Why Is Owner Financing an Excellent Alternative for Land Sellers?
Frequently, the dream of many Colombians and people worldwide is to have a place of their own, whether a property or a land lot in which to build their dream home. However, for many people, this dream is beyond reach, as real estate is very expensive. For this reason, today, we want to discuss options and alternatives to acquire a property or lot in Colombia through financing or payment plans.
There are financing options available to purchase or sell real estate in Colombia when the buyer does not have the money upfront. Each of these options has advantages and disadvantages, so the alternative that best suits your situation may vary depending on your circumstances.
Leasing as a form of financing for the purchase of properties or land in Colombia
Leasing is a mechanism used by financial entities as an alternative to financing when a client or applicant intends to acquire an asset in possession of the financial entity. In this scheme, the buyer commits to making periodic payments over a set period, in return for which the financial institution delivers the asset to the client for their use and enjoyment for an agreed period, granting them a purchase option in the agreed period.
Leasing offers multiple advantages for buyers and the financial entity selling the property:
In the first place, the possibility of using and enjoying the asset without having to spend its full purchase price is a great advantage, which allows buyers to better evaluate the suitability of the property for their intended purposes. Additionally, as the property title is in the bank’s name, it is not counted among the buyer’s assets, freeing them from paying taxes for it. Also, if the client decides to exercise their purchase option, the purchase is made for a price agreed at the beginning of the lease, which is significantly lower than the property’s value as it takes into account the lease payments as an advance. Usually, the agreed purchase price does not exceed 30% of the commercial value of the property.
One of the advantages for the financial entity that owns the property is that the lease carries higher interests than a conventional credit, translating into greater long-term profitability. Also, as this type of deal is more flexible than a direct purchase, leasing provides greater agility in selling the property. There is always the possibility of the property returning to the entity if the client does not want to acquire the property or fails to comply with the obligations agreed in the contract.
Purchase option as a financing mechanism for real estate property and land
A purchase option is a legal mechanism in Colombia which, while not an alternative to financing, can have a similar effect. A real estate purchase option allows a potential buyer to pays a set amount of money to the seller of a real estate property to be granted exclusive purchase rights on the property. Additionally, the potential buyer assumes the obligation to pay the purchase price’s balance within a period agreed on in the contract. Once the purchase option is signed, it becomes irrevocable. However, for a purchase option to be valid, it must be in writing and have both parties’ signatures. It must indicate the amount paid and the term for paying the balance.
So, although a purchase option is not a form of financing, it allows the buyer to secure the property for a certain time while securing the rest of the funds to conclude the purchase. One of the advantages of purchase options for the buyer is that they don’t have to pay interest on the balance and that the agreed sale price is final. However, if the buyer changes their mind or cannot pay the balance on time, the initial deposit is irrevocably lost.
Another point is that to consider is that during the time it takes for the purchase to be closed, the property remains in the name of the seller, who can still use and enjoy it.
A mortgage as an alternative to finance a real estate or land purchase
Another alternative for sellers for closing a sale is a mortgage, which is useful when a potential buyer wants to acquire the property but does not have the funds for direct purchase and does not want to take a bank loan. A direct mortgage establishes a promise of sale through a down payment instead of a full payment of the land’s price. A mortgage deed is elaborated, which transfers property owner from seller to buyer, under the condition of paying the property price’s balance in a time and form agreed between them. The consequence of the buyer’s breach is that the seller may enforce the debt by repossessing the mortgage collateral, which is the property itself.
If you’d like to own land in Colombia, be sure to get in contact with us today. We have land scouts on the ground searching for the best Colombian land deals. Not only does Tycoon.to help with sourcing the best land deals, but wfe also offer owner financing allowing you to pay a small down payment and then reasonable monthly payments. We’ll hold your hand through the entire land purchase process.