Real Estate Financing

Real Estate Financing

Typically, a buyer of residential real estate is not able, or willing, to pay the full purchase price for their new property at the time of closing, when they take possession of the property. Instead, many buyers pay for real estate by making monthly payments over the course of many years. There are several different options regarding how such an arrangement can be structured, with varying pros and cons associated with each option. This article will briefly summarize several such options, as well as some of the major differences associated with each.

Option #1: Mortgage Loan from Bank. A conventional mortgage loan, typically from a bank or credit union, is the most common option for buying real estate, taking possession of the real estate at closing, and then making monthly payments over the course of many years to pay off the purchase price. In this sort of arrangement, there are three parties involved. The seller transfers title to the property to the buyer, who get immediate possession of the property at closing. The buyer borrows the money from the bank and uses it to pay the seller, so the seller gets paid in full at closing. The bank lends the money to the buyer to be used to pay the seller for the property, and the bank obtains a mortgage on the property from the buyer. A mortgage protects the bank in the event that the buyer is unable to repay the loan, in which case the bank is entitled to foreclose the mortgage, have the property sold, and have the proceeds of the sale used to pay back the loan. Depending on the type of financial institution doing the lending, a mortgage loan from a bank is typically governed by state and federal banking regulations. Depending on the circumstances, such regulations may include consumer protection regulations, and resources designed to help borrowers who are at risk of facing foreclosure.

Option #2: Seller Financing. Seller financing is very similar to Option #1. In fact, it is another type of mortgage loan. The primary difference between Option #1 and Option #2 is that in Option #2, there are only two parties involved. Here, the seller essentially acts as the bank. The seller lends the buyer the money to buy the property, and obtains a mortgage on the property. So, the buyer holds title to the property, and gets immediate possession of the property at closing, and the seller has a mortgage, just like the bank in Option #1. If the buyer fails to repay the loan, then the seller can foreclose. Another difference is that in this scenario, no money actually changes hands at the time of sale, since there is no reason for the seller to actually transfer the loan proceeds to the buyer only to have the buyer transfer the loan proceeds back to the seller to pay for the house. Instead, the buyer simply signs paperwork indicating that the buyer owes the purchase price to the seller, including a promissory note and mortgage. Because the lender is a private individual in this scenario, many of the regulations that would apply in Option #1 may not apply to this scenario. This option is sometimes used by buyers who are not able to qualify for conventional bank financing. This option can also allow for greater creativity and flexibility in how a loan is structured than is likely to be available from a financial institution.

Option #3: Agreement For Deed. At first glance, an agreement for deed seems quite different from a mortgage loan. However, they are actually very similar, and in fact, are treated the same under Florida Law. An agreement for deed is a different type of seller financing, which is sometimes described as an installment sales contract. Here, the seller and the buyer enter into an agreement under the terms of which the buyer gets possession of the property and the buyer is obligated to make monthly payments to the seller, usually over the course of several years, and if the buyer makes all of the agreed upon payments, then at the end of the repayment period, the seller will transfer title to the property to the buyer. So, instead of the buyer getting title to the property at the beginning of the process, subject to a mortgage held by the lender, as in Option #1 and Option #2, here the seller retains title to the property until the buyer has made all of the agreed upon payments. This may seem like it would provide more protection for the seller than a mortgage would, since the seller retains title to the property. However, Florida Statutes §697.01 provides that an agreement for deed is legally deemed to be a mortgage and that if the buyer fails to pay as agreed, then the seller’s remedy is to foreclose according to the same rules as would apply when foreclosing a mortgage. Because an agreement for deed is treated, by law, the same as a mortgage, in most situations there is no reason for the parties to opt for an agreement for deed over the more typical seller financing, involving a deed and a mortgage.

Option #4: Lease with an Option to Purchase. Another arrangement in which the buyer takes possession while making monthly payments in order to buy the property over time is a Lease with an Option to Purchase the property. Here, the seller retains title to the property, as the landlord, and the buyer has possession of the property as a tenant. This option can be thought of as a “rent-to-own” arrangement. Essentially, the buyer pays rent to the seller, and the buyer has the Option to purchase the property at a later date, so long as all rent payments are made as agreed. Typically, if the buyer pays as agreed, then some portion of the rent payments made by the buyer will be credited towards the purchase price. One of the major differences here is that, prior to the exercise of the option to purchase by the buyer, the conduct of both the landlord and the tenant is governed by the Florida Residential Landlord and Tenant Act, during the term of the lease. In this situation, if the buyer does not pay as agreed, then the landlord is entitled to file an eviction action against the buyer, rather than a foreclosure action. Eviction actions are typically resolved more quickly than foreclosure actions. However, after the buyer exercises the option to purchase the property, the Landlord-Tenant Act no longer applies, and the relationship changes from a landlord-tenant relationship, to a seller-buyer relationship. If a dispute were to arise at this stage of the process, then the seller would not be entitled to file an eviction action against the buyer. Instead, the seller would have to file an ejectment action in order to retake possession. An ejectment action typically takes longer and costs more than an eviction. In addition, in some cases, an ejectment action may take longer and cost more than a foreclosure action.

As discussed above, an agreement to purchase real property by paying over time and taking possession at the beginning of the process can take several different forms. And, each different form of agreement has different pros and cons depending upon whether you are the seller or the buyer. Determining which form of agreement is best for your unique situation requires specific consideration of your goals, needs, and desires. Buyers and sellers of Florida real property should consult a knowledgeable Florida real estate attorney in order to ensure that their interests are protected.

If you have any questions or concerns about how best to structure your next sale or purchase of Florida Real Property, please contact our office to schedule an appointment to discuss your unique situation.

Please note that this article is intended for informational purposes only, and that nothing contained in this article may be relied upon as legal advice. Every situation is unique and requires unique attention and legal advice.