Claire Drage and Milena Cardinal
Laurel: We're with two wonderful women, Claire Drage with Windrose Group and Milena of Cardinal Law. Now I've talked to both of these women. I've listened to them speak and they're amazing. They're absolutely amazing. Claire of course is our mortgage broker extraordinary and she has a great team.
And I could listen to Claire speak forever. And Milena you are just such a passionate person, a caring person, the wonderful story. You really care about your clients. You both care about your clients. We're going to be talking about vendor take-backs and the scoop, the inside scoop. So, you know what a lot of people think they know about vendor take-backs and most people don't really understand how it works.
So, can you give us some insight, like what's a vendor take-back? How does it work? Why do we want one? Or why don't we want one? Just over to you.
Claire: Awesome, fabulous, I'm thrilled to be here with Milena today and we're gonna do a bit of a, to and fro, and we're going to get Milena to start off, with our legal counsel, if you like, and tell us about what is a vendor take-back?
Milena: Thank you, Claire. So, what's a vendor take-back. Yes, very interesting. So basically, the idea of a vendor take-back is when the entire purchase price of a good is not paid on.
And it doesn't have to be a real estate property. It can be a business, it can be shares of a corporation for all kinds of reasons. Sometimes you don't pay the full purchase price on closing. You just pay it later and all kinds of installments or whatever. So, the idea of vendor take-back, refers to a vendor take-back loan when the seller is actually lending money in the form of not receiving the full sale price so that I feel that it gives the purchaser more time to pay it off.
So, for instance, it can take many forms, right? So, for instance, if it's a sale of shares incorporation, the vendor take-back may take the form of a lien on certain shares or holding back some shares. But most of the time when we're talking about, in this context, we're going to be talking about a vendor, take-back mortgage.
That's when the seller will say, you're going to pay the entire purchase price at a later date. And we're going to secure that as a mortgage on the property that you're purchasing. Or sometimes it's just a small percentage of that, which can be, usually it comes in as a second mortgage, or it can be in a different place in the mortgage scale, I guess I think that also be in the form of a promissory note.
So, it doesn't have to be in the form of a mortgage. So, Claire, what are the benefits and challenges for a buyer that are considering financing with a vendor take-back on title?
Claire: So, when we look a lot like the pros and cons, we've always got to think about how much is your vendor take-back as a percentage of the purchase price?
How much are you putting in yourself? So, what's your skin in the game or your down payment. And then are you getting any other financing? So, one of the things you've always got to consider is, who is going to be your primary lender because in essence of vendor take-back when it is a mortgage put in the form of a mortgage, it's like the seller, the vendor becomes your private lender.
So, is he in first position or second position? And if he's in second position, it's going to depend on who is your first position lender, will they allow that vendor take-back to happen? So, you've got to do a little bit of pre-work in order to figure out, is this strategy going to work for your overall strategy with regard to the financing you're going to get, the down payment you're going to put in, as well as what the vendor is giving you in the way of a loan or a mortgage. But I want to touch on the pros because there's so many pros with a vendor take-back, that's going to take a majority of the purchase price where you don't need any financing anywhere else.
Claire's going to cry because you won't need a mortgage, but that's okay. The benefit is you can act fast. There's no qualifying for financing. You don't need to get an appraisal if you don't want to, you can basically say, if you give me a vendor, take-back, I'll give you $50,000 on closing and we can close Monday.
And there are many benefits, especially the no qualifying, it's just a really good creative way of financing real estate. And I know that we'll talk a bit later about how we can even ask for this in these crazy markets, but what about the buyer Milena? What about from the bias side?
Sorry, the pros and cons to the seller?
Milena: So, I guess the main con for a seller is the obvious, right? They're not getting their money. They can't invest in somewhere else. They can't buy another property. For whatever reason, they don't get their money upfront. But there's also a lot of good advantages for a seller. If a seller who's not super keen on risky investments.
For instance, maybe looking at this as an investment in lieu of a GIC or putting the money in a savings account or something like that, they already know with property that investment and it can mean a return. In the form of monthly payments, if that's the negotiation factor, right? So, it could be beneficial as a form of income, especially for I find elderly people. It's great for them to have supplementary income that isn't actually income because they're getting basically the sale price of their home.
So, it's not subject to tax that it won't affect. It won't affect their other government income sources. Also, another advantage that's the big one is the capital gains tax. So, I'm not an accountant. I don't pretend to be an accountant or to know all the accounting things. But I understand that, if you sell a principal residence won't be affected, but if you sell a property, that's like an investment property, then you're going to be subject to capital gains.
But if you defer, you can defer that capital gain up to five years down the road by half by taking a vendor take-back. So, if you take a vendor take-back mortgage spread out over five years where you take 20% of the purchase price every year, then you're only tax capital gains on the 20% every year. So that can be a significant tax benefit with sellers that are selling something other than the principal.
So, Claire, what work should be done on a vendor take-back from the seller, what should they think about ahead of time?
Claire: So, that's a really good question. Cause you've got to do some due diligence beforehand. So, the first thing would be, we're going to pull a purview report.
You need to find out the vendor can only give you a loan or a mortgage. Based on the equity, that's currently in the property. So, for example, if I see a property and I want to put an offer in for 400,000, and I want to see if there's an opportunity for a vendor, take-back a purview report is one that a mortgage broker can pull.
And it's going to tell us the whole history of the property, the current owner's name, when they bought it, how much did they pay? How was the transfer of title done? Was it a transfer through a foreclosure? Was it through a trustee? Was it an estate? But most importantly, the key item is it's going to tell us any registered mortgages on title and also when they were taken out and what the registered dollar amount is.
So, if I see a property that I want to put her off for him for 400, but I noticed that the current sellers purchased the property a year ago. The 380 and they have a mortgage for 350, for example, assuming we've got one year of mortgage paydown, it's so much me asking them to take-back more than 50,000, because that's the only part they can give me.
Because the rest of them owed to the bank. But if I see that it's free and clear, or it's got a small line of credit that was taken out 18 years ago, I really am getting an idea of what is the available equity available cash in the property that I can even ask for. Part of that purview is going to give me a lot of history.
So now I can start to Google current homeowners, obviously the address and go on social media. I can basically be a bit of a stalker to get some background and history because my challenge is going to be. I need to be able to sell the seller and that seller needs to be sold usually by their representation, which would be their realtor.
I'll get into that in a bit later, but basically, I need to have a good understanding of where the current sellers’ financial position is on that property. We can even do searches for other properties they may own. Because maybe they are also an investor that owns eight properties in that particular city.
So, there could be another opportunity for us to really look at how much cash they have accessible. I know it seems a little bit invasive, but there's information that we can really pull on to create a win-win we're not doing it to manipulate. We really want to create that win-win scenario.
But of course, in order to do that, we've got to actually write out I've been to take-back. Milena do you want to go through some examples of what standard vendor take-back clauses might look like?
Milena: Sure. Actually, there's no such thing as standard. One thing I've noticed is that, and I get asked that all the time, so I love that you're bringing that up.
I've noticed that people will ask me, what's usual, what, what should I be asking for? And really there's no rule of thumb, because it depends on the particular circumstances, right? So, I've seen vendor take-backs with no interest, no payment until a certain event. So, for instance, you're buying a property off of an elderly person and the property needs a lot of renovations and you're like we'll take a full vendor take-back.
You'll take a whole better take-back. We'll give you a higher purchase price. Then the property is worth now, but way less than what the property will be worth once we renovate, but we'll only pay it to you once we refinance after the renovations are complete, that can meet the very lucrative arrangement for both sides.
So, I've seen that happen. I've also seen cases where an investor he's selling the property and we'll understand the value. We'll pray, crunch the numbers. On their property and know exactly what it's worth and how much money that the buyer can expect to make. And as long as the property is lucrative, they might sell it and say, I'm going to offer you a vendor take-back on the second one, gauge I say 12 or 15% up to even 15%, because say, I'm going to give you the benefit of buying this property that I put together. That's actually extremely lucrative. It's running really well, but I'm going to take a piece back by basically charging you a higher interest rate until it grows in value when you're able to be fighting.
So, I've really seen both. There's no rule of thumb. It can be as flexible as I do creativity. So, it really depends also on the position that you're in. So look at the seller's market and there's a ton of properties for sale and a property has been on the market for six months.
That's the time to go in and ask for a vendor take-back because that's when you may have much more advantage. I guess the next question then is how do you sell it to a seller? Like how, as a buyer, you want to get a property with better feedback? What's your experience with that? Claire?
Claire: That's probably the toughest one because you've got to get through their representation. And whoever's representing the seller, whether it's some people you work directly with, is awesome. So, you talked about a lot of things earlier, and I think that all of those are replicable, the capital gains still continuing with the cash flows.
For a seller, they're still going to get positive cash in their pocket cash flow because they're going to be owning interest in monthly payments, but they're not going to be a landlord. So, sell them the fact that your income is going to continue without the headaches of being a landlord.
Now, the odd one is protecting the cash from family members. So, uncle Bob has owned these 18 units building for 20 years and all of a sudden, he's selling it. And all of a sudden, the family comes out of the woodwork wanting to borrow money from uncle Bob. So, we've had a few circumstances when our research has led us to potentially not making that assumption, but throwing out there as a possible, motive, I will tell you though vendor back.
So I'm not going to work in these crazy markets where you've got multiple offers, the chances of you winning the offer with a vendor take-back is pretty slim. We see these a lot, especially with commercial properties or properties that have been run down, that have dead animals and flooded basements and damage, and where there is more of an incentive because you can post fast, no conditions, no more showings.
Anyone that owns a multi-family knows the hassle. It is to actually give notice to each tenant every time there's a showing without even knowing if that buyer is serious. So, there's definitely, many advantages for the seller. And I think selling it to them, you've got to get in front of them.
You've got to be able to get through their representative or have a good representative. That's not going to tell you it's illegal to do a vendor take-back or no, they won't accept it. How do you know if you don't ask? But how do you draw those clauses though? Is that something you handle or how do we do a mortgage commitment?
Milena do you want to cover that bit?
Milena: So yes. I always recommend you draft the agreement of participants. I recommend a few lines to just say the seller agrees to pick a vendor, take-back in this amount in accordance with the terms of schedule. And I always put a standard mortgage commitment in schedule B.
And the reason I do that is because you don't want to be close to closing. And then B how the interest is calculated has not been determined. And then you ended up in a debate on something like that. So, you do want to hash out those terms. And I do recommend that a lawyer, at least look at it. If somebody else's drafting it, right?
So, if the realtor's drafting it, especially if you have a realtor that doesn't have a lot of experience with investors, it's really important to have your lawyer take a peek at it, to make sure that you're hitting all of them. Or maybe even both your lawyer and your mortgage broker you're fitting all of the different terms on the mortgage.
So, Claire one time we were talking about the take-back and you brought up, like to offer, approach them, to have time to elaborate on that. So, I'm really curious to know what that means.
Claire: So, I love the two-offer approach. So obviously you've done your research. You tell me that there is an opportunity where a vendor take-back might be conducive for the seller.
So, basically putting two offers at the same time. So, your first offer is slightly higher than your second offer. And it's with a vendor take-back with a closing date of anywhere from a week from now, assuming you can do the balance of your due diligence. So, one offer higher purchase price with a large vendor, take-back or a vendor.
take-back close very quickly. Your second offer has a longer closing. It's a lower purchase price and there's no vendor take-back. Now, the two-offer approach is going to start. You're going to really determine where you can negotiate because a lot of people there's always in these offers. People make a lot of assumptions.
The assumption is set up like this, the assumption that they don't need this, they don't want this. How do you know until you ask? That would be my advice. If you don't ask you don't get so putting into offers, even if they reject the vendor, take-back, but they take the other offer, but maybe there's some terms and conditions you can add in you're starting the negotiating and you are getting a really good idea of whether there really is an opportunity or someone's just telling you it because they don't want to make two offers for you. So, putting two offers in slightly higher with the men to take-back quick, close, lower, no vendor, take-back longer closing to give you time to get your own financing and all those ducks in a row.
You'll start to really find out what's important to the seller. What do they really care about that you can assist them with and create that win-win? So, what about closing? It talks about how we don't have to give as much money on closing. Do you want to quickly run through that?
Milena: Yeah. So, the way that it works is that the amount of the temp vendor take-back will be adjusted on the statement of adjustments will be a credit to the purchaser, almost a statement of adjustment because that's that much less money that they're going to advance on closing one consideration as well as the legal.
Unless it's otherwise specified, it's typically assumed by the lawyer either going to be paid by the buyer, which is not always what the parties intend, and sometimes you have diverging opinions. So that's also something that I strongly advise those specified on the mortgage commitment that is an accurate schedule so that the legal fees are determined ahead of time and so maybe just in closing Claire, do you have any story that you could share?
Claire: I’ve got one line - you don't ask, you don't get. We'll share some of those other clauses Milena and I worked on together, we'll share some of those in the community, on the forum.
Laurel: That's great. Thank you, guys.
That was wonderful. I really learned a lot. I love the double offer. So, much said, thank you very much.
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