Valley Real Estate

jack pearce and al leonard

Alternative Seller Financing

Alternative Financing: Seller Participation

Alternative Financing

How can a buyer purchase Real estate without going to a bank? Generally, this will involve the seller making available some type of financing. In the past the use of "Land Contracts" was very popular; but owner financing methods and combinations seem to be endless in their variation and can be effectively utilized to the advantage of both buyers and sellers.

By law, because we are not attorneys, we cannot offer legal advice or prepare the final documents. But, as real estate professionals, the HomeTeam, Jack Pearce and Al Leonard, we can guide you through these transactions together with competent legal professionals.

The basic types of 'seller participation' are summarized here:

Land Contract

A contract between the owner of the real property (called the "vendor" or the "seller") and a person who wants to buy the property (the "vendee", "contract purchaser", "purchaser" or "buyer") for an agreed-upon purchase price. Detailed information will be found here.

Purchase-Money Mortgage

Any mortgage in which the seller is the principle lender. The seller is the 'bank' in this instance and carries a first position lien on the home.

Owner-carried second mortgage for the down payment.

In this case the seller offers a mortgage that is secondary to the principle lender and is often made to help the buyer make the down payment on the principle loan. The first lien is held by the principle lender and the seller's lien is subservient to it.

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 a specified property at a specified price. 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.

Lease with Option To Purchase

An alternative financing scenario that combines an Option To Purchase with a Lease Agreement. It allows the home buyer to lease a home with a formula to eventually buy it. A Lease Option is different than the so-called  lease-to purchase which, in Ohio, is legally treated as a land contract or installment contract. A lease-option give the tenant an option to purchase the home after a specified time which he can choose to exercise or not. A land contract obligate the buyer to purchase the home after a specified time.

Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the mortgage. 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.

See also - Real Estate guide: Your Mortgage - Lease Options

Equity Sharing.

Equity Sharing (also known as Tenants In Common) is co-ownership of real estate. The co-owners share in the equity as well as the tax benefits of the real estate according to the total amount of their investments.

There are 3 forms of equity sharing:

  1. First is the Traditional Agreement,
    • 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. Secondly, Co-occupiers live in the property together and split the expenses.
  3. Thirdly, Joint Venturors rent out the property together and split the expenses as well as the profits.

Read more: Your Mortgage - Equity Sharing Agreements

Assumption of Mortgage and "Purchase Subject to Mortgage."

Both agreements are assumption loans used by sellers to  help finance the sale of real estate particularly when the seller (mortgagor) is in financial difficulty himself, and needs 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. The new owner steps in the shoes of the seller as far as the mortgage is concerned.
  • 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.

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