Purchase and sale with deferred payment: How to protect the seller?
Real estate sales with deferred payments require a very well thought-out strategy to avoid, or at least be prepared for, possible eventualities, especially when the buyer wishes to take possession of the property before completing the full payment. This scenario, frequent in transactions with foreign buyers, poses significant risks for the seller who, on occasion, does not want to lose this sales opportunity.
Deferred payment real estate sales can be tempting for both sellers and buyers. However, these arrangements are not without risk, especially for the seller. These types of transactions are usually not advisable for the seller, although there are some special cases in which it is advisable to accept this type of agreement.
Reasons for accepting a deferred payment offer
- The buyer's offer is considerably higher than what we consider we could obtain in future offers.
- The property has some legal irregularity or physical defect that minimizes the options of the sale.
- Tax advantages for the selling party, for example if the property belongs to a company that prefers to ensure the sale of the property now but is not interested in invoicing 100% of the amount in the same fiscal year.
- If, as the selling party, we consider that the price of the property is going to fall in the next few months and we do not want to risk having to lower the price in order to accept a lower offer.
The Risks for the Seller
However, as a seller, it is very important to be aware of the risks you are exposed to if you have decided to accept a deferred payment offer. Here are the main dangers to be aware of:
- Payment Default: The buyer may face future financial difficulties, preventing him from completing the agreed payment.
- Damage to the Property: Once the buyer occupies the property, there is a risk of deterioration or damage that could reduce the value of the property.
- Changes in the Real Estate Market: Market fluctuations may result in a sale below the actual market value at the time of the final transaction.
- Precarious situation of the occupant: if the buyer defaults on the established payments but does not leave the property, he/she becomes a precarious occupant who will have to be evicted.
As we have just seen, there are several types of risks that we have to face, but the one that entails the greatest risk is the combination of points 1 and 4, that is to say, not receiving the agreed payments and that the buyer does not abandon the property by mutual agreement due to non-compliance with the payment conditions.
How to carry out this type of sale and purchase in a safe manner
When a seller comes to us to manage the safe sale of a real estate property with deferred payment we have two strategies, to be addressed depending on the particular circumstances of each transaction:
- Rental with option to buy.
- Deferred purchase of the property.
Both options have their pros and cons but, to simplify this post, we are going to focus on being protected against the risk of non-payment and subsequent precarious situation of our possible unsuccessful buyer.
The rental contract with option to buy offers us more guarantees when it comes to recovering the property than the deferred purchase contract, since it is quicker to evict a tenant for breach of contract than the procedure to recover the property in the case of the deferred purchase of the property.
On the other hand, a rental contract with option to buy allows the seller to remain the legitimate owner of the property until the total fulfillment of the contract; in this way he is protected against possible seizure annotations caused by the buyer since the property cannot be registered in his name. Neither will he be able to sell it to a third party before completing the payments since he cannot register it in his name.
In the case of the deferred purchase, it could also be protected against the risk of the buyer selling the house to a third party before completing the agreed payments. For this purpose, a "resolutory condition" must be agreed in the deed as a guarantee of the outstanding amounts. In addition, this resolutory condition allows to demand the fulfillment of the payment or its resolution, as foreseen in articles 1124 and 1405 of the Civil Code.
Establish an initial premium
Regardless of whether you carry out this transaction through a lease with option to purchase or a deferred purchase, the seller would be taking your property off the market on the basis of a promise of future payment, therefore it is recommended to establish a high first down payment, of at least 10% of the total sale price.
In addition, before transferring the use of the property to the buyer, we recommend that an additional 30% of the total price has been received, totaling 40% of the total price, leaving the remaining 60% dependent on the rental payments in a period not exceeding 3-5 years (if it is a lease with option to buy), or the remaining payments in an agreement not exceeding 2 years maximum (for the deferred purchase).
In this way, we cover ourselves against buyers acting in bad faith and possible swindles, since it is difficult for a buyer to want to incur in a breach of contract by losing 40% of the total price and knowing that sooner or later he will be evicted.
Other protective measures
To protect their interests, sellers should consider:
- Detailed Contracts: It is crucial to have a well-drafted contract that clearly specifies the terms of the agreement, including the consequences of breach.
- Security and Warranties: Requesting collateral such as an escrow mortgage or significant deposit can provide additional security.
- Expert Advice: Consulting with real estate attorneys is essential to cover all legal and financial aspects of the deal.
Sellers should be thorough and cautious. Evaluating the buyer's creditworthiness and considering all possible consequences before proceeding with the sale is essential. In addition, staying informed about the real estate market and relevant laws is crucial to making informed decisions.
Deferred payment real estate sales require careful consideration and thorough preparation. By being aware of the risks and taking appropriate steps to mitigate them, sellers can successfully navigate these transactions. At Valido Home, we offer expert advice and support to help sellers make safe and profitable sales.
Miguel S. Moreira
Miguel is a trained architect and building engineer with a ample experience in the real estate sector. He is the co-founder of Valido Home and loves to inform about the risks involved in purchasing property in Spain.
