How Real Estate Contracts Offer Flexible Financing Options

Real estate contracts are a versatile tool in owner financing, allowing buyers and sellers to structure deals without traditional bank loans. While commonly associated with residential properties, these agreements are also widely used for vacant land, commercial buildings, and family property transfers.

For sellers, these contracts provide a steady stream of passive income without the hassle of property management. For buyers, they offer a pathway to ownership when traditional financing isn’t an option.

This guide explores how real estate contracts work for commercial properties, vacant land, family transfers, and wraparound financing, helping both buyers and sellers maximize their opportunities.

Selling Commercial Properties with a Real Estate Contract

Many income-generating properties are sold using real estate contracts, offering property owners a way to convert real estate assets into passive income. For those who have spent years managing tenants, handling maintenance, and dealing with leasing agents, this approach provides financial stability without the burden of day-to-day management.

Rather than selling outright and taking a lump sum, a seller can finance the sale through a real estate contract and continue earning monthly income.

For example, an investor selling a $1 million commercial building could structure the deal with:

• A down payment of $100,000 to $200,000.
• Monthly payments of $7,500—replacing rental income with a structured payout.

This arrangement allows sellers to transition out of property management while maintaining steady cash flow, making it an ideal option for those planning for retirement.

Buying Vacant Land with a Real Estate Contract

Vacant land is another popular use for real estate contracts. Some buyers want to purchase land to build a home in the future, while others invest in land as a long-term asset.

For instance, a buyer might not be able to afford a house or developed property, but they can afford a piece of vacant land in a rural area. They make small payments toward the land over time, expecting its value to increase.

Sometimes, buying land is based on family advice or generational wealth-building strategies. A buyer might remember their grandfather saying that real estate is the key to wealth and choose to start by purchasing an affordable piece of land, knowing it could be worth significantly more.

Passing Down Property to Family Members

A real estate contract is also a great way to pass property to family members while ensuring financial responsibility. In many cases, when a loved one passes away, their property is inherited by family members.

Instead of selling the home to a stranger, the family may want to keep the property within the family but still require a structured payment plan.

For example, let’s say a family owns a home that was previously occupied by a parent or grandparent. They don’t want to give the home away simply, but they also don’t want to sell it to an outsider. Instead, they might use a real estate contract so that a nephew, son, or daughter can purchase the home over time.

This allows the family to:

• Keep the property in the family
• Ensure financial responsibility by requiring payments
• Gradually transfer ownership without an outright gift

This structure prevents situations where someone inherits a home without responsibility, which may lead to financial strain or mismanagement. Instead, the next generation earns ownership while still benefiting from the family’s existing real estate assets.

Understanding Wraparound Real Estate Contracts

A common misconception about real estate contracts is that a home must be fully paid off before it can be sold—but that’s not always true. A wraparound real estate contract allows a seller to finance a home for a buyer while still making payments on their existing mortgage.

Here’s how it works:

• The original owner still owes money to the bank.
• They sell the property using a real estate contract.
• The buyer makes payments to the seller, who continues paying off the mortgage.

Wraparound contracts work especially well for sellers with low-interest mortgages.

For example, let’s say a seller has an existing mortgage at 3.5% interest. They can sell the home using a real estate contract at 6% interest, creating a 2.5% profit margin on the financing.

Additionally, many loans from the late 2010s had historically low interest rates. If a seller has already paid 10 years into their mortgage, they are now paying mostly principal instead of interest. This means they can:

• Sell the home at today’s market value
• Earn interest on the financing
• Continue benefiting from their low-interest mortgage

Eventually, the buyer will either pay off the loan or refinance, completing the transaction. This strategy maximizes the seller’s return while giving buyers an alternative financing option.

Key Terms to Know in Real Estate Contracts

Understanding these key terms will help buyers and sellers navigate real estate contracts and their various applications:

Real Estate Contract

A legally binding agreement where the seller acts as the lender, financing the sale instead of requiring the buyer to get a mortgage from a bank. The buyer makes payments directly to the seller, and ownership transfers once the full balance is paid.

Owner Financing

A method of selling property where the seller provides the financing instead of a traditional lender. This structure allows the seller to set custom terms, including interest rate and loan duration.

Wraparound Real Estate Contract

A financing strategy where the seller continues paying their existing mortgage while also collecting payments from the buyer. The seller charges a higher interest rate than their original loan, profiting from the difference.

Balloon Payment

A large lump sum payment due at a specified point in the contract. Sellers may include this to collect a significant portion of the loan earlier.

Vacant Land Contract

A structured payment agreement used to purchase land, often for future development or long-term investment.

Commercial Real Estate Contract

A real estate contract used for selling income-producing properties, such as commercial buildings. Sellers often use this method to avoid property management responsibilities while still collecting passive income.

Principal and Interest Spread

In wraparound financing, the profit a seller earns when charging the buyer a higher interest rate than their own existing mortgage.

Memorandum of Real Estate Contract

A document recorded with the county to publicly acknowledge that a real estate contract exists. The buyer does not receive the deed until the contract is fully paid.

By understanding these key terms, buyers and sellers can better navigate real estate contracts and use them as a flexible financing tool.

Your Path to Smart Real Estate Financing Starts Here

Real estate contracts provide flexibility and great opportunities for both buyers and sellers. Whether you’re selling commercial property for passive income, buying vacant land for future plans, or passing down a family home, these agreements provide custom financing solutions without bank restrictions.

Plus, wraparound real estate contracts let sellers maximize their low-interest loans while giving buyers an alternative path to homeownership without the hassle of traditional bank financing.

Not sure where to start? Mike Schlichte and our team at Absolute Real Estate are here to help! We’ll walk you through the process and make sure your deal is set up for success. Reach out to Absolute Real Estate today to explore your options!