Even as buyers contend with those more-rigid underwriting standards, they still have to meet minimum 20% down payment requirements. It’s one of the factors driving new interest in vendor take-backs, say analysts, point to those agreements where sellers lend buyers money toward a downpayment or, in fact, the entire mortgage amount, effectively positioning themselves as the mortgage lender.
Brian Pulis of Pulis Investments says it is a good strategy - depending on the economy.
“Vendor take-backs gain popularity when banks tighten up the rules, and this has been going on for the last 50 years,” he said. “It is an excellent strategy if used correctly.”
Pulis advises consideration of factors such as neighbourhood, growth potential, the marketplace and general economy before committing to a VTB. Other experts say buyers should be aware that price negotiations on purchase prices are often limited in VTB deals and sellers are often quicker to move to foreclosure than the bank.
A plus side to the VTB is it allows investors to borrow less from banks, allowing them to devote capital to purchasing other properties. But there can be downsides and risks associated with VTBs, said seasoned investor Shawn Maher.
“I do think it is good if you have equity in the deal, and I would have no problem giving a VTB mortgage if the buyer has good credit and has invested more than 10% to 15% into the home or building,” he said. “The thing to watch out for is not having equity in the deal when you are in second place to the bank.
“Have your lawyer look at the VTB and negotiate a fair, open contract for both parties.”
Still there are other options available to real estate investors, said Pulis.
“The next step when the banks tighten their lending is to bring on a money partner,” he says.
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