By Barry Lebow

In various parts of the country, some buyers are backing out of deals. The reason for many is simple – they bought but could not sell (at their price) their own home. In many cases, one sale leads to a chain of sales and that first deal can cause problems for four or more other sales up the line.

Recently a broker friend received a pleading email asking her to share in a $10,000 shortfall by a buyer. This was not her client. This party was the first in a chain that impacted three more deals. The first buyers could not sell their home, save for less money than they had budgeted for, and they wanted all the salespeople to kick in to share in their loss.



I told my friend to simply reply that it seems fair if the party would sign a guarantee that the agents who contribute to the loss would get half of any appreciation over the next 10 years. Funny, isn’t it? People are always reaching out for others to help them share in their losses but seldom do they divide up their gains.

So what options can a Realtor offer to save a deal or worse, a chain of deals? First, mortgage manipulation. Let’s take a simple example, the $400,000 house sale.

We will assume the buyer has 20 per cent or an $80,000 down payment. The issue is that at the last minute the appraiser valued the house at $380,000 and the financing is now predicated on that price.

The buyer still has the same $80,000 down payment. The problem is, they need another $20,000 to close the deal, which they just cannot come up with.

Yes, you may be able to go back and renegotiate the price with the seller, but the odds of that are against you.

The simplest solution is to use a mortgage. You calmly present to the buyer and the seller that they face litigation, which is very costly and you have a plan to avoid it – a take-back mortgage.

In this case I would advise the seller to take a note, registered as a second mortgage against the property for $20,000. The term would be maybe two to three years. I would start with offering the buyer no payments for the term. If the seller wants repayment, I would do something simple like $100 per month plus interest (to be negotiated). You can work on the terms. There are so many variables. I am not in favour of holding an amortized mortgage as a private lender.

By taking back the mortgage, the seller still gets their price but just a small part of it is deferred. The buyer still lives up to their obligation in respect to that price.

Here is another aspect. That second mortgage, depending on how it is written and under what terms, is saleable. Private investors through mortgage brokers or lawyers are seeking good returns (for a saleable mortgage, interest must be in place). Before negotiating a seller take-back mortgage, speak to your favourite mortgage broker – one who handles private funds – and find out what terms are necessary to make it saleable and what the discount on the paper would be.

If the interest rate is reasonable, the costs to sell that mortgage would mostly reflect fees to the broker and for legal costs. The seller may lose only a couple to a few thousand dollars in the end, which is a lot cheaper than the legal costs to sue a buyer who cannot close.

Seller-take-back mortgages and discounting mortgages were once staples of this industry and are a forgotten method of making deals.

There are other options for negotiating to close a deal, from price concessions, extended closing dates or a commission reduction (why would you do that as you will be working even harder). But overall, I have found that taking back paper is one my best options to make a perilous deal become a solid deal.

Want to learn more? Sit down with a mortgage broker who works with private funds and learn.

Deals not closing? My favourite line was stated by Napoleon Hill of Think and Get Rich fame. He wrote, “It’s always your next move.” I keep that in my daybook as a daily affirmation.

  • Basie

    And when the bank finds out you’ve borrowed the $20,000, they pull the first mortgage entirely.

  • Dale Rumming

    Good article!! I forgot that would be a viable option. I used that almost every day back in the 80’s when interest rates were 22 1/2%, and believe me, that was the only way we got the sales. Its tough to think about in these days of low interest rates, but there is always an example that gives someone the “AH HA” moment!

    • Carolyne in Canada

      Yes. And coupled with rates that seemed to increase daily, three or four times the highest of rates what they are today in some cases, daily we dealt with vendor (seller) “rate buy-downs.”

      Can’t remember what year that stopped. The highest one I saw was when a seller prepaid the buyer’s bank rate at a cost of $9,000. That was a whopping big amount of money in the early 80’s. The “seller-buy-down rates” was often the topic of the day.

      As an aside, that sort of financing supported not adjusting the reported MLS sale price:purchase price, therefore not diminishing values of comparable properties, or the LTT the buyer had to put into the govt coffers.

      Always wondered who devised these systems. (And not unlike buyer agency co-op fees relative to APS reported MLS prices, where if finite details were known, it surely would impact appraiser’s reporting numbers?)

      And when acting on a buyer’s APS (in sub agency) we were required to spell out the buyer’s arranged financing in detail on the offer (x amount of mtg, at x rate, for a term of x, amortized semi-annually not in advance, payment including or not including taxes) and accompany the offer with a commitment letter from the buyer’s bank or mortgage broker. (Subject to appraisal).

      No one had to guess where the purchase money was coming from or if it would be available on closing (for the newbies – we had to memorize all the clauses and lost a half point on exams if words not spelled right.) Or if the buyer’s qualifications would get in the way of closing that specific transaction that might be one of a dozen in a string.

      Round about the early nineties, I had a seller who remembered those requirements back in the 80’s, and insisted I put on his listing that any MLS buyer was actually pre-qualified and to prove it by bringing a bank or mortgage broker commitment letter as an offer Schedule. I processed the MLS listing with the seller’s “note to incoming offers.”

      You might not believe the calls from agents booking appointments to show, tearing my ears off! Demanding to know who I thought I was relating that message right on the listing on behalf of my seller (pre-buyer-agency). Very loud boisterous demanding calls saying the seller did not have the right to demand such information with an offer.

      Anyone remember when commitment letters started to no longer accompany offers? Do you think they were a good thing? And should they be brought back into the current system? Would it help any of the debacles in the current evolving market environment?

      The thought came to mind remembering when I sold a prior client a property subject to the sale of his existing home. I put his and his mother’s home on MLS.

      The agent bringing the buyer wanted ten banking days to arrange a mortgage. My seller agreed to five days. Typically reported to MLS that the property was sold COF. Days passed with no communication from the buyer’s rep. Didn’t return phone calls. Had to get releases to accept another offer and release trust funds. So much extra unnecessary work.

      Agent from the same company brought the next offer. Same routine. Releases required. Buyer didn’t qualify.
      The third time, I casually asked the agent (from the same company, “what bank or mortgage broker” is the buyer using? And was his buyer “pre qualified?” Big eyes, surprised countenance and answer: “Why do you ask? Not your business or mine; I have NO IDEA! And you should mind your own business. I don’t ever pre qualify buyers until I find the perfect house for them. (REALLY. Showing dozens of houses to buyers. Not knowing if they can afford? And getting sellers thinking their home was sold, and losing out on possible viewings because often showings stopped when COF’s reported to MLS.

      That was a one-only experience. Anyone else ever find themselves involved in such an offer presentation? His buyers were in the car and wanted to walk through one more time. The seller cornered the buyers and personally inquired. They got along okay and the then 3-day finance condition got removed on day 4. I was nervous until the law office informed me the string of related transactions closed, registered, done. WHEW!

      Agents from that company were pleasant but difficult to communicate with, because they had to fit real estate work in-between their real job between their taxi-driving career shifts. Gotta admire their long work hours managing two careers, but it often made business difficult with irrevocable’s and other deadlines. Having discussed this topic with real estate lawyers, they too experience such issues.

      Here’s an interesting link:
      (Header: The era of blind faith in big data must end)
      “Algorithms decide who gets a loan, who gets a job interview, who gets insurance and much more — but they don’t automatically make things fair, and they’re often far from scientific. Mathematician and data scientist Cathy O’Neil coined a term for algorithms that are secret, important and harmful: “weapons of math destruction.” Learn more about the hidden agendas behind these supposedly objective formulas and why we need to start building better ones.”

      https://www.ted.com/talks/cathy_o_neil_the_era_of_blind_faith_in_big_data_must_end/up-next?utm_source=newsletter_daily&utm_campaign=daily&utm_medium=email&utm_content=button__2017-08-22

      Carolyne L 🍁

  • PED

    PP = $400,000 less 20% DP of $80,000 = $320,000 uninsured loan required @ 80% of PP.

    Appraised value = $380,000 @90% LTV =$342,000 insurable mortgage available

    No costly VTB or second needed.

    • Carolyne in Canada

      One thing for newbies to know, and oldies, too, if never having participated in situations such as that are currently in the national news in the decimating market for some, should they ever get involved with (VTB’s) STB’s (sounds like a disease) in first place or second: make sure that the private mtg is “non-transferable.” Not your job, says the agent. That’s between the lawyers and the principles. But wait. Lawyers have been known to make mistakes, too.

      Choose a real estate lawyer who understands the mortgage world. Not all do. It’s interesting that litigating lawyers who are otherwise well-versed in contract law, sometimes admit after the fact, to knowing nothing about the world of mortgages. And the clients don’t know the right questions to ask, so are then at the lawyer’s mercy.

      In the event the subject property is resold at any time during the term of that VTB/STB, a further new buyer might be able to “take-over” (assume) that registered mortgage. It would be a terrific selling feature in some instances.

      That’s not necessarily the same thing as selling the mortgage (sometimes referred to as “selling the paper) at a discount.

      And who then becomes responsible for all the additional substantial legal fees? Although less than involved with a lawsuit, the fees can still be substantial. There are no winners. It has all become a game of chance. Wasn’t supposed to be that way.

      Sometimes things are left in control of the lawyer(s), and, in such cases, the agent is not kept in the loop, so to speak. Yet could find themselves directly or indirectly involved down the road, maybe surprised to be named in a subsequent suit, wherein anyone involved at any stage is added to the defendant list.

      For some reason many in such situations “look to the agent to give up their commission to save a closing problem; often the very first call one of the involved lawyers make, sometimes in a threatening manner.

      Agents would be well-advised to more than discuss with their broker; head straight to the corporate counsel. The broker might be known to decline to help, might be concerned about corporate counsel fees, even if on retainer. Agents might be well-advised to seek their own independent legal counsel.

      For starters the agent(s) involved in the (could be dozens of) transactions tied in a string will not get paid until title changes hands, and that can only happen at the registry office when all the transactions have physically closed.

      Carolyne L 🍁

  • windsortraveler

    Since the value for mortgage is $380,000 only $76,000 (20%) is needed for the mortgage, so the buyer already has an extra $4,000 of the $20,000 they need. So make the second for $16,000 and all your good advise stays the same.