VTB Question

[Nir]

Hi,
Can someone please give an example of a purchase with a good vendor take back (VTB) option?

Trying to understand what is considered good VTB conditions in terms of amortization, interest, loan as a % of purchase price, etc.

Obviously one should look at the big picture and the profitability of the deal depends mainly on other things.
Still, curious to know what an "average" VTB looks like.

THANKS.

 

[Rickson9]

QUOTE (investmart @ Dec 19 2009, 10:57 PM) Hi,
Can someone please give an example of a purchase with a good vendor take back (VTB) option?

Trying to understand what is considered good VTB conditions in terms of amortization, interest, loan as a % of purchase price, etc.

Obviously one should look at the big picture and the profitability of the deal depends mainly on other things.
Still, curious to know what an "average" VTB looks like.

THANKS.

I believe that `typical` VTB is 10-20%. Ask for 30% and be prepared to negotiate downwards.

For the structure of the VTB I would suggest asking for "principle to be paid back in 5 years". I don`t know why a person would only want to get his principle back, but I know investors who ask for this and get it. You can then escalate to "x% simple interest, principle and interest to be paid back in 5 years". You can then go to "x% simple interest, to be paid monthly", and then some form of `standard` amortization and term.


Ultimately the point is to give yourself room to negotiate.

 

[Nir]

Thank you Rickson. Interesting. BTW, I`m interested as a buyer not a seller..yet.
Is 10 years or even 20 years VTB amortization, rare?

 

[invst4profit]

VTBs are something that is geared more to the seller in my opinion. The buyer needs to assess the needs of the seller and negotiate accordingly.
Obviously it must be determined how much equity the seller has in the property and there present financial situation, can they afford to hold a mortgage.
Ideally a buyer would want to find a older seller that may be interested in a steady income stream. The buyer would be offering a interest rate return higher than the seller would normally be able to achieve with the cash.
Once I have researched the sellers financial status I make an offer requesting the seller hold a mortgage, no details on the VTB.
If the seller is open to the idea I ask them to suggest the terms which then allows me to negotiate to suite my situation at the same time feeding there needs.
My latest purchase involved a property the owner had paid for by refinancing another property he owned that was mostly paid off. He was looking to receive a month income for retirement but wanted enough cash up front to insure I had sufficient skin in the deal. He is holding a 75% mortgage on the property 30 yr amortisation with a 7 year term.

The sky is the limit but you must hone your negotiating skills and research to find the right seller. Knowing the sellers needs is key to taking control/advantage of the deal.

 

[Rickson9]

QUOTE (investmart @ Dec 20 2009, 01:22 AM) Thank you Rickson. Interesting. BTW, I`m interested as a buyer not a seller..yet.
Is 10 years or even 20 years VTB amortization, rare?

I don`t think that a 10 to 20 year VTB is rare, but I don`t have any sources to cite for that opinion.

A buyer of RE should always ask for a VTB. Once a Seller questioned my financial wherewithal because I asked for a 30% VTB. I said that it wasn`t about financial wherewithal; a VTB increases my cash-on-cash return so I will always ask for a VTB.

 

[smalltown]

QUOTE (Rickson9 @ Dec 20 2009, 10:53 AM) I don`t think that a 10 to 20 year VTB is rare, but I don`t have any sources to cite for that opinion.

A buyer of RE should always ask for a VTB. Once a Seller questioned my financial wherewithal because I asked for a 30% VTB. I said that it wasn`t about financial wherewithal; a VTB increases my cash-on-cash return so I will always ask for a VTB.


How would a VTB increase your cash-on-cash return?

Beware with an older seller, because they could die while holding your mortgage and then what happens? Is the estate obligated to continue holding the mortgage?

My first purchase was a VTB. The seller didn`t do any credit checks which was good because our credit was in the toilet. but he was also counting on us defaulting and he would get the property back. Much to his dismay, this didn`t happen and we have expanded out real estate holdings since then.

 

[Nir]

QUOTE (smalltown @ Dec 26 2009, 03:44 PM) How would a VTB increase your cash-on-cash return? ROI increases when downpayment reduced.

Beware with an older seller, because they could die while holding your mortgage and then what happens? Is the estate obligated to continue holding the mortgage? Good question! I guess that`s why you should have a good agreement with the seller... prior to his death.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 19 2009, 08:57 PM) Hi,
Can someone please give an example of a purchase with a good vendor take back (VTB) option?..
108 unit building in Abbotsford @ $8.5M .. first mortgage at 5.7M and VTB @ $1.0M @ 4% interest only ..

 

[Nir]

QUOTE (ThomasBeyer @ Dec 26 2009, 08:19 PM) VTB @ $1.0M @ 4% interest only ..

nice one! what is the VTB`s required principle ($1M) payment date in # of years from receving the loan? 5 yrs? Thanks.

 

[Nir]

QUOTE (ThomasBeyer @ Dec 26 2009, 09:19 PM) 108 unit building in Abbotsford @ $8.5M .. first mortgage at 5.7M and VTB @ $1.0M @ 4% interest only ..

when and how will you pay the $1M VTB back? through re-financing in 3 or 5 or 10 years?
so you depend on value increase in order not to have an issue paying the $1M back(!?) thanks.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 27 2009, 11:45 PM) when and how will you pay the $1M VTB back? through re-financing in 3 or 5 or 10 years?
so you depend on value increase in order not to have an issue paying the $1M back(!?) thanks.
plan is in 5 years when the VTB and first expire .. through asset sale or re-fi .. keep in mind that with a 25 year amortization we pay the 1st mortgage down by about 10% or 600K .. and with BC rent control and Fraser Valley in-migration and economic growth rents should be at least 20-30% higher than today .. for a re-fi value of about 100/door (up from purchase price at 78/door) so a 70% LTV re-fi with CMHC should be no problem in 4 1/2 years from now !

 

[markl]

Isn`t the theory behind 5 year or less VTB is the fact that the current owner will face a capital gains tax liability at the end of 5 years no matter how long the VTB is set for?

Regards,

 

[Thomas Beyer]

QUOTE (markl @ Dec 28 2009, 11:31 AM) Isn`t the theory behind 5 year or less VTB is the fact that the current owner will face a capital gains tax liability at the end of 5 years no matter how long the VTB is set for?
The beauty of taxes: you made money !

Yes, he has to pay taxes IN 5 YEARS on the $1M !

Better in 5 years than today ?

 

[markl]

QUOTE (ThomasBeyer @ Dec 28 2009, 01:58 PM) The beauty of taxes: you made money !

Yes, he has to pay taxes IN 5 YEARS on the $1M !

Better in 5 years than today ?

I agree but I was just saying that is why you usually do not see VTB`s for longer than 5 years as the seller could be faced with a liability that they would have to come up with the cash for.