- Joined
- Dec 9, 2013
- Messages
- 56
Q&A from our student forum:
What're the difference between AFS & Vendor-take-back mortgage, practically and technically? Any particular consideration when using one over the other? Thx.
Both are forms of seller financing. The basic differences between the AFS and VTB are:
1. Technically: with the VTB, title changes into the buyer's name and, with the exception of your payment to the seller under the VTB, that's all the connection the seller still has with the property. With the AFS the seller's name remains on title and to the world at large he is still the owner.
Practically, with the AFS you have to work with the seller to set up your payment under the AFS so that it goes to an account from which where the seller is typically making his mortgage payment. ( not all sellers have underlying mortgages but most do). There is more admin stuff to do in making sure that the right insurance policy is in place, that the AFS buyer's address is the one for tax notices, condo/strata corps if any, insurance and mortgage renewals .
When you look to close out your AFS, its trickier because if you are the one buying and the property is worth more, you can't finance based on the increased equity but only on your purchase price. Some buyers have had to use a bridge lender to acquire title, hold for 3-12 months and then re-fi based on the increased equity. If you have found a third party buyer, then you have to work with the seller to put together a contract between them and the ultimate buyer making sure that you get your profit.
One or the other?
AFS is preferable in the low equity-no equity situations. Sellers are more comfortable, easy to explain and often no point in doing a VTB as there is no equity. Plus, in most VTB situations, there is an underlying first mortgage and when title changes, you have to deal with that underlying mortgage unless you are getting your own new first plus the VTB.
Overall, the AFS strategy takes a bit to learn and then implement, it is usually not smooth sailing on the admin side but the ability to get control of properties for little or no money down often (but of course not always ) makes all the effort worth it.
What're the difference between AFS & Vendor-take-back mortgage, practically and technically? Any particular consideration when using one over the other? Thx.
Both are forms of seller financing. The basic differences between the AFS and VTB are:
1. Technically: with the VTB, title changes into the buyer's name and, with the exception of your payment to the seller under the VTB, that's all the connection the seller still has with the property. With the AFS the seller's name remains on title and to the world at large he is still the owner.
Practically, with the AFS you have to work with the seller to set up your payment under the AFS so that it goes to an account from which where the seller is typically making his mortgage payment. ( not all sellers have underlying mortgages but most do). There is more admin stuff to do in making sure that the right insurance policy is in place, that the AFS buyer's address is the one for tax notices, condo/strata corps if any, insurance and mortgage renewals .
When you look to close out your AFS, its trickier because if you are the one buying and the property is worth more, you can't finance based on the increased equity but only on your purchase price. Some buyers have had to use a bridge lender to acquire title, hold for 3-12 months and then re-fi based on the increased equity. If you have found a third party buyer, then you have to work with the seller to put together a contract between them and the ultimate buyer making sure that you get your profit.
One or the other?
AFS is preferable in the low equity-no equity situations. Sellers are more comfortable, easy to explain and often no point in doing a VTB as there is no equity. Plus, in most VTB situations, there is an underlying first mortgage and when title changes, you have to deal with that underlying mortgage unless you are getting your own new first plus the VTB.
Overall, the AFS strategy takes a bit to learn and then implement, it is usually not smooth sailing on the admin side but the ability to get control of properties for little or no money down often (but of course not always ) makes all the effort worth it.