Non-Mortgage Alternatives to Real Estate Financing

Non-Mortgage Alternatives to Real Estate Financing

There are a variety of ways to acquire real estate interests without using mortgage financing. With the exception of the real property sales contract, these methods are available only to large financiers, very strong tenants or substantial  institutions.

An all-cash purchase is an obvious alternative to mortgage financing. However,  it  is  often difficult for an individual to raise substantial sums of money and protect against unlimited liability.


Syndicates afford small investors opportunities to invest in high-yield real estate. A syndicate offers knowledge of values and the ability to find, organize and manage a successful venture.


A straight bank loan can be used to purchase real property. The borrower  obtains  the loan based on good credit or on some type of collateral (stocks, bonds, personal property) other than the real property.


Large, well-rated corporations can sell stocks or general obligation bonds in order to purchase real property without using a mortgage.


This is a good approach if the property is usable as is. If the lessee is leasing only the  land and has to pay for construction of improvements, the investment will probably be larger than buying improved property with a mortgage.

Advantages to the tenant are:

  • One hundred percent of rent is deductible as expense. (If property was owned, only the improvements would be )
  • Money freed for other uses can frequently be used more
  • Tenant’s total debt load is not increased. Disadvantages to the landlord are:
  • Often cannot find good tenants willing to
  • Tenant having a high credit rating at beginning of lease may go “sour” in a few
  • Tenant may improve property with special purpose development and then go bankrupt
  • Tenant may go bankrupt before completing construction, leaving landlord with unsaleable and unleasable


A trade or exchange of properties can be an alternative to mortgage financing, if the properties are not mortgaged and the trade is made without  financing.


A sale-leaseback is a popular  option  for  companies with  excellent credit. Also   termedpurchase-lease, sale-lease, lease-purchase or  leaseback.

Some advantages of sale-leaseback to seller/lessee are:

  1. Property is suited to
  2. Working capital not tied up in fixed
  3. Since leases are not considered long-term liability, rent is 100  percent  tax deductible. Lease term is often longer than mortgage. Balance sheet looks better and credit is
  4. Often more capital can be raised than by
  5. Writing off 100 percent of lease payments is frequently better than depreciation  since the land cannot be
  6. By selling property at profit after development, seller acquires immediate use of additional cash. Repayment is actually in rent paid over time in constantly inflating dollars.
  7. For companies working under government contracts that call for cost plus a  fixed  fee, rent is an allowable expense item but mortgage interest is not. (This is  why many aircraft, electronic, and other defense plants are leased rather than  )

Some advantages of sale-leaseback to buyer/lessor are:

  1. Transaction results in a long-term, carefree
  2. Property is likely to
  3. Usually, the lease payments are higher than the mortgage    Lease payments will pay off the mortgage and lessor will still have title to the property.
  4. Investment will not be paid off prematurely, as mortgages often are through refinancing. Investor will not have to seek another good investment to replace the one prematurely paid
  5. Lease terms often give lessor a claim against other assets of the lessee in the event of a


A real property sales contract is an instrument by which the seller (vendor) agrees to convey title to real property after the buyer (vendee) has met certain conditions specified in the contract and which does not require conveyance within one  year.

If a buyer can make only a small down payment and monthly installments,  a  real  property sales contract may be appropriate.

This device, variously designated ‘‘Installment Sales Contract,”  “Agreement  to  Convey,” “Agreement for Purchase and Sale,” “Land Sale Contract,” or “Land Contract  of Sale,” must meet the requirements set forth in Section 2985, et seq. of the California Civil Code.

Historically, the primary advantage of this instrument to a seller  was  the  ease  with which seller could eliminate purchaser’s interest in the event of default. This advantage was considerably weakened by the court’s conclusion, in Barkis v. Scott (34 Cal. 2d 116, 208 P. 2d 367), that California Civil Code Section 3275 was a sufficient barrier to harsh and  unreasonable  foreclosure  proceedings.  After  Barkis  v.  Scott,  other  cases     have expanded the remedies of defaulting vendees to include even willfully  defaulting  persons.

When selling a parcel of land under a sales contract which is not recorded, the seller is prohibited from otherwise encumbering the parcel to an aggregate amount exceeding the amount due under the contract without the written consent of the  purchaser.

A real property sales contract must recite the number of years to complete payment and,  if a tax estimate is made, the basis for  it.

When selling real property under a real property sales contract, the seller must apply installment payments first to payment(s) due on an obligation(s) secured by the property. The seller must hold in trust payments received for taxes and insurance and use  those funds only for those purposes, unless the payor and the holder of an encumbrance on the property agree to some other use of those funds.

A real property sales contract for purchase of real property in a subdivision must clearly set forth the legal description  of the property, all the existing encumbrances at the date   of the contract and the terms of the  contract.

Except in the special area of large land developments, the advantage which a  land contract may have held as a security device seems to have dissipated in favor of the use   of a deed of trust with power of sale.

Disadvantages to buyer. The disadvantages of a sales contract to the buyer  are:

  • The contract may include covenants restricting its assignment or
  • Most financial institutions regard a land contract as poor
  • Buyer has no assurance that the seller has good title at the time the  contract  is  The buyer cannot rescind the contract for this  reason.

If, prior to full performance by the buyer and conveyance by deed, the seller is:

  • adjudicated a bankrupt;
  • dies, with title passing to heirs; or
  • is adjudicated an incompetent;

the buyer can expect time-consuming, frustrating, and expensive litigation before obtaining a deed and policy of title insurance.

  1. After full performance, the buyer may receive defective title or no title at all, although normally the contract will require delivery of a policy of  title insurance. The buyer may have to pay the premium for

Many of these disadvantages are largely eliminated by using a contract  secured  by a  deed of trust or a three-party instrument, where a trustee is appointed in the same way as in a deed of trust, coupled with title insurance insuring the equitable title of the vendee  and the legal title of vendor.

Prepayment. A buyer shall be entitled to prepay all  or  any part  of  the balance due on any real property sales contract entered into on or after January 1,1969 with  respect  to the sale of land which has been subdivided into a residential lot or lots which contain a dwelling for not more than four families. Provided, however, that the seller, by an agreement in writing with the buyer, may prohibit prepayment for up to a 12-month period following the sale. Any waiver  by a buyer  of this provision is contrary to public policy and thus unenforceable and void but would not affect the validity of the remainder of the contract.



Agents in  real  estate transactions involving  both  personal  and  real  property must be familiar with the transfer and encumbrance of personal property. Because it is often difficult to determine whether or not a particular item affixed to  real  property  is  a fixture, the obligation should be secured by both a trust deed/mortgage and a personal property security instrument (mixed security).

Upon default and foreclosure of real property, Code of Civil Procedure Sections 580(b), 580(d) and 726 prevent or limit a deficiency judgment. No  antideficiency  limitation exists in a personal property foreclosure.

Business opportunities. Business opportunity brokers are routinely involved in personal property transactions which must fully satisfy the Bulk Sales Law (Uniform Commercial Code, Division 6) and the secured transaction statutes (Uniform Commercial Code, Division 9). Assets of a business are commonly used as collateral to create a security interest in the seller or lender.

Just as a trust deed or mortgage encumbers real property as security for an obligation (debt), a “security agreement” creates a security interest in personal property.

To protect “or perfect” the interest created by a security agreement, as against other security interests and/or lien creditors or subsequent purchasers, a Financing Statement (UCC-l) is usually filed. In most cases, a security interest is perfected when it has attached and been properly filed with the appropriate filing  officer  (the  Secretary of State in Sacramento or the appropriate county recorder).

A security interest attaches when:

  • there is agreement by the parties that it attach;
  • value has been given; and
  • the debtor has acquired rights in the

Once perfected, the secured party’s interest is protected against the debtor’s other creditors.

The Financing Statement should not be confused with  the  actual  security agreement. The security agreement creates the security interest.

Although a written  agreement is not necessary where the collateral is in  the possession  of the secured party as a pledge, a security interest is usually not enforceable unless there is a written security agreement, signed by the debtor, describing the collateral.

Uniform  Commercial Code (UCC)—Division 9

Division 9 (entitled “Secured Transactions, Sale of Accounts, Contract Rights and  Chattel Paper”) of the Uniform Commercial Code (UCC) contains the unified and comprehensive scheme for regulation and control of the sale, creation and priority of all liens and security interests in personal property. It covers a  transaction  in  any  form which is intended to create a security interest in personal property, including goods, documents,  installments,  chattel  paper,  accounts or  contract  rights  and  similar items.

The security interest gives the secured party the right to foreclose and apply the sale proceeds toward the satisfaction of the secured obligation if the debtor defaults.

Purpose of the UCC. The basic purpose of the Uniform Commercial Code is to provide  a simple and unified structure within which the immense variety of secured financing transactions can be completed.

As amended over the years, the UCC comprises a uniform, clear and easily available set of rules for the conduct of commercial intra- and interstate  transactions.

Filing system. Under the UCC, a Financing Statement, properly filed, perfects a security interest. Absent a filed Financing Statement, subsequent purchasers without actual knowledge of the security interest might acquire property free of the prior security interest. On the other hand, a secured party who does file is in most cases protected from the interests of subsequent purchasers. UCC records are indexed by the true name of the debtor.

Place of filing. The proper place to file in order to perfect a security interest is  as  follows:

  • When the collateral is consumer goods, in the office of the county recorder in the county of the debtor’s residence or, if the debtor is not a resident of this state, in the office of the recorder of the county in which the goods are
  • When the collateral is crops growing or to be grown, timber to be cut or minerals or the like (including oil and gas) or accounts subject to subdivision (5) of  Section 9103, in the office where a mortgage on the real estate would be
  • In all other cases, in the office of the Secretary of

The proper place to file in order to perfect a security interest in collateral, including fixtures, of a transmitting utility is the office of the Secretary of State. This filing also constitutes a fixture filing as to the collateral described therein which is or is to become fixtures.

For filing purposes, the residence of an organization is its place of business if it has one  or its chief executive office if it has more than one place of business.

The proper place to file a financing statement as a fixture filing is in the office where a mortgage on the real estate would be  recorded.

Any subsequent filings such as Statements of Continuation, Termination, Release, Assignment and Amendment must be filed in the same location as the original Financing Statement.

Erroneous filing. A filing made in good faith in an improper place or not in all of the places required is nevertheless effective with regard to any collateral as to which the  filing complied with the requirements and is also effective with regard to  collateral covered by the financing statement against any person who has knowledge of  the  contents of the financing statement.

Change in debtor’s/collateral’s location. A filing which is made in the proper place in this state continues effective even though the debtor’s residence or place of business or  the location of the collateral or its use, whichever controlled the original filing, is thereafter changed.

Proper filing. Presentation for filing of a Financing Statement, tender of the filing  fee and acceptance of the statement comprise filing under the  code.

Duration of filing. A Financing Statement is effective for five years from the date of filing. For extension, the secured party must file a Continuation Statement any time  within the six-month period preceding expiration. Succeeding Continuation Statements may thereafter be filed in the same manner to continue the effectiveness of the original Financing Statement.

Filing information. If the Standard Form UCC-l or UCC-2 is used for filing, the filing officer will note the file number and date and hour of filing and return the acknowledged copy to the person or firm indicated in the box at the bottom of the standard form. If a non-standard form is used, the filing party must request an acknowledgment and  send  the filing officer a duplicate copy of the form filed, which will be acknowledged and returned.

The Secretary of State will furnish a certificate showing whether there is on file in its office any presently effective Financing Statement, naming the Debtor and, if there is, giving the date and hour of filing of each such statement and the names and addresses of each secured party named therein. This information and copies of  the  pertinent financing statements may be obtained by filing a Request for Information or Copies form (UCC-3) with the Secretary of State.


One purpose of the Uniform Commercial Code Division 9 is to give lien rights to providers and installers of fixtures. A provider’s perfected security interest in  fixtures  has priority over the conflicting interests of owners and subsequent encumbrancers [Section 9313 (4) ].

A secured creditor who is first to make a proper filing has priority, regardless of when his/her claim arose. However, Sections 9301(2) and 9312(4) grant sellers special priority on purchase money security interests when perfected within 10 days of the purchaser’s receiving possession of the collateral.

Section 9312 of the UCC sets forth the basic rules of priority among conflicting security interests in the same collateral and Section 9313 gives the priority rules for liens of  a  trust deed and other fixture filings.

Failure to File

If a Financing Statement is not filed, subsequent purchasers and secured parties without actual knowledge of it take the property free of the prior security interest. Section 9201 provides, however, that the (unperfected) Security Agreement is still valid between the debtor and secured party.

Escrow  – Early Filing

A Financing Statement may be filed before a security agreement is made or before a security interest otherwise attaches. In an escrow for a bulk sales transaction there is  often need to promptly perfect a seller’s purchase money security interest to establish priority over other liens which will be perfected when the legal ownership changes. An escrow holder often files a Financing Statement to perfect the seller’s interest before escrow closes. (If escrow fails to close, the escrow holder files a UCC-2 Termination Statement to remove the UCC-l from the record.)

Fixture Filings

Under the UCC, tangible personal property includes “goods” and personal property deemed fixtures under the law, meaning goods which are so related to particular real property that an interest in them arises under real estate law. However, ordinary building materials to be incorporated into a building are not deemed  fixtures.

A security interest in fixtures can be created by (1) specific provisions included in a trust deed or mortgage secured by the real property or (2) a fixture filing in the form of a Financing Statement. Both must be recorded in the county where the real property is located.

In either case, to qualify as a fixture filing, the instrument must  contain:

  1. a description of the goods which are or will become fixtures;
  2. a legal description of the real property;
  3. a statement that the goods are, or will become, fixtures; and
  4. an assertion that the statement will be recorded in the county where the  real  property is

A fixture filing in the form of a Financing Statement is a lien on the fixture for 5 years from the date of filing, unless a Continuation Statement is recorded prior to expiration to extend the Financing Statement/lien an additional 5 years. A fixture filing in the form of   a trust deed or mortgage is effective as long as the trust deed or mortgage remain a   lien.

As to enforcement, a fixture filing in the form of a Financing Statement is enforced according to the provisions for personal property secured interests in the UCC. If the fixture filing is contained in a trust deed or mortgage, the secured party has the option of proceeding under the UCC to enforce the lien or by foreclosure proceedings under the trust deed/mortgage to enforce the lien on both the real and the personal  property.

UCC 9402 provides:

  • a Financing Statement form to be used as a fixture filing;
  • the formal requisites of a Financial Statement; and
  • amendments and contents of a mortgage to be used as a Financing

A copy of a security agreement signed by the debtor is sufficient as a  Financing  Statement if it contains all the information required by Section  9402.


This discussion of the Uniform Commercial Code should not serve as a substitute for:

  • statutory analysis when dealing with specific problems;
  • consultation with legal counsel on legal matters; or
  • proper financial advice on banking or financing