(almost) Death of Seller Financing
In some cases, seller financing is what is necessary and beneficial for both the buyer and seller to come to an agreement and successful sale.
In this webinar, Clint Coons explains the SAFE Act as well as the implications of the Dodd Frank Act that will affect us. Lease option agreements are not affected (good!) but there are changes that will come about that we all need to be aware of.
Here are some notes I took:
SAFE Act addresses seller financing on a temporary basis.
The SAFE Act was designed to keep people in their homes, and is controlled by HUD (Federal Housing and Urban Development).
Basically, the loan originator must be licensed if they benefit from the sale, and if the sale is to an owner occupant (homeowner). Lease options are okay to do – so long as it doesn’t “look” like a mortgage, i.e. balloon payment, x% interest, etc.
If you are selling your own residence or inherited property, you are exempt from the SAFE Act, and can do seller financing.
Investors are exempt from the SAFE Act unless they do seller financing as a commercial venture, or have “habitualness” of the activity of seller financing.
If seller financing is the majority of the investor’s real estate plan, then should get licensed or use a licensed loan originator (mortgage broker) to facilitate the loans.
The Dodd Frank Wall Street Reform Act was enacted after the SAFE Act, dealing with the same issue but taking it away from HUD and putting into the Consumer Finance Protection Bureau jurisdiction effective January 21, 2013.
Applies to sale of ALL property (even your own personal residence) if the buyer will use the house as their residence. Does not apply to commercial or investor buyers.
It is a stricter broader Act affecting us as real estate investors with the following rules:
no more than 3 transactions per year
seller did not construct the home
must be fully amortized at market rate
on effective date of 1/21/13, will pick up on existing or old loan agreements when the current term of the existing loan expires
This Act can be changed at any time. Severe penalties if Act is violated. Up to $1 million per day, non-compliance is a felony. The message seems to be – become licensed, or use the services of a loan originator.
One solution Clint mentioned is hold the property in an LLC, and then sell the buyer the LLC. Or have the buyer form a LLC and they buy the property in the name of the entity. This makes it more of a business transaction to prove the buyer is not using the property as his personal residence.