VTB and Risks

[kir]

Hi, I have a legal question.
I`m trying to sell off a 4-plex in the east coast (near Halifax) and to make it easier to sell, I`m offering a VTB that
would be in on title as a caveat.

However, in the case of a foreclosure, would I likely lose my investment if the value of the property hasn`t gone up?

For example, I sell at 300K, with a 20K VTB. However, in subsequent years, the house is still worth 300K and the owner goes bankrupt. I`m sure the bank would do a forced listing and get what they can get. However, will I lose my investment of 20K???

In general, how can I protect myseft or mitigate this risk if I am considering a VTB?

Kir.

 

[BHoward]

Kir,
If the property goes into foreclosure ... you have the opportunity to get the property back ... by paying the overdue payments.

In market places such as Alberta ... when we strongly beleive that the market will increase ... VTB`s are a great idea. (Some vendors will provide them ... and hope the property goes into Foreclosure.)

In offering a VTB in Halifax ... you should feel reasonably confident in your buyer ... and reasonably confident that the market will continue to increase in value. (... it will.)

Where`s the 4-plex ... I may even know a buyer for you.

Bryon

 

[kir]

Hi Bryon,

Thanks for info. I appreciate this very much.

My 4-plex is actually in a town call Windsor, and about 45 minutes away from Halifax.
If you know of any property management company willing to manage outside of Halifax, I would be interested and would even keep this venture going for the next 10 years, if I have too. It`s managed now by a Realtor, but I don`t feel good or secure with such arrangements.

Selling means I could move whatever proceeds to invest in Calgary or Edmonton, which is what I want,

If you know of any buyers ,let me know. I`ll even pay commission (the usual rate of 3.5/1.5).

Kir.




QUOTE (BHoward @ Oct 4 2007, 11:37 PM) Kir,
If the property goes into foreclosure ... you have the opportunity to get the property back ... by paying the overdue payments.

In market places such as Alberta ... when we strongly beleive that the market will increase ... VTB`s are a great idea. (Some vendors will provide them ... and hope the property goes into Foreclosure.)

In offering a VTB in Halifax ... you should feel reasonably confident in your buyer ... and reasonably confident that the market will continue to increase in value. (... it will.)

Where`s the 4-plex ... I may even know a buyer for you.

Bryon

 

[BarryMcGuire]

A few comments from an Alberta perspective:
1. All provinces have different rules so make sure you get advice from a Nova Scotia lawyer about the specifics and details of enforcing your VTB in the event of borrower default.
2. Is your loan best protected by a caveat or a mortgage ? In AB , a mortgage would be better security
3. VTBs are less risky when there is sufficient equity to protect them . Make sure your buyer puts down as much of his own money as possible.
4. Does the buyer have other property? Could you place your security against it as well as the 4 plex ?
5. Do a credit check on your buyer, find out about them , assess them , assess the risk level and your comfort level with making the loan. This is what banks do everyday, follow their example.

 

[BHoward]

Kir,Some of the best advice I got from a successful business man here in Alberta in Fall 2004 was to sell my nagging business in Prince Edward Island. (I moved to Alberta in 2003 and continued to manage my Adventure Tourism Company, Outside Expeditions, until I sold it in July 2005.)

I finally sold `my labor of love` in 2005 for much less than what I beleived it was worth (with a VTB). However, I was able to put that little bit of money into Alberta Real Estate. More importantly, I was able to put that ENERGY into Alberta Real Estate.

If you are uncomfortable with your existing managment on the four-plex in Windsor, NS ... I encourage you to spend 30 days working hard to find a better solution. If after 30 days you don`t have one ... put a realistic price on your 4-plex ... let buyers and realtors know you will cosider a VTB ... and Market the property for sale. (Market it like a REIN member ... use the tools taught here.)

Success:
1. Being in the right place at the right time;
2. Knowing you are there;
3. Taking action

Like many REIN members, I beleive Albeta is the right place ... and we`re in the right time.
Good luck.

 

[HowardWiens]

Kir: I practiced real estate law for 14 years, so I`ll jump in here and see if I can give you an answer.

Effectively, what you`re doing is lending $20K to the purchaser, and the question becomes: "What`s the best security for this loan?". Generally speaking, a loan that is secured by real estate (i.e. a mortgage) is the best kind of security available, provided there`s still equity in the property after the bank`s first mortgage. Typically, a VTB mortgage will be a second mortgage, meaning it will get registered in second priority behind the purchaser`s conventional bank financing. So, the real question is how large will the bank`s first mortgage be. If the first mortgage is for $200K, then there`s probably still enough equity to pay you back if the bank is forced to foreclose on the property and sell it (i.e. $300K less real estate commissions, legal fees, etc. less the bank`s $200K plus unpaid interest and there`s probably still at least enough money left over to pay you the $20K plus your unpaid interest). You`ll want to make it a condition of your VTB that the bank`s first mortgage cannot have a principal amount in excess of whatever number you believe is reasonably low enough to ensure that there`s adequate security for you. For example, given that you`re lending about 7% of the purchase price, you may decide that the first mortgage can`t be higher than 80% of the purchase price.

When the bank forecloses, the sale of the property will occur upon court approval. One of the court`s jobs is to ensure that the property is sold for the best price possible. So, the bank can`t sell it for whatever price it wants. They`ll have to get an appraisal and show the court that the price they`re getting is something realistic. Upon the sale the bank will get 100 cents on the dollar before any money goes to pay off the second mortgagee (you).

FYI, even if you don`t get repaid in full upon the sale of the property, you still will have the legal abiliy to sue the borrower personally for the unpaid balance. Now, this is definitely a last resort because it`s much tougher to get your money back this way. However, this option is still available.

My comments above are for general discussion purposes. You should talk to your own lawyer about your specific circumstances.