Legal Forms for Starting & Running a Small Business by Fred S. Steingold

Author:Fred S. Steingold [Steingold, Fred S.]
Language: eng
Format: azw3, pdf
ISBN: 9781413322262
Publisher: NOLO
Published: 2016-01-24T16:00:00+00:00

Financing a Real Estate Purchase

There are a number of ways to finance a real estate purchase.

Pay Cash

If you have deep pockets, you can obviously pay for the property outright. This approach normally makes sense only if you don’t need capital to build your business.

Borrow the Purchase Money From a Commercial Lender

You can normally borrow much of the money needed to finance the purchase from a bank or other commercial lender. The lender will want you to have some money of your own in the deal—perhaps 30% or 40% of the purchase price. In addition, you’ll need to secure the loan by giving the lender a mortgage or deed of trust on the building.

If a mortgage is used as security for the loan, three basic documents are typically involved:

• Deed: The seller signs a legal form entitled a deed transferring the legal ownership of the property to you.

• Promissory Note: With a mortgage, you agree in writing to make specified payments to the lender until the loan has been fully paid off.

• Mortgage/Deed of Trust: With a mortgage, you sign a legal form giving the lender the right to take the property and sell it to pay off the loan balance if you don’t make your loan payments as promised. Sometimes the lender must go to court to enforce its right to sell the property. If a deed of trust procedure is instead used as security for the loan, you give the trustee (often a title company) the right to sell your property at the instruction of the lender, with no need of court approval if you fail to make your payments on time.

Borrow From the Seller Instead of a Bank

If the seller doesn’t need all of the money from the sale immediately, he or she may be willing to self-finance the deal. As with outside financing, the seller will deed the property to you, and you’ll give the seller a down payment plus a promissory note and either a mortgage or deed of trust to secure payment of the balance.

In many states, seller financing can also be accomplished by a land contract—an installment purchase agreement in which you promise to pay off the balance of the purchase price by making specified payments to the seller. If you don’t keep up the payments, the seller can take back full ownership of the property through procedures called forfeiture or foreclosure.

It’s also possible to work out a combination of commercial and seller financing. You might, for example, borrow part of the purchase money from a bank, giving the lender a first mortgage or first deed of trust as security for the loan. Then, the seller might agree to accept a note for part of the balance, in return for your granting a second mortgage or second deed of trust. Using this procedure, you might buy a $200,000 building this way:

Down payment from savings

$ 20,000

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