People generally buy property, including houses, simultaneously exchanging money for the property. These are often referred to as “direct sales / purchases”. In these situations, if a buyer does not have all the money for the purchase, the buyer will borrow money from a lender (bank or credit union). The lender will hold a mortgage on the purchased property which legally authorizes the lender to repossess and sell the property to pay the lender if the buyer / borrower does not 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 had traditionally been a good reason for sellers to want to receive their sales payments over time, but changes in tax laws make that reason less applicable now than in the past.
Sometimes a buyer may not be able to secure traditional financing from a lender for a purchase. Alternatively, some buyers buy a property to use in a business that will only earn a small amount initially, but end up earning larger amounts. In these situations, if a traditional lender cannot meet the needs of the buyer, a “forward” sale / purchase of the property may make sense. There are three main types of “over time” real estate sales.
First, land contracts (legally called “land installment contracts”) are well known and may apply. If the purchased property 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 acquired equity in the event of default in payment and foreclosure. Until the land contract is fully paid by the buyer to the seller, both buyer and seller are considered to have “ownership” rights to the property, even though the right of possession belongs to the landlord. Buyer.
A second alternative structure in this case is a hire purchase arrangement. In a hire-purchase structure, the buyer initially simply “leases” 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 in which some or all of the tenant-buyer 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 earn equity (which will serve as a down payment on the purchase) while leasing the property upfront.
Third, a seller can act as a lender in a real estate transaction. In this structure, the seller provides a deed of ownership to the buyer. At the same time, the buyer gives the seller a written IOU / promise to pay called a “promissory note” and a mortgage. In this case, the loan term may be shorter than the term of a traditional lender, but the seller’s remedies for non-payment are the same as if the seller were a traditional lender.
Lee R. Schroeder is a Licensed Ohio Lawyer with Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning, and agriculture in Northwestern Ohio. He can be reached at [email protected] or 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed lawyer of your choice based on the specific facts and circumstances you are facing.