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The house at 3542 Copley St., near Trout Lake Park.eXp Realty

Higher interest rates have resurrected an old form of private lending that can be an especially useful financial tool for hard-to-sell properties.

A couple of Vancouver realtors say the vendor take-back mortgage has come in handy in cases where the property didn’t qualify for conventional lending because it wasn’t the standard habitable residential property. A house at 3542 Copley St., near Trout Lake Park, had been occupied by a hoarder who’d packed the place to the ceilings. The assessed value was $1.6-million, but there was no way that the man’s widow, who was living in a room on the property, would be able to sell for market rate. Buyers had to make cash offers because banks wouldn’t finance a house that couldn’t be lived in and rented out, says listing agent Mark Hammer.

The realtor had found a buyer for another hard-to-sell house with a vendor take-back mortgage earlier last year at 989 W. 23rd Ave., which was zoned as commercial. He thought he’d try it again with the Copley house. Like most people, the seller hadn’t heard of a vendor take-back, and was initially reluctant, but eventually came around when she realized it was likely the only way she’d get her value out of the property, Mr. Hammer says.

A vendor take-back arrangement is a form of private lending. The seller is the lender and retains equity in the home until the buyer pays the loan in full. The interest is generally higher than a traditional bank loan, around 6 or 7 per cent in today’s market, and the down payment is about 30 or 40 per cent instead of the usual 20 per cent, says co-listing agent Ian Rozylo.

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989 W. 23rd Ave., Vancouver. Realtor Mark Hammer found a buyer for the run-down home in 2023 using a vendor take-back mortgage.eXp Realty

“The only people coming to the table were … making very low offers with cash because that’s all they were willing to risk,” Mr. Rozylo says of the sale. “But with the vendor take-back, it enabled us to get an asking price that we didn’t think would be attainable.”

They got the seller her $1.399-million asking price, which was about $200,000 more than the offers she’d been receiving. If the property had been livable and updated, it would have sold for around $1.7-million, the agents say. The buyer plans to renovate the home, pay off the vendor and hold onto the property longer-term because it’s in an area upzoned for high density. The sale completed March 6.

Vendor take-back is a short-term solution that allows the seller to generate some income and buys the purchaser some time, says Mr. Hammer, who expects to see more vendor take-backs before the end of the year.

“If the buyer doesn’t make their mortgage payments, then you just take over the property again. The other thing is, you can only do it as a first mortgage – you can’t do it if there are any other mortgages on the property,” he adds.

However, an airtight agreement must be in place that protects both parties, and due diligence is required, says lawyer Ron Usher, general counsel for the Society of Notaries Public of B.C. Mr. Usher says he hasn’t seen vendor take-back mortgages since the 1980s, when interest rates were around 20 per cent and they were common.

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The house at 989 W. 23rd Ave. was zoned as commercial.eXp Realty

“In weird markets, people are always exploring more creative things,” he says.

But there are risks, particularly in today’s lending market, says Mr. Usher. The agreements are complex.

“Of course, sellers want to maximize what they get for their place and maybe they would be willing to accept a little risk to protect what they see as the value. Whereas it may provide a genuine opportunity for a buyer to get into a market that they otherwise couldn’t get into. But there’s a whole bunch of stuff to negotiate and settle beyond the usual terms of a standard real estate contract. You will want to go to a sophisticated lawyer or notary.”

He cautions that anyone who already has a bank mortgage should be especially careful about altering the ownership to a property or doing any creative financing. He’s seeing a heightened need to understand mortgage terms because banks are opting to default on properties at an increasing rate.

For example, almost all lenders have a stipulation that selling the property or taking on a second mortgage is cause for default, and most people aren’t even aware of that.

“For a couple of decades, the banks paid no attention, they really didn’t care,” he says. “But just recently we are seeing this very aggressive behaviour by lenders. Imagine you are a bank sitting there with a five-year, 2-per-cent mortgage, and you have the chance to turn that into a much higher interest rate.

“The No. 1 concern of every mortgage lender is to have priority. They want to know that their money is first dibs on the property,” he says. “Even adding mom to the property could be treated as a default if it wasn’t approved by the bank.”

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A vendor take-back arrangement is a form of private lending.eXp Realty

Vendor take-back mortgages can work if such things as payment terms, property taxes, insurance, potential liens on the property and a host of other possible complications are properly addressed, Mr. Usher says.

“It can be creatively done. Eyes open, properly advised, you could make a sale that would otherwise be difficult to do, or a purchase that’s difficult to do, and it will work just fine. Maybe somebody knows they will get an inheritance but not get the money for six months – all kinds of things might be motivating for a buyer and seller to come up with a more creative arrangement.

“It’s good for people to know there are more options than a completely clean buy-sell, but it takes some sophistication, and it takes better advice, because you’re getting messed up with each other. This is not a clean break. You are kind of doing this thing together for a while.”

The realtors say the seller gets a decent rate of return and for the buyer, it’s a better borrowing rate than they’d get for a short-term loan at the bank.

“If the buyer went to the bank to try to get the mortgage on a short-term lend like that, because it’s an 18-month term or whenever, the bank wouldn’t give you that rate,” says Mr. Rozylo.

Once they’re able to pay off the vendor, however, the buyer would want to go the conventional mortgage route to get a better rate over the long term.

And there can be tax benefits for the seller, such as splitting the capital gains taxes owed over a couple of years instead of paying a big sum for one year, adds Mr. Hammer.

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