INTRODUCTION

INTRODUCTION

There are a variety of ways to acquire real estate interests without using mortgage financing. With the exception
of the real property sales contract, these methods are available only to large financiers, very strong tenants or
substantial institutions.

An all-cash purchase is an obvious alternative to mortgage financing. However, it is often difficult for an
individual to raise substantial sums of money and protect against unlimited liability.

Syndicate Equity Financing

Syndicates afford small investors opportunities to invest in high-yield real estate. A syndicate offers knowledge
of values and the ability to find, organize and manage a successful venture.

Commercial Loan

A straight bank loan can be used to purchase real property. The borrower obtains the loan based on good credit
or on some type of collateral (stocks, bonds, personal property) other than the real property.

Bonds or Stocks

Large, well-rated corporations can sell stocks or general obligation bonds in order to purchase real property
without using a mortgage.

Long-term Lease

This is a good approach if the property is usable as is. If the lessee is leasing only the land and has to pay for
construction of improvements, the overall cash investment will probably be larger than buying improved
property with a mortgage.

Advantages to the tenant are:

• Rent may be deductible as an expense. (If property was owned, only the improvements would be
depreciable.)

• Money freed for other uses can frequently be used more advantageously.

• Tenant’s total debt load is not increased.

Disadvantages to the landlord are:

• Often cannot find good tenants willing to lease.

• Tenant having a high credit rating at beginning of lease may go “sour” in a few years.

• Tenant may improve property with special purpose development and then go bankrupt

• Tenant may go bankrupt before completing construction, possibly burdening property with mechanic lien
claims leaving landlord with unsaleable and unleasable property.

Exchange

A trade or exchange of properties can be an alternative to mortgage financing, if the difference in valuation
between the properties can be reconciled and the trade made without financing difficulties.

Sale-Leaseback

A sale-leaseback is a popular option for companies with excellent credit. Also termed purchase-lease, sale-
lease, lease-purchase or leaseback.

Some advantages of sale-leaseback to seller/lessee may be:

1. Property is suited to needs.

2. Working capital not tied up in fixed assets.

3. Since leases are not considered long-term liability, rent may be tax deductible. Lease term is often longer
than mortgage. Balance sheet looks better and credit is enhanced.

4. Often more capital can be raised than by borrowing.

5. Tax deduction of lease payments is frequently better than depreciation since the land cannot be
depreciated.

6. By selling property at profit after development, seller acquires immediate use of additional cash.
Repayment is actually in rent paid over time in constantly inflating dollars.

7. For companies working under government contracts that call for cost plus a fixed fee, rent is an allowable
expense item but mortgage interest is not. (This is why many aircraft, electronic, and other defense plants
are leased rather than owned.)

Some advantages of sale-leaseback to buyer/lessor may be:

1. Transaction results in a long-term, carefree investment.

2. Property values may appreciate.

3. Lease payments may be higher than the mortgage payments. Lease payments may help pay off the
mortgage and lessor will still have title to the property.

4. Investment will not be paid off prematurely, as mortgages often are through refinancing. Investor will not
have to seek another good investment to replace the one prematurely paid off.

5. Lease terms often give lessor a claim against other assets of the lessee in the event of a default.

Sales Contract (Land Contract)

With certain exceptions, a real property sales contract is an instrument by which the seller (vendor) agrees to
convey title to real property after the buyer (vendee) has met certain conditions specified in the contract and
does not require conveyance within one year.

This device, variously designated ‘‘Installment Sales Contract,” “Agreement to Convey,” “Agreement for
Purchase and Sale,” “Land Sale Contract,” or “Land Contract of Sale,” must meet the requirements set forth in
Section 2985, et seq. of the California Civil Code.

Historically, the primary advantage of this instrument to a seller was the ease with which seller could eliminate
purchaser’s interest in the event of default. This advantage was considerably weakened by the court’s
conclusion, in Barkis v. Scott (34 Cal. 2d 116, 208 P. 2d 367), that California Civil Code Section 3275 was a
sufficient barrier to harsh and unreasonable foreclosure proceedings. After Barkis v. Scott, other cases have
expanded the remedies of defaulting vendees to include even willfully defaulting persons, which has effectively
taken away the automatic power of sale.

When selling a parcel of land under a sales contract which is not recorded, the seller is prohibited from
otherwise encumbering the parcel to an aggregate amount exceeding the amount due under the contract without
the written consent of the purchaser. This may be risky to a buyer with an unscrupulous seller.

A real property sales contract must recite the number of years to complete payment and, if a tax estimate is
made, the basis for it.

When selling real property under a real property sales contract, the seller must apply installment payments first
to payment(s) due on an obligation(s) secured by the property. The seller must hold in trust payments received
for taxes and insurance and use those funds only for those purposes, unless the payor and the holder of an
encumbrance on the property agree to some other use of those funds.

A real property sales contract for purchase of real property in a subdivision must clearly set forth the legal
description of the property, all the existing encumbrances at the date of the contract and the terms of the
contract.

The advantage which a land contract may have held as a security device seems to have dissipated in favor of the
use of a deed of trust with power of sale.

Disadvantages to buyer. The disadvantages of a sales contract to the buyer are:

1. The contract may include covenants restricting its assignment or transfer.

2. Most financial institutions regard a land contract as poor collateral.

3. Buyer has no assurance that the seller has good title at the time the contract is made. The buyer cannot
rescind the contract for this reason.

4. If, prior to full performance by the buyer and conveyance by deed, the seller is:

• adjudicated a bankrupt;

• dies, with title passing to heirs; or

• is adjudicated an incompetent;

the buyer can expect time-consuming, frustrating, and expensive litigation before obtaining a deed and
policy of title insurance.

5. After full performance, the buyer may receive defective title or no title at all, although normally the
contract will require delivery of a policy of title insurance. The buyer may have to pay the premium for
this.

Many of these disadvantages are largely eliminated by using a contract secured by a deed of trust or a three-
party instrument, where a trustee is appointed in the same way as in a deed of trust, coupled with title insurance
insuring the equitable title of the vendee and the legal title of vendor.

Prepayment. A buyer shall be entitled to prepay all or any part of the balance due on any real property sales
contract entered into on or after January 1, 1969 with respect to the sale of land which has been subdivided into
a residential lot or lots which contain a dwelling for not more than four families. Provided, however, that the
seller, by an agreement in writing with the buyer, may prohibit prepayment for up to a 12-month period
following the sale. Any waiver by a buyer of this provision is contrary to public policy and thus unenforceable
and void but would not affect the validity of the remainder of the contract.