Buying a Home on Installment Requires Careful Consideration

Buying real estate on installment is an easy option if your income is low or you don't want to take out a bank loan. However, when using this method of purchase, you need to be very careful, explains ELUM Real Estate broker Mariliin Aarend.

"Installment purchase of an apartment or house has been mainly used in regions where incomes are low and property purchase prices are smaller," says Aarend. "At the same time, investors have also introduced such an option to sellers, making offers that they will pay 50% immediately and the rest over a five or ten-year installment plan."

The advantage of installment for the seller is primarily that they can still sell their property, which, due to its location, is not particularly liquid. The seller receives part of the money immediately, and the rest comes in through installments.

"Installment can be a good solution for real estate whose sale has been prolonged. For example, it may have many defects and documentation in disarray, or it is a dilapidated farmhouse in a remote location, whose value decreases over time," adds Mariliin Aarend.

For the buyer, the main reason for preferring installment is their low income, which does not allow them to get a loan from a bank. The seller and buyer can agree on different down payment amounts and payment schedules. There are also those who do not wish to deal with a bank themselves, or the reason is previous problematic financial behavior.

Multiple risks

However, with installment purchases, you need to be very careful. "It is a financial risk to the seller, as they do not receive the full amount immediately, and inflation also affects the income received. The buyer, on the other hand, must realize that they become the owner of the property only when the full amount has been paid," explains the broker.

All contracts must be notarized. There are cases where people do not conclude their transactions at a notary's office, but put agreements, including the sales transaction, on paper and sign them. This is not sufficient and may later be void in court.

"In addition, if a bank mitigates many risks when buying a home with a bank loan, then when using installment purchases, the parties must think through all the risks and steps themselves," concludes Mariliin Aarend.