending back to you just like a bank) is to just pay them the interest on the $15,000 (say maybe just $100/month) and then at the end of the 5 year term pay back the whole thing in one big shot called a 'balloon payment'.
When it comes to larger deals (commercial or multi-family) there's a way to structure things so we maximize a Sellers' tax savings but it's really no more complex than that.
Say you're buying a 100,000 property. You get a new mortgage for 70,000. You put in $15,000 of you own cash and agree to pay the seller the remaining $15,000 over the next five years plus 10% interest.
Another common variation on that $15,000 you owe them (i.e. they're lending back to you just like a bank) is to just pay them the interest on the $15,000 (say maybe just $100/month) and then at the end of the 5 year term pay back the whole thing in one big shot called a 'balloon payment'.
When it comes to larger deals (commercial or multi-family) there's a way to structure things so we maximize a Sellers' tax savings but it's really no more complex than that.
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Yes it matters. 100% financing works only in midnight infomercials while drinking pinacolada in your pool with an ocean view.
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[quote user=dplummer]If the bank is on for a first at 80% does it matter to them that the vendor takes a second for 20%? Thus giving you a 100% financing. This would allow you to use your own money for renovations.
Doug
Most banks will want to see some money from you. You may be able to get by with only 5%, but there usually has to be something. If the entire deal is seller financed (so no bank directly involved), then you can structure the deal however you and the seller agree, thereby possibly putting zero down (though this is unlikely).
Doug
Most banks will want to see some money from you. You may be able to get by with only 5%, but there usually has to be something. If the entire deal is seller financed (so no bank directly involved), then you can structure the deal however you and the seller agree, thereby possibly putting zero down (though this is unlikely).