People typically purchase assets, including houses, by simultaneously exchanging cash for property. These are often referred to as “direct sales/purchases”. In these situations, if a buyer does not have all the cash for the purchase, the buyer will borrow money from a lender (bank or credit union). The lender will retain a mortgage on the purchased property, which legally authorizes them to repossess and sell the property to pay the lender if the buyer/borrower fails to pay as required.
There are many reasons why a buyer may not pay the full purchase price immediately after taking possession of the property. Capital gains tax savings have traditionally been a good reason for sellers to want to receive their sales payments over time, but changes in tax law make this reason less applicable today than in the past. .
Sometimes a buyer may not be able to obtain traditional financing from a lender for a purchase. Alternatively, some buyers buy a property to use in a business that will earn only a small amount initially, but will eventually earn higher amounts. In these situations, if a traditional lender cannot meet the buyer’s needs, an “over time” sale or purchase of the property might make sense. There are three main types of “over time” real estate sales.
First, land contracts (legally called “installment land contracts”) are well known and can be applied. If the property purchased includes a single-family home, the land contract must meet many requirements, including ensuring that any buyer who pays at least 20% of the purchase price or pays for at least five years for the purchase is able to retain any capital gained in the event of default and foreclosure. Until the land contract is paid in full by the buyer to the seller, both the buyer and the seller are considered to have “ownership” rights to the property, even if the right of possession belongs to the owner. Buyer.
A second alternative structure in this circumstance is a lease-to-own arrangement. In a rent-to-own structure, the buyer initially simply “rents” the property (although the buyer is often responsible for utilities, insurance, and property taxes). This structure typically sets up an initial lease window of a few years during which some or all of the lessee-purchaser’s payments will be applied to the purchase price at the end of the initial lease window of a few years. This can allow a buyer to acquire equity (which will serve as a down payment for the purchase) upon the initial rental of the property.
Third, a seller can act as a lender in a real estate transaction. In this structure, the seller provides a deed to the buyer. At the same time, the buyer gives the seller a written acknowledgment of debt / promise to pay called a “promissory note” and a mortgage. In this case, the term of the loan may be shorter than that of a traditional lender, but the remedies of the seller in the event of non-payment are the same as if the seller were a traditional lender.
Lee R. Schroeder is an Ohio licensed attorney with Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agricultural matters in Northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to be used as legal advice, and specific advice should be sought from the licensed attorney of your choice based on the specific facts and circumstances facing you.