QUOTE (tweetypilot @ Nov 4 2007, 01:22 PM)
Hello
I would like somebody to explain to me clearly what a VTB is: the advantages for the vendor (home owner or investor). I need it to
I would like to make an offer with a VTB but I need to explain clearly what it is and for that I need it to be very clear in my head first.
thank you for your help.
Sylvie
Hi Sylvie,
I've just recently gotten my head around VTBs, so I'll do my best to help.
VTBs can benefit both sides quite a bit, in the right situation. For the buyer, it can reduce your monthly carying costs, since you can provide the seller with interest only payments, or even fully deferred payments (just a lump-sum balloon payment at the end of the term). If the property has appreciated at the end of the term (a safe bet), then you would just refinance the property, increasing the mortgage amount, and taking those extra funds out to pay off the VTB principal (or principal plus the accumulated interest). Some sellers will even just renew the VTB, pushing that payout even further into the future.
From the seller's perspective, there are several benefits. First, they will likely get a higher selling price if it includes a VTB. They also can get a monthly/quarterly/yearly interest payment from their investment, providing truely hands-off cash flow. Of course, their investment is fully secured against the title of the property (in a 2nd mortgage position), so there is very little risk to them.
Another significant benefit to the seller if they are an invester (ie; this is not their principal residence), is that they will be facing capital gains tax when they sell the property. With a VTB, they can choose to defer the portion of capital gains tax that would have been due on the portion that they carry. This lets them spread that tax over the term of the VTB option, rather than pay it all immediately! For many sellers, this is a HUGE benefit.
One side note to VTBs is that if you are taking a mortgage on the property, the financial institution will likely have a minimum amount of cash that is put into the deal, meaning that the 1st mortgage cannot be 75% if the VTB is 25%. My understanding is that most banks usually require 15% cash down, so if a seller carried 10% of the price, and you put 15% down, then your mortgage would be 75%. If the seller would carry 20% for example, you would put 15% down, and then your 1st mortgage would be 65%.
I hope that helps,
David.