General

Very generally all residential real estate transactions can be broken down into two types of transactions.  There are conventional and non-conventional.  We use the term "non-conventional" so as not to be pejorative.  

In conventional transactions the buyer obtains his own financing and pays off the indebtedness of the seller.  In non-conventional transactions the buyer typically does not obtain his own financing and instead purchases the property "subject to" the underlying indebtedness placed on the property by the seller.  

History

Conventional transactions are more common than non-conventional.  There is a centuries old tradition and body of law regarding conventional transactions.  They typically involve real estate agents, most of the time two agents, one working with the seller, the other working with the buyer.  It is common practice to enter into a Purchase and Sale Agreement.  This agreement typically provides for a closing date which is to occur in the future, most of the time within 10-60 days from the date of entering into the agreement.  

Non-conventional transactions have been around for less time.  It is certainly true that there is Georgia case law from the 1800s reporting non-conventional transactions.  However, most of the increase activity in non-conventional transactions can be traced to the 1970s.  In the United States in the 1970s we experienced a significant increase in interest rates that was historically abnormal.  By the end of the decade interest rates for residential real estate loans had climbed significantly into the double digits and topped out in the high teens in the very early 1980s.  As rates climbed dramatically buyers and sellers of real estate began to look for creative ways to structure transactions and keep the underlying, typically lower interest rate loans in place.   They typically resorted to the non-conventional transaction in which effectively the buyer obtained a deed from the seller without paying off the seller's note.  Investors began using this technique of purchasing property "subject to" the seller's note to a lender.  Many people entered the business of providing real estate investment advice and began recommending that investors focus their activities in "subject to" investing, touting the lower interest rates on existing loans together with the opportunity to invest with "no money down." 

Non-conventional transactions are now commonplace when one party is a real estate investor.  Most often no real estate agent is involved.  Sometimes there is a Purchase and Sale Agreement but frequently the investor has been advised to get a deed if he can get one and many times the investor does get a deed, obviating the need for a Purchase and Sale Agreement.  The Purchase and Sale Agreement envisions a closing weeks after it signing.  If an investor gets a deed from the seller there is no reason to enter into a Purchase and Sale Agreement.   

Risks

The risk to the sellers in non-conventional transactions is that they remain liable on any promissory note they have signed.  If the buyer fails to pay the seller's note timely it adversely affects the credit of the buyer.  If the buyer ceases paying on the seller's note altogether, the property ends up in foreclosure, and at the least the seller's credit is substantially damaged.  

Buyers particular investor buyers that get the deed over the coffee table, so to speak are also exposed to risks.  With a Purchase and Sale Agreement and subsequent closing in an attorney's office there are many safeguards built into the process for the buyer.  They primarily revolve around the fact that there is a closing, a lawyer is involved, a title examination is performed, title insurance is obtained, and before the closing any title problems that have been identified are resolved.  

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Last modified: December 05, 2006