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Ins and outs of vendor take-backs

Mastering the ins and outs of financing is crucial to success

Canadian Real Estate Wealth

Brokers Dalia Barsoum and Enza Venuto explain the pros and cons of using vendor take backs.

Whether you are starter or veteran investor, mastering the ins and outs of financing and getting the right advice is crucial to your continued success.

We have seen a tightening in the lending guidelines and they are expected to continue tightening, especially of the economic situation changes.  We have seen amortizations drop from 40 years to (25) years in most cases, tighter rules for buying as a self-employed especially if you don’t show much income on your tax returns as well the increase in down payment requirements over the years for rental properties.

The good news is that despite the tightening in guidelines, you can still buy and benefit from investing in real estate. It just means that you may now have to broaden the pool of lenders and financing strategies you deal with. It may also mean that there would be some increase to the cost of doing business.

In this issue, we discuss one of the key financing strategies that investors can tap into for lowering their out of pocket financing expenses and to save time: Vendor Take Back Mortgages.

What is a Vendor Take Back? A VTB or Vendor Take Back is when the seller (vendor) of a property provides you with a some or all the mortgage financing for purchasing his/her property. This type of financing is more common on commercial properties (including multi residential) however you can tap into this strategy on residential purchases. A VTB can also entail the seller covering one or more of your closing costs such as land transfer tax, appraisal, survey or application fees.

Why Consider a Vendor Take Back There are many reasons as to why seller-arranged financing may be attractive to you as a buyer: 1.    Buying a distressed property. If you are a flipper or looking to buy distressed properties with the mindset of improving/renovating those to increase value then a VTB may come in handy, simply because some lenders may shy away from lending against such a property or may lend at whopping interest rates. When dealing with distressed properties, it is often beneficial that you finance your purchase through a combination of a VTB, Line of credit, your own cash and then approach a lender once you have brought the property to a certain standard.

  1.  You are unable to obtain Financing through the standard lending sources.  Qualifying for a VTB is a matter of negotiating one with the seller while getting a mortgage requires you to qualify with the lender.  If your financing application got declined and you have exhausted your sources, you may be able to finance your purchase through the seller.  Your ability to negotiate a VTB would depend on how motivated the seller is and his willingness to continue to tie his capital onto the property.
  2.  Increase Your Return on Investment.  Assume you have $50,000 in down payment funds to buy your next investment property. In today’s world, this is a 20% down payment for a $250,000 purchase.  

If you were able to arrange first mortgage financing on this property for 80% of the value, so your first mortgage would be $200,000. If you are able to arrange with the seller a VTB for 10% of the purchase – which is $25,000 – , then you have effectively lowered your down payment for this property to $25,000 and as a result have boosted your return on investment due to the lower cash outlay.

  1.  Buy a Larger Property with the same amount of funds or less.  As per the above example, you can buy a $250,000 property with $50,000 in down payment funds. With the same amount funds, you can buy a $500,000 property if you were able to arrange a VTB first mortgage for 90% of the value.
  2.  Save on the costs and time associated with traditional financing.  There are various costs associated with financing a property. Those costs are typically much higher in Commercial properties and include but not limited to the following: appraisal, survey, lender fees, environmental analysis fees and mortgage insurer fees. In addition to the costs, the process of getting approved for a loan may be lengthy – depending on the complexity of the deal – and often require providing the lender with one or more support documents such as: income and employment verification, details about your existing property holdings, credit, bank statements and tax statement. A vendor take back saves you the time and costs associated with getting approved as you are dealing directly with the seller. It is also worth noting that with a VTB, generally there isn’t a penalty for pre paying the mortgage before the end of the term, while with traditional lenders such as banks for example, you will incur a penalty for prepaying the mortgage prior to the end of the term.
  3.  You can afford to pay more for the property.   By negotiating a VTB with favorable interest and terms, you may be able to offer the seller a higher price for their property making your offer more attractive.

What is the Maximum Vendor Take Back that you can get from the seller? If you are negotiating a VTB as a first mortgage, then the loan to value (the ratio of how much the seller is loaning you to the purchase price) is a function of what you negotiate with the seller.  We have seen buyers able to arrange a VTB First Mortgage as a high as 90% of the price at which they are buying the property. If you are arranging a VTB in a second position; meaning that you are going to an institution for your first mortgage; then the max you can use in a VTB is 10% of the purchase price.

Do Lenders Allow Vendor Take Backs? Not all lenders allow a VTB. Your lending advisor would be able to assist you in placing your deal with the right lenders that support this strategy. If you are planning on using a VTB for a particular deal, it is important to disclose this information to your lending advisor.

<subheader>What are the Rate and Terms of a Vendor Take Back? The rate and terms on the VTB are negotiable. In most cases however, the seller will charge you an interest rate higher than what you would typically get through your bank. This is reflective of the higher risks that the lender is willing to accept. The terms on a VTB can vary from interest only payments with one balloon payment at the end of the term or interest and principal payments.

Why Would the Seller Agree to Such Arrangement? The advantages of a VTB are many to the seller, including: 1.    Monthly Cash Flow.  A VTB provides the seller with monthly cash flow after the property sells. Some sellers are likely to charge higher than market interest rates on their loans , enhancing their overall returns and ongoing cash flow 2.    Obtaining a higher price for their property.  A seller who is providing a VTB at attractive terms, can demand a higher price for their property 3.    Deferring taxes.  Instead of getting taxed on the full capital gains from selling his/her investment property, the seller can defer the taxes payable on some of those capital gains over a period of 5 years by arranging a VTB mortgage.   4.    Avoiding pre-payment penalties on existing locked-in loans.  If the property has a locked-in loan, the seller can sell without having to negotiate with the lender for a higher loan amount or permission to assign or repay the loan; saving the seller time and money 5.    Selling in a slow market. Offering a VTB in a stagnant market offers an extra incentive to buyers. It also helps the seller successfully market a hard to sell property

What are the risks of a VTB? Despite its advantages, a VTB mortgage should be entered into with caution. It is complicate and you should always consult with a real estate lawyer to review all documentation and for due diligence.  From a seller’s point of view, he/she is dealing with the risk of default.  From a buyer’s point of view, he may find himself having to pay off the VTB mortgage in a lump sum if the seller dies, goes bankrupt or needs to liquidate his estate.

Copyright © 2019 Key Media Pty Ltd

Home prices trended lower in the second half of last year

Canadian home prices slipped back in the second half of 2018

Steve Randall

Canadian home prices slipped back in the second half of 2018 according to a leading measure of pricing trends.

The Teranet-National Bank National Composite House Price Index was down 0.3% in December compared to the previous month, continuing a trend of most metropolitan markets in recent months.

For Calgary, December marked a sixth straight month without an index rise, and a cumulative decline of 2.0%; for Vancouver a fifth straight month and a cumulative loss of 2.9%; for Edmonton a fourth straight month and a cumulative loss of 2.7%.

In the fourth quarter, only Montreal and Ottawa-Gatineau posted price gains.

The summary of the latest index data highlights the impact of higher mortgage rates and tougher qualification criteria; and calls for a soft landing for Canada’s resale market.

December by market Across the metro areas surveyed, there was widespread price decline in December with 7 of the 11 negative.

Edmonton (−1.4%), Vancouver (−1.2%), Winnipeg (−0.9%), Calgary (−0.6%), Victoria (−0.4%), Hamilton (−0.4%) and Quebec City (−0.4%). Indexes were up for Ottawa-Gatineau (1.0%), Montreal (0.4%), Toronto (0.2%) and Halifax (0.1%) all saw lower price indexes compared to the previous month.

Looking at the 6-month picture, there was year-over-year decline for Calgary (−2.6%), Edmonton (−0.9%), Winnipeg (−0.5%), and Quebec City (−0.1%); Halifax was flat; and there were gains for Victoria (6.0%), Ottawa-Gatineau (5.9%) Montreal (4.4%), Hamilton (4.4%), Toronto (3.7%) and Vancouver (1.4%).

The 12-month advance of the composite index, at 2.5%, was the smallest since 2009.

The index is calculated from a base value of 100 in June 2005.

Copyright © 2019 Key Media Pty Ltd

BC Home Sales Decline 25% in 2018

BCREA Reports a Decline in Home Sales


The British Columbia Real Estate Association (BCREA) reports that a total of 78,345 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in 2018, a decline of 24.5 per cent from the 103,758 units sold in 2017. The annual average MLS® residential price in BC was $712,508, an increase of 0.4 per cent from $709,601 recorded the previous year. Total sales dollar volume was $55.8 billion, a 24.2 per cent decline from 2017.

“BC home sales fell below the 10-year average of 84,800 units in 2018,” said Cameron Muir, BCREA Chief Economist. “The sharp decline in affordability caused by the B20 mortgage stress test is largely to blame for decline in consumer demand last year.”

A total of 3,497 MLS® residential unit sales were recorded across the province in December, down 39.1 per cent from December 2017. The average MLS® residential price in BC was $695,647, a decline of 5.2 per cent from December 2017. Total sales dollar volume was $2.4 billion, a 42.3 per cent decline during the same period.

Total active residential listings were up 33.3 per cent to 27,615 units in December, the highest December inventory since 2014 when 33,995 active residential listings were recorded.

Copyright ©2019 BCREA

High cost of housing sparks exodus from Vancouver

Vancouver lost 1200 people to other provinces in 2018

Canadian Real Estate Wealth

Iain Reeve and his wife moved from rental home to rental home in Vancouver but their final solution for secure housing was to move to Ottawa and buy two houses one for them and another for his parents.

He and his wife, Cassandra Sclauzero, are professionals in their mid-30s who wanted to start a family but they couldn’t afford to buy in the city.

“We wanted to own a home to have stability, and peace of mind and flexibility,” Reeve said.

“The rental market didn’t have stability. We both had settled into pretty good first jobs. But as much as we loved the city and had these connections it wasn’t worth it.”

They were “kicked out” of a few places in three years through no fault of their own, he said, adding that it was because people were selling or flipping properties.

Reeve grew up and went to university in Vancouver.

“I also have parents who live in the Vancouver area who don’t own a home and are working class and not a ton of money saved for retirement, and I’m an only child,” he said. We just couldn’t even get our foot in the door in terms of stable housing.”

Reeve said he knows a number of people who are thinking of moving out of the city simply because of the housing market.

“Life is challenging enough, it’s so hard when you have (housing) insecurity all the time.”

Statistics show that Vancouver, and B.C. generally, is losing skilled workers to other parts of the country.

CMHC spokesman Leonard Catling said one of the main reasons people between the ages of 21 and 25 come to Metro Vancouver is for university but they move out as they get older.

A December news release from Statistics Canada shows that B.C.’s population crossed the five million mark for the first time because of international migration.

However, it lost about 1,200 people to other provinces in the third quarter of 2018 after 21 quarters of gains. Ontario, Alberta and Nova Scotia had the largest gains in population from other provinces.

Andy Yan, director of the City Program at Simon Fraser University, said Vancouver is mostly able to attract people early in their careers, whether they come for education or a job, but it has a problem retaining talent.

Even if they earn a relatively high wage, he said they can’t afford anything except condominiums.

“In a world like that, the labour pool has options,” he said, noting that other provinces offer much more housing for their salaries.

Finance Minister Carole James said in an interview “there’s no question that Vancouver is facing a brain drain.”

“Crisis is not too strong a word to describe the challenges we are facing, not just in Vancouver, but other urban settings around our province,” she said.

In her budget speech last year, she said young professionals are moving out of the province because they can’t find housing.

Yan said Vancouver is losing people in certain age groups. Those between 35 and 45 are usually at the apex of their careers and thinking about their first or second child. But they might find themselves still having to share housing if they stay in Vancouver, he said.

“It doesn’t become cool when you’re 37 and have a roommate.”

In its December report on the housing market, the Real Estate Board of Greater Vancouver pegged the average price of a detached home at a little more than $1 million. An apartment was about $664,100 and an attached home stood at about $809,700.

Figures from BC Assessment, the Crown agency that develops and maintains property assessments in the province, show the housing market is moderating with estimated value of some homes in Metro Vancouver dropping about 10 per cent.

Nationally, experts have said higher interest rates and a new mortgage stress test have also had an impact on property prices across the country.

Yan said despite those changes housing in the Vancouver area remains unaffordable.

Kevin Olenick, who is in his mid-40s, moved back to Vancouver earlier this year. He grew up in Calgary and spent about six months in Kamloops.

“I’m one of the minority who would say moving back here makes sense,” he said, adding that the creative field he works in provides for more opportunities in Vancouver than in other places.

But he said he understands the challenges of living in Vancouver.

“You wouldn’t want to move here if you have a family. It’s especially tough to find a home and buy a home,” he said. “I’m renting … but if you’re looking to start a family I can certainly understand why you’re moving out of Vancouver.”

B.C. Ministry of Housing spokeswoman Melanie Kilpatrick said the government has announced measures that are helping to cool the real estate market and moderate prices with a 30-point housing plan.

Yan said that a study he did in 2018 shows that while home prices in Metro Vancouver were still the highest in Canada, median household income was the lowest. The study also showed that Vancouver remained the least affordable city in the country.

Since both ownership and rental is becoming more and more difficult, other problems with the labour force are becoming clearer, he said.

James said the government is aware of the problem and working on it.

Jas Johal, the jobs critic for the B.C. Liberal party, said the NDP government needs to focus on increasing the supply of housing, not taxes.

The NDP government has limited rent increases to 2.5 per cent per year, starting this month. A speculation and vacancy tax was also introduced, aimed at moderating the housing market and creating more homes for renters.

But Yan said neither the speculation tax nor the vacancy tax will make much of a difference and if the city continues to lose workers it will lose its competitive edge.

“And I think that one of the biggest challenges is that how do you build an economy one that’s knowledge based when that population seems to be leaving the city?”

Copyright © 2019 Key Media Pty Ltd

Canada’s home prices recovering from “significant correction”

Canada?s home prices increased 4% year-over-year

Steve Randall

Canada’s home prices increased 4% year-over-year in the fourth quarter of 2018, a sign of the market recovering from “the most significant housing correction” since the financial crisis.

That’s the conclusion of a report from Royal LePage which shows that the media price of a home in Canada rose to $631,223.

For a two-storey home, the median rose 3.9% to $745,007, while the median price of a bungalow climbed 1.5% to $516,950. Condos remained the property type with the sharpest rise in prices nationwide rising 7.2% year-over-year to $447,915.

“The invisible hand that guides our complex economy hit the real estate reset button in 2018 and that is a good thing,” said Phil Soper, president and CEO, Royal LePage. “Major market home price inflation through much of the decade had led to dangerous overheating in our most populous regions. Government regulatory intervention and rising interest rates, when combined with property price overshooting, triggered the correctional cycle we find ourselves working through today.”

The report shows that secondary markets gained in Q4 2018 as buyers looked to more affordable options.

Of the regions studied in the Royal LePage National House Price Composite, Windsor and Kingston saw the highest appreciation rates in Ontario, rising 14.7% and 13.8% year-over-year, respectively.

Meanwhile, regions including Ottawa, Kitchener/Waterloo/Cambridge, and London saw strong aggregate price gains of 9.3%, 9.0%, and 8.9% respectively.

How is 2019 looking? Last week’s decision by the BoC to hold interest rates steady at 1.75% and its reduced economic growth forecast (1.7% in 2019 rather than 2.1%) has prompted some economists to reset their forecasts.

But Soper says that the underlying economics should support growth for Canada’s housing market in the year ahead.

“House prices and home sales volumes were soft and slow last year; expect modestly better results in 2019,” he said.

One bright spot, he added, is better conditions for first-time buyers.

This is due to easing prices, growing employment, and mortgage rates that are 40% lower for a 5-year FRM than they were a decade ago (3.5% now vs. 5.9% according to the Canadian Association of Accredited Mortgage Professionals).

“Employment is high, rates are low, and home prices are essentially flat. 2019 is shaping up to be a year of rare opportunities,” Soper said.

Tight supply However, tight inventory remains a challenge for many Canadian housing markets and Soper says policymakers must not take their eyes off the ball on this.

“In down markets, construction tends to slow, exasperating our housing shortage problems. From there it is simple supply and demand; if we don’t build more homes, we risk another housing crisis and a return to runaway prices in our major markets,” he warned.

Copyright © 2019 Key Media Pty Ltd

Interest rates might remain flat until next year

BoC might refrain from further tax hikes this year

Ephraim Vecina

The Bank of Canada’s decision last week to retain its trend-setting interest rate at 1.75% is indicative of the institution’s cautious stance that will keep rates flat until at least next year, according to money manager BlackRock Inc.

The central bank will most likely refrain from further hikes “given increased market volatility and more restrictive financial conditions,” BlackRock head of Canadian fixed income Aubrey Basdeo told BNN Bloomberg.

“The bank has latitude to go on an extended pause,” Basdeo explained. “What’s the rush to get to neutral if inflation’s not an issue?”

Lower oil prices are also acting as a downward pressure on inflation.

“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income,” the BoC said.

“With some of the volatility we’ve seen in the financial markets and the lower oil prices’ impact on economic activity in Western Canada, the Bank of Canada can afford to be cautious and will be in no rush to their next rate hike,” TD Bank senior economist James Marple observed in late December

However, the central bank emphasized that more hikes will be necessary “over time”, amid predictions that the national economy will expand “with renewed vigour.”

The bank adjusted its 2019 growth forecast to 1.7%, down from the 2.1% prediction in October. This will likely be followed by a stronger economy as early as the second quarter of this year, it added.

Copyright © 2019 Key Media Pty Ltd