For years this writer has been advocating "vendor-take-back" financing as a way for problem mortgagors to get financing. In other words, someone who has a blemished credit background (with good explanation), or someone who lacks "provable" income, or someone who has trouble coming up with a down payment, may get financing easier through a motivated house seller rather than an institution. This week, we’ll look at the other side of the coin.

Terry and Sarah owned a mobile home on the southern outskirts of Ottawa. They now work in the high tech sector in the west end. Commuting has become a pain now that our couple have children. Last year they saw a beautiful home in Kanata, which they thought was reasonably priced. They entered into an agreement to purchase, conditional on selling their mobile home. Until the mobile was sold however, the Vendor would continue to market the house. If another offer was received in the meantime, Terry and Sarah would have 72 hours to decide to remove their condition on selling the mobile (making it a firm offer).

Two weeks later, the Vendor called to say he had another offer. Terry & Sarah decided to waive their selling condition, and they bought the house. They now had but two months to get rid of their mobile home, which meant they were very motivated. Along came a couple who offered to buy the mobile home. They had $5000 down. The purchase price was $26000. These purchasers asked Terry & Sarah for financing thorugh the offer to purchase. Since Terry & Sarah had no mortgage on the unit, they decided to lend these people $21000 at 8%. They were happy to get rid of the mobile, or so they thought. The first payment from the purchasers to Terry & Sarah went though OK, but after that every other payment bounced. Every month Terry had to chase after the purchasers to make good on the NSF cheque. The extra work involved to collect their money seemed worth it at the time, but after 6 months of chasing, the purchasers decided to change to an unlisted phone number. Now Terry had to travel to the mobile home every month to collect cash. Half the time the purchasers were not home, necessitating another trip. Finally, after one year of this nonsense, Terry & Sarah decided to go see a lawyer to foreclose on the purchasers to get their unit back. Another 4 months went by without any payments but finally, the occupants were evicted from the unit. Terry went back to the mobile to find the unit trashed. The occupants had demolished every wall, broken the bathroom fixtures, ripped up all the rugs, etc. The original $5000 that Terry had received from the purchasers would not cover the damages. Insurance would not cover because this was willful damage. In the meantime, Terry & Sarah had to struggle to make ends meet, since they were no longer receiving payments from the mobile. After agonizing over the repairs to the unit, after taping all their credit cards to pay for said repairs, they still could not find a purchaser for the unit. They finally attracted a good tenant for the mobile home. Their budget will be strained for a while, but the rent from the mobile will eventually pay for the repairs.

The purpose of this article is to arouse caution when allowing for "vendor-take-back financing." Always run a credit worthiness check on the prospective purchasers, and if there are surprises after the credit check, no matter how motivated your circumstances have forced you to be, you had better ask for extra money down or pass on this applicant. Trying to remedy something after the fact can be heart wrenching.