Financing Real Estate Purchases in a Tight Credit Market
In an economy where credit is tight for certain purchasers of real estate, vendors may want to consider alternative financing arrangements in order to make their property more marketable. Vendors have two primary alternatives: to sell the property to the purchaser under an Agreement for Sale or to sell the property subject to a vendor take-back mortgage.
An Agreement for Sale (or Right to Purchase) is a contract under which the vendor agrees to sell the property to the purchaser and the contract provides that the purchase price is to be paid in instalments. Title passes to the purchaser when the full purchase price has been paid and, in the interim, the purchaser’s interest in the property is registered on title as a charge against the vendor’s title.
A vendor take-back mortgage involves a vendor extending a mortgage to a purchaser for the amount of the purchase price not paid by the purchaser on closing. Unlike an Agreement for Sale, title will issue in the name of the purchaser and the vendor will have a charge against the title.
The primary advantages of vendor take-back mortgages and Agreements for Sale are:
- A vendor may be prepared to provide financing beyond the limits of banks and other traditional lenders;
- The vendor may receive a greater return on their money by extending such financing than they could with other investment alternatives; and
- As discussed, a vendor may make their property more marketable if they are willing to extend financing to a purchaser.
However, there are a number of issues that vendors should consider prior to entering into these alternative financing arrangements:
- The vendor must be in a position that they do not need payment in full on closing in order to finance another property purchase;
- The vendor must consider the risk of non-payment by the purchaser;
- For both Agreements for Sale and vendor take-back mortgages, the vendor can keep its original mortgage financing, typically from a bank, in place. However, the purchaser needs to ensure that the vendor makes the mortgage payments on the first mortgage. The purchaser will want to obtain an irrevocable letter providing the purchaser with the authority to make mortgage payments directly to the bank on behalf of the vendor;
- The vendor must ensure that the terms of its existing mortgage allow for an Agreement for Sale or vendor take-back mortgage without requiring immediate payment in full of the mortgage; and
- The vendor will want to ensure that the maturity date of the Agreement for Sale or vendor take-back mortgage and the vendor’s existing mortgage match.
At one time there were advantages of an Agreement for Sale over a vendor take-back mortgage that have since been eliminated. The redemption period used to be shorter for the cancellation of an Agreement for Sale than in a foreclosure of a mortgage. However, amendments to the Law and Equity Act removed this distinction between the two types of vendor financing.