Creative Finance in Oklahoma Real Estate

Real estate investing has become a mainstream and reliable way to build wealth, but traditional financing methods aren’t always accessible or desirable for every investor or buyer. Creative financing strategies allow buyers and sellers to structure deals outside of conventional bank lending, creating opportunities that might otherwise be unavailable.

We regularly see several popular creative financing strategies for real estate purchases, including Contract for Deed, Lease to Own, Rent to Own, Seller Financing, and Subject-To Transactions. We also see rental strategies such as rental arbitrage. Some of these strategies can be more attractive than traditional real estate financing in certain situations, but each carry unique risks that parties must know before signing agreements.

Contract for Deed

What is a contract for deed?

A contract for deed (sometimes called an installment land contract) is a type of real estate agreement where the buyer makes payments directly to the seller over time, but the seller retains the legal title to the property until the buyer has paid in full. Once all payments are complete, the seller transfers the deed to the buyer. If the buyer defaults on payment obligations, the most common seller recourse is to terminate the contract and retain all payments made by the buyer.

Top benefits of a contract for deed

• Easier access to purchasing equity in a property for buyers whop may not qualify for traditional bank loan mortgages
• Faster initial closing process with fewer banking and lending requirements

Top risks of a contract for deed

• The buyer is typically not adequately protected with negotiating power or consumer protection standards
• Sellers will be required to foreclose on the buyer in court in order to clear title and terminate the contract for deed (most sellers think they can avoid this, which may be possible in other states but is not possible in Oklahoma)

Real estate lawyer’s take on contract for deed agreements in Oklahoma

The reason this is faster and easier to close than traditional financing is that contract for deed parties do not honor or comply with the consumer safeguards which have become strong protections under federal law. This means lack of protection for buyers. Contract for deed sellers who haven’t experienced a defaulting buyer yet will inevitably be frustrated when they do – Oklahoma laws treat contract for deed arrangements as a sale at the time of commencement with a mortgage back to the seller (i.e. seller financing).

While the parties often think they are able to simplify a basic transaction and not convey title to the property to the buyer until the payment schedule has been completed, courts will require foreclosure to correctly terminate the buyer’s equitable position in the property.

Lease to Own, Rent to Own

What is a lease to own agreement? What is a lease to own agreement?

People mean two different thinks when they talk about a lease to own or rent to own agreement.

First, some definitions of lease to own involves a tenant option; a tenant pays regular monthly rent in exchange for occupancy but also pays an up front lump sum for an option to purchase at a specified price at a later time. Under the purchase option contract approach, the tenant must exercise the option and close on a purchase of the subject property within a certain time. The option fee may be applied toward the purchase price, or may be treated as independent consideration for keeping the option open.

Second, some definitions of lease to own, also called rent to own, involves regular payment installments toward an agreed purchase price; the monthly payments include a partial purchase of equity, meaning the buyer’s equity position increases with each payment made. This structure is very similar to a contract for deed.

Top benefits of lease to own

• Buyers can “test out” a property before committing to purchase
• Sellers can provide a tenant a pathway to ownership while maintaining the benefits of rental property income

Top risks of lease to own

• The seller will be obligated to foreclose the buyer’s interest in the property if using a monthly payment installment method
• Buyers must be careful to comply with contract deadlines for exercising the option to purchase if using an option contract method

Real estate lawyer’s take on lease to own agreements in Oklahoma

Most lease to own parties want to leave their agreement language somewhat murky on purpose; they think it will help them reserve the right to evict a tenant who doesn’t pay, even under a lease to own agreement. However, extremely clear language is a much better approach. We often have to carefully review a lease to own agreement to determine what methods and terms were used before we can provide informed counsel on the parties’ rights upon default; this includes determining whether an option method or payment installment method was used, whether the option fee is refundable, whether the option fee will be applied to a purchase price, ensuring compliance with local landlord-tenant laws, etc.

Seller Financing

What is seller financing? How does it work?

In seller financing, the seller steps into the shoes of a mortgage lender and allows the buyer to make payments directly to the seller, instead of a bank. The seller transfers title to the buyer at the time of closing, and the buyer signs a promissory note (promise to repay the loan) and mortgage (publicly filed notice that the seller has a security interest in the property until repaid) in seller’s favor. Once the buyer fully satisfies the loan, the seller prepares and records a “notice of satisfaction of mortgage” in the county land records, releasing the mortgage.

Benefits of seller financing

• Easier qualification process for buyers compared to traditional bank loans
• Can lead to faster sales and higher selling prices for sellers
• Allows for flexible terms, interest rates, and repayment schedules

Risks of seller financing

• Seller is replacing a the traditional role of a bank, which is normally subject to heavy lending regulations in order to protect consumers, so individual sellers may not want to protect buyers in contract terms or actions
• Banks have strict prequalification requirements for traditional buyers, which the Seller may not require, leading to less secure loans
• If the buyer defaults on payments, a seller will have to foreclose on the buyer and force a sale of the property at auction to recoup the loan balance

Real estate lawyer’s take on seller financing transactions

While seller financing offers flexibility, it often ends up being more costly when a buyer defaults by failing to make all payments on time. Oklahoma is a lien theory state, so the seller must give a deed (title) to the buyer at the time the purchase is first made and the buyer begins to make payments in exchange for a lien (such as a mortgage); the seller cannot wait until after the payment schedule has been completed. Sellers should carefully verify the buyer’s financial capacity to reduce the risk of default.

Learn more about seller financing here.

Subject-To Transactions

A subject-to transaction, also known as a “sub-to”, occurs when a buyer takes over the seller’s existing mortgage without formally assuming it or notifying the mortgage lender of a transfer. The seller’s name remains on the mortgage, but the buyer makes the payments and takes control of the property. Some subject-to sellers will also use “wraparound” interest to make the buyer pay a higher monthly rate in addition to the mortgage rate in exchange for the risk absorbed by the seller.

Benefits of subject-to deals

• Buyers can acquire properties with little to no down payment
• Sellers have a chance of avoiding foreclosure by transferring ownership to a buyer who continues making mortgage payments
• Buyers can benefit from lower interest rates on existing mortgages

Risks of subject-to deals

• Closing a subject-to deal is a clear violation of the terms of almost any standard mortgage
• Any and all individuals or entities in the chain of ownership or attempted transfers will be named in a lawsuit by a bank that forecloses on the existing/original mortgage
• The seller will often have an issue with their debt-to-income ratio until the existing/original mortgage is completely satisfied

Real estate lawyer’s take on subject-to transactions

These transactions are legally complex and carry significant risks to all parties involved. To mitigate any risks, subject-to parties should work with an experienced real estate attorney to draft clear agreements that outline each party’s obligations and protections, consider using land trusts or other legal structures to mitigate due-on-sale risks, and conduct thorough title searches and due diligence before signing.

Learn more about subject-to transactions here.

Use A Real Estate Attorney for Your Creative Finance Deals

Creative financing strategies open up new opportunities for real estate investors and homebuyers, but they also come with legal complexities and risks. If you are considering a creative financing strategy for your next real estate transaction, consulting with an experienced real estate attorney is crucial.

Contact Avenue Legal Group for trustworthy legal advice and contract review to ensure your deal is structured for success.