Strict loan qualification requirements and steep down payment amounts stand in the way of many investors and homebuyers looking to purchase Florida real estate. However, there are other non-traditional ways to make owning a home or investing in a Florida property a reality. Creative financing can lower the barrier to homeownership or investment for individuals and companies looking to buy Florida.
What is Creative Financing?
This is a term given to unconventional methods of financing in real estate transactions. The most traditional route to purchasing a property is obtaining a conventional or FHA mortgage, but this is not a feasible option for everyone. By using innovative and unique ways to buy land or property, more people can take advantage of investing in and purchasing Florida real estate.
Because the key indicator of creative financing is the creative aspect, there are several different methods to obtain the necessary funding. There are, however, some more popular options for people interested in this route.
Owner financing (a/k/a seller financing) is one of the most popular methods of non-traditional financing. Owner financing takes place when the seller agrees to accept a down payment and give the buyer a loan for the remainder of the purchase price. Instead of the seller receiving the full purchase price of the property at closing, they agree to take a smaller lump sum and then ongoing mortgage payments from the new owner.
There are benefits to this type of creative financing. It can often lead to a faster selling process, which can be especially advantageous when a property has been on the market for a significant period of time. Owner financing also allows the buyer to qualify for a home they may otherwise be unable to purchase (perhaps due to lack of credit, excessive debt, or insufficient proof of income). Payment options are often more flexible in this type of financing, and the new homeowner may be able to save money in the initial transaction because an appraisal and other traditional loan-related fees are not required.
One seller benefit is the possibility of having to pay less capital gain taxes from the sale. Sellers may also receive a higher purchase price due to the flexible financing terms being offered. A drawback for sellers is that if the buyer defaults, the seller will have to bring forth a foreclosure lawsuit in order to recover the amount financed and any other amounts owed by the buyer.
Lease to Own and Lease Purchase
Many people who are looking for creative home financing options are renting a home as they plan for their future in homeownership. For those people, they are already familiar with the main structure of a lease-to-own option. This involves an arrangement in which the buyer is first a tenant of the seller, agreeing to rent the property for a specified period until they are ready to purchase the property. In most rent-to-own situations, the goal is to work toward traditional financing while renting the property that will eventually be bought.
Purchasing the property is not always a requirement in rent-to-own or lease-to-own. However, in a lease purchase arrangement, the tenant who is renting the property does commit to purchasing it after the agreed-upon time period ends. In both of these scenarios, the rent payments collected by the seller are often credited and put toward the buyer’s future down payment.
When someone buys a home subject-to, it means that the seller’s mortgage payments will become the buyer’s responsibility. The new homeowner or investor will make the necessary payments to the seller’s lender. There is no contract or agreement made with the lending institution, but the seller and buyer agree to the terms of subject-to financing.
Real estate investors frequently utilize this approach when purchasing properties for their portfolios, but it is also a beneficial option for homeowners when interest rates spike. Sellers and buyers should be aware that the mortgage’s due-on-sale clause may be triggered when a property is sold subject to the mortgage, and they should speak to an attorney to fully understand their rights and responsibilities in a subject-to transaction.
A novation occurs when one contract is replaced by another. In Florida real estate transactions, this means that an existing contract is nullified, and a new one takes its place. A standard novation in property ownership is when two parties agree to create a new contract with updated terms, or the buyer is replaced in the new contract.
Hard Money Loans and Private Financing
Hard money loans, or private money financing, are usually short-term options for property acquisition in Florida. Investors interested in fixing up a home and reselling it for a profit often take advantage of this type of financing. While hard money and private loans tend to be more expensive than other types of financing, there are still benefits for some buyers. Those whose credit or income disqualifies them from traditional lending may prefer private financing. Additionally, obtaining funds from a hard money or private lender is often quicker than going through a traditional mortgage lender. In times when mortgage rates for a traditional loan are high, this option becomes even more attractive.
How Farshchian Law Can Help
Our attorneys have substantial experience with creative financing transactions throughout the State of Florida. To learn more about our services for investors or homebuyers, or for a free consultation, please contact us at (305) 901-5628, or email us at Info@JFRealEstateLaw.com.