Selling a commercial or residential property can be more difficult than one might think. Some property sellers and buyers are comfortable with managing a real estate transaction on their own. However, it often makes sense to employ an experienced real estate financing lawyer to guide them through a transaction.
“Real estate financing” is something of a phrase that includes various legal and financial matters involved in real estate transactions. It can deal with everything from getting a mortgage to informing a seller about the potential tax implications of a real estate trade. Attorneys who practice in this area must not only have deep knowledge of real estate law, but also comprehend how financial markets operate.
Real estate transactional lawyers wear many hats when it comes to getting a deal done and helping clients navigate the procedure. Real estate attorneys may represent a buyer, a seller, or a lender in any given transaction.
Real estate law is an area of law strongly affected by the property market, so it is subject to constant change. It covers such topics as the following:
- The mortgage market;
- Real estate financing devices;
- Due-on-sale clauses;
- Finance forms;
The law of real estate finance also addresses the following subjects:
- Government intervention in the mortgage market;
- Financing condominiums and cooperatives;
- Securitization of commercial real estate;
- Leasehold and leaseback financing;
- Refinancing, bankruptcy, and lender liability.
What Are Some Real Estate Financing Devices?
Real estate financing devices include mortgages, deeds of trust, and land contracts. A mortgage is an instrument in which the borrower, or mortgagor, gives a promissory note, along with a mortgage, to the lender or mortgagee. Usually, the mortgagee is a bank or other lending institution, e.g., a credit union.
If the mortgagee is the property seller, the seller would provide financing to the buyer. This is an instance of a kind of financing called “seller financing.” In this strategy, the seller is the mortgagee and essentially lends the money to buy the property to the buyer. The buyer gives the mortgage security for the remainder of the property’s purchase price.
A deed of trust is a legal document that states that a third party, the trustee, holds legal title to a person’s property until the person has paid off a loan, usually a loan that financed the purchase of the property. Deeds of trust are recorded in public records, as are mortgages. Technically, the borrower and owner of the property is the trustee.
The trustor conveys title to the property to the trustee to hold in order to protect the interest of the beneficiary in receiving payment of the loan. The title to the property is provided in the form of a trust deed. Both the loan agreement and the trust deed are documented in the county recorder’s office to establish the existence of the security interest in the property.
A land contract, or “contract of sale,” or “contract for deed,” is another form of seller-financed real property transaction. The seller gives possession of the property to a buyer who makes payments until the seller has been paid the full price for the property. The owner keeps the title until the purchase price has been paid in full. When the seller has been paid in full, they will transfer the title to the buyer.
What Are Some Kinds of Creative Financing?
Creative financing delivers a means by which a buyer can buy a property even though the buyer’s credit may be less than perfect. One kind of innovative financing is subject-to transaction. In this type of transaction, a buyer takes over the seller’s remaining mortgage balance unofficially and without the prior agreement of the mortgage lender.
It is reportedly popular with real estate investors. If interest rates have risen since the mortgage was made, it can be an attractive financing option for homebuyers. This is because the interest rate on the existing mortgage might be lower than what is available on the market at the time of the sale.
The buyer is taking a chance that the mortgage lender discovers the transfer and objects to the take-over of the mortgage. The lender might demand payment of the full mortgage loan balance if they learn of the transfer to the buyer. That is because the transfer may violate a due-on-sale clause in the mortgage.
This is a provision in a mortgage contract that requires the borrower to repay the mortgage loan in full upon the sale or conveyance of any interest in the property that is security for the mortgage. If a mortgage has a due-on-sale clause, the mortgage cannot be assumed or taken over by a new buyer of the property.
If the mortgage lender demands full payment of the remaining balance on the mortgage loan, and the buyer cannot pay off the loan in full, they could lose the property.
A short sale is another kind of creative financing. A short sale is the sale of a piece of real property for a price that is less than the amount that the owner at the time of the sale owes on their mortgage or deed of trust.
There are additional options for those seeking the funds to purchase commercial real estate as follows:
- Federal Small Business Administration Loans: The Federal Small Business Administration offers some inexpensive loans for investing in commercial real estate. Some of them guarantee that part of a loan will be repaid. One of them is targeted at investment in large investment projects;
- Conventional Loans: Most loans for the purchase of commercial real estate are still made by banks;
- Hard Money Loans: Investors in commercial real estate may use hard money loans so they can obtain quick financing while they negotiate a long-term bank loan. For this reason, hard money loans are sometimes called “bridge loans;”
- Online Marketplace Loan: Online marketplaces help match borrowers with private investors who can help finance the purchase of commercial properties for a return on their investment. These loans are sometimes referred to as “soft money loans” because the interest rates are higher than those for conventional bank loans. They are, however, lower than the loans offered by hard money lenders.
- The loans available from online marketplaces are usually short-term loans;
- Joint Venture Loan: In some cases, an investor cannot get commercial financing, or the investor does not want to be alone in bearing the risk of a purchase, so they might pursue a joint venture. Two or more buyers can get a joint venture loan and share the risks without entering into a real estate partnership.
Commercial real estate loans are used only to finance the purchase of property that generates income. Investors who want to obtain loans to purchase commercial real estate usually must set up a business entity, such as a limited liability company (LLC), to qualify for loans for commercial real estate. Lenders usually require the borrowers to use the property as security for payment of the loan. If the borrower defaults on the loan payments, the lender can seize the property.
When considering a loan for the purchase of commercial property, banks still consider the creditworthiness of the borrower. Of course, lenders also weigh the property’s potential income production when they consider whether to lend funds for a commercial real estate purchase.
Seeking Legal Help
If you aspire to buy real estate, either residential or commercial, for investment purposes, you want to consult a real estate lawyer.
LegalMatch.com can connect you to an experienced real estate lawyer who can assist you with funding and make sure that any agreements you enter into give you maximum protection for your interests. It pays to be cautious when engaging in real estate transactions so that they work as you wish to achieve your goals.