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Alternative 'Seller' Financing
There are many ways real estate
can be purchased without going to a bank. Generally, this involves seller financing
, in which the seller provides some type of structured financing for the buyer. Buying on "land contract" most often comes to mind, but the methods and combination of owner participation employed between owners and buyers to get the deal 'done' is seemingly limitless. Here are the basic types:
- Purchase-money mortgage. (Seller financing or owner financing.) Any mortgage in which the seller is the principle lender. This differs from a land installment contract in that the seller does not retain title to the real property and must seek foreclosure action as remedy to buyer default.
See Also: Your Mortgage - Seller Financing
- Land Contract. Ohio revised code Chapter 5313 defines a Land Contract, or more properly, a Land Installment Contract as a contract between the seller, known as the Vendor, and a buyer, known as the Vendee, to convey real property. The contract is not required to be fully performed within one year and the Vendee pays for the property in installment payments, usually monthly. The Vendor retains title as security. Ohio law makes it very clear that 'options contracts' for the purchase of real property are not land installment contracts.
Land Installment Contracts carry an absolute contractual obligation to purchase the real property upon terms which are clearly stated in the contract. The terms also include an outline of the monthly payment installments which build the Vendee's equity in the property, the same as an ordinary homeowner with a conventional mortgage. Duties to make repairs and keep premises in fit and habitable condition may be shifted to Vendee according the terms of the written contract.
In the case of Vendee's default, the Vendor may terminate the Vendee's interest in the real property by simple eviction known in Ohio as "Forcible Entry and Detainer." However, if the Vendee has been current in payments for a period of five years or more, or has paid at least 20% of the purchase price, in Ohio, the Vendor can only extinguish the Vendee's interest by action of foreclosure.
All About Land Contracts.
Land Contract Tips
- Owner-carried second mortgage for the down payment. In this case the seller offers a mortgage that is secondary to the principle lender. These would include so called "Wrap-Around-Loans."
See Also: Your Mortgage - Seller Financing
- Option to purchase. A buyer purchases an option for a specified amount of time giving him/her the right to enter into an purchase agreement for the specified real property at a specified price. The seller may not market the property to another buyer during the time period specified by the option contract. If the option holder does not exercise the option by the specified time, the option seller keeps the option money and is again free to market the property to another buyer.
- Lease with Option to Buy (Lease Option) An alternative financing option that combines a lease for a period of time with a purchase agreement where the tenant (lessee) has the option to purchase the real property at a fixed price at a specified future point in time. Each month's rent payment typically consists of principal, interest, taxes and insurance (PITI) payments as though a conventional mortgage were in place. Often there is included an extra amount that is earmarked for deposit to a savings account in which money for a down payment will accumulate.
The lease option differs from a land installment contract in five distinct ways:
1. Lessee has NO obligation to purchase property unless he or she exercises the option.
2. The Lessee has no equity in the real property other than a leasehold interest provided by the lease agreement. (NOTE: a provision providing for real property interest may be written into the lease agreement.)
3. The Lessee may be entitled to have some portion of lease payments applied to purchase price in event option is exercised.
4. If Lessee should be determined to be in default, interest can be terminated by the eviction process. Foreclosure action is never necessary.
5. Duty to make repairs and keep premises in fit and habitable condition MAY NOT be shifted to Lessee.
See also: Your Mortgage - Lease Options
- Equity Sharing (also known as Tenants In Common) is co-ownership of real estate whereby each of the owners share in the equity and tax benefits of the property according to the portion of their investment.
There are 3 basic forms of equity sharing:
1. Traditional Transaction, the 'Occupier' lives in the property and pays all expenses; the 'Investor' pays most of the down payment and does not live in the property.
2. 'Co-occupiers' live in the property and split the expenses.
3. 'Joint Venturors' rent out the property and split the expenses and profits.
- Assumption of Mortgage and "Purchase Subject to Mortgage." Both are assumption loans used by a homeowner to finance the sale of property usually when the homeowner (mortgagor) is in financial difficulty and desires to sell the property to avoid foreclosure.
An Assumption - is a transfer of the homeowner’s (mortgagor's) existing mortgage to a buyer in which the homeowner is released from any further liability of debt under the assumption.
A Purchase Subject to Mortgage - is an Assumption mortgage in which the lender (mortgagee) does not release the homeowner (mortgagor) from the note and the homeowner remains liable for the debt should the new buyer default.
In 1987 the United States Department of Housing and Urban Development (HUD) created Reverse Mortgages as a "Safe and Highly-Regulated Plan" to give older American Homeowners (over 62) greater financial security.
As you can see combinations of alternative financing methods are almost endless and limited only by the creativity, needs, and desires of the parties involved. Owner financing can be effectively utilized to the advantage of both buyers and sellers.
And, yes, RE/MAX Valley. does maintain an inventory of owner-financed properties. But, more importantly, we are willing to go out and shake some deals loose for you.
By law, we cannot offer legal advice or prepare the final documents. But, as a real estate broker, we are equipped to guide you through these transactions together with competent legal professionals.
Ask Your Agent . Whether your seeking traditional or alternative financing, your RE/MAX Valley Real Estate Professional can recommend lenders to pre-qualify you prior to any serious house hunting. It's important you know exactly what you can afford.
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