Most Common Purchase Types
There are literally dozens of ways to purchase property. Some you have heard of others, probably not. What is important is the fact that there are many more benefits to owning rather than renting. Below are the four most common types of purchase methods used today.
Keep in mind that nowadays no matter how you plan on buying (even rent with option) you must have some type of down payment, credit scores of 625 or higher and steady income.
A 'straight forward' purchase where the buyer obtains a loan and the property is transferred at a 'closing'. This the most common transfer of property. Usually this includes a mortgage debt to a lender but, sometimes may involve 'cash'.
Rent with Option
A Buyer fronts (puts down) money (usually 2%-4% of the price) for the 'option' to purchase the property in the near future (usually 1-3 years). The Buyer essentially 'rents' until that time. The Buyer has the option of purchasing at the end, or anytime during the term of lease. If the buyer does not execute his option the seller retains the front money. The purchase price is usually agreed upon in the beginning but, sometimes settled by an appraisal near the end of the term.
Buyer fronts money (usually 2%-4% of the price) for the purchase the property in the near future (usually 1-3 years) and essentially rents until that time for a higher than market rental rate with the difference (say 20% of each monthly payment) being applied to the purchase price. This builds some equity in the property. The Buyer must perform at the end of the term or, is essentially in default. The purchase price is agreed upon in the beginning.
Contract For Deed (Articles of Agreement)
In what is essentially temporary owner financing a Contract For Deed sale gives the buyer an opportunity to purchase if they 'just miss' qualifying for a standard sale with traditional financing. In this scenario the buyer usually fronts 3-10% of the price for the purchase. There are essentially two closings. In the first closing there is a statement indicating transfer of funds. In addition, usually title is pulled and retained by one of the parties attorneys. The buyer owns the property and pays the Seller who continues to pay his lender. In the near future (usually 12-24 months) the Buyer refinances with a conventional lender and pays off the Seller. Because the Buyer has Equitable Title he can paint, add a deck even sell the property as long as he pays off the Seller.
The most important part to note in scenarios 2 and 3 the Seller is still responsible for the larger maintenance of the home (ie roof, mechanicals, etc) and retains the tax breaks.
After executing a contract for deed, a buyer gets possession of the property and agrees to make monthly payments to the seller, much like a mortgage. The seller retains title until the contract is paid in full. Because there's no lender involved, a contract for deed gives the buyer and seller more flexibility when negotiating interest rates and the size of the down payment. There are also very little losing costs.
Buyer Benefits: A contract for deed gives buyers who can't quite qualify for a mortgage a way to buy. Another advantage is that if a buyer falls behind in payments, the seller, unlike a mortgage lender, can't demand payment in full; the buyer only has to make up the missing payments to restore the loan.
Seller Benefits: The contract for deed is a simpler, quicker legal process than going through a lender. The seller often receives an interest rate a little higher than conventional mortgage loans (half to full point). If the buyer does default and fails to make it up, the seller can reclaim the property and any improvements (ie deck, new windows etc) the buyer made without having to go to court.
Contract sales can vary quite a bit but often retain some core elements. In a typical contract for deed we see the buyer pays the seller monthly Principle, Interest as well as 1/12 of the sellers current Taxes and Insurance. No mortgage insurance is required. Most often the mortgage paperwork states a buyer cannot make significant property changes without the seller’s approval and must use professional licensed contractors
In the Contract for Deed scenario the Seller no longer has to worry about a 'tenant'. The overall maintenance of the property is the Buyers responsibility. More importantly, the Buyer gets all the tax breaks and benefits of appreciation.
In every scenario you need to have decent credit and have steady reliable income.