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Dodd Frank and Lease Option!

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Thanh Nguyen

Real Estate Investor from Louisville, Kentucky

Nov 07 '13, 02:18 PM


I keep hearing all this crap... So will I or Will I not be able to do lease options and subject 2s with the DOD frank laws changing?



Bill G.

Real Estate Investor from Springfield, Missouri

Nov 07 '13, 02:26 PM
3 votes


You can do them all day long on commercial transactions.

If it is residential and there is any financing like a note with a sub-2, you'll need to comply.

A lease is not an issue, a straight option is not an issue, applying rents toward a purchase price or financing the option price is an issue.

ANY scheme that finances a purchase transaction is an issue in residential transactions.

There are a couple active threads up now on the issues. :)



Account Closed

Dallas, Texas

Nov 07 '13, 02:30 PM
2 votes


Thanh,

I suggest you talk with a lawyer, who is experience in the Dodd-Frank law not someone on the Internet that might know and might not.


Joe Gore



Thanh Nguyen

Real Estate Investor from Louisville, Kentucky

Nov 07 '13, 06:14 PM


@Bill G. Why do you say that we still can do lease option rent to own and only issues is apply rent toward purchase price. As I know that, Dodd Frank Act make buyers harder to get loan from the bank, meaning closing in the end of the term is mostly impossible. If we know it is hard to close in the end of the term and still do Wholesaling lease option, take money consideration and disappear, is that a right business to do?.



Brian Gibbons Verified Video

Wholesaler from Sherman Oaks, California

Nov 07 '13, 06:26 PM


A good link @Thanh Nguyen is http://www.greateraustinhomes.com/dodd-frank-safe-act-owner-financing-and-you/


Updated: 06:46PM, 11/07/2013

And this one http://www.asreb.com/skins/asreb/standard.aspx?elid=66&aid=318

Edited Nov 7 2013, 18:46


Medium_thinequitydealsBrian Gibbons, REISkills.com Mentoring
E-Mail: [email protected]
Telephone: 626 318 0599
Website: http://www.DontBeAOneTrickPony.com
Brian Gibbons - Free REI Resources - www.DontBeAOneTrickPony.com


Bill G.

Real Estate Investor from Springfield, Missouri

Nov 07 '13, 07:48 PM
4 votes


Originally posted by Thanh Nguyen:
@Bill Gulley Why do you say that we still can do lease option rent to own and only issues is apply rent toward purchase price. As I know that, Dodd Frank Act make buyers harder to get loan from the bank, meaning closing in the end of the term is mostly impossible. If we know it is hard to close in the end of the term and still do Wholesaling lease option, take money consideration and disappear, is that a right business to do?.

Misunderstood, if it's commercial, Dodd-Frank is not a concern.

No, it really doesn't making institutional lending "harder" just a little different. For example, qualifying ratios have been increasing making it easier to qualify, use to be 36% dti, now it's 43% and at a bank it can go higher.

Let me be clear, never apply rents toward a purchase price, you can search that here on BP and find several threads about the appraisal issues and what is allowed to be credited.

States do have exemptions for owners selling their owner occupied homes, pointed out in the link Bryan provided. Be careful about sources of information on the internet, but you'll see that on many sites, it's consistent from the CFPB sites, which is the best place to get information along with the Act (s). State sites will give you the specifics as to exemptions, don't read anything into what you read if it's not crystal clear.

While there can be exemptions, the lender will still need to comply with what we call prudent lending practices, there can be rules, like 43% dti ratios, but there can be compensating factors such as a borrower receiving future reliable income (might be rare) or debts falling off within 6 months. These are areas that are known to mortgage originators and loan officers, not so much with the public or even the best investors. Another example might be a co-signer not living in the property, in some cases such income or guarantees can be used, in conventional fannie mae lending, it's not.

While you can read a list of things you must have, name, ssn, income, contract with a sale price an a loan amount requested, you'll need more information and verification by certain documentation to actually justify making the loan.

So, reading a list as explained in the link provided, while correct, it won't put the average (or even above average) investor in a position to do underwriting.

Point is, to do those "exempt" seller financed notes, you, as a lender will be liable for the loan origination. You really shouldn't take on that liability if you are not trained in mortgage lending, you should still take the deal to a mortgage originator who is qualified to do the processing and origination.

Since balloon loans are out of the question now, you may want an incentive for the buyer to refinance (I know you're buying....) you can do an ARM, but I won't go there now, but the margin is 5% over several indexes that may apply.

Another issue is having any underlying mortgage that may have a balloon that a bank may make like a 180/60, meaning a 15 yr amortization with a 5 year balloon. If you sub-2 is done 2 years into that loan, the buyer will have an obligation to buy in 3 years or the lender will need to pay it off.

Seller financing is required to be fully amortized so that it can be paid off. The reason is that in the past seller financing was all about underwriting the loan to a point in the future where a borrower could qualify for new financing, this is even harder to do than simply approving someone for a loan under a loan program as they either qualify based on the rules that day or they don't. SF meant using a crystal ball looking into the future. To do that, the underwriter has to know the lending requirements to shoot for. This was obviously a problem as you had all kinds of people out there thinking they knew how to make a loan and they had a high failure rate as a group. While this still applies in many aspects, now that a loan is to be fully amortized, the Dodd-Frank issues actually make this aspect easier as to the tasks to overcome.

No, you certainly don't wholesale take money and step aside with a seller financed contract to be assumed. If you were instrumental in facilitating that deal you could be liable on many fronts.

The learning curve for these deals has gotten a lot longer, it's not as easy as any program or strategy claims on the surface. Seller financing is not dead, but it's more complicated for most everyone.

There is also the issue of collecting payments or loan servicing, to do that you'll need a license, so I'd suspect that these exempt loans that might be made will need to be immediately assigned to a loan servicer, there will be a fee.

And again, this is for those who are exempt, it won't really apply to an investor/dealer selling non-owner occupied homes, check you state laws. :)



Brian Gibbons Verified Video

Wholesaler from Sherman Oaks, California

Nov 20 '13, 01:25 PM


American Banker released this today about new mortgage forms from the CFPB

http://www.americanbanker.com/issues/178_223/cfpb-releases-final-rule-on-mortgage-disclosure-forms-1063777-1.html?ET=americanbanker:e17790:699372a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=AB_Washington_Regulatory_112013

Also see http://www.mortgagenewsdaily.com/11202013_cfpb_mortgage_rules.asp

Good download links there.



Medium_thinequitydealsBrian Gibbons, REISkills.com Mentoring
E-Mail: [email protected]
Telephone: 626 318 0599
Website: http://www.DontBeAOneTrickPony.com
Brian Gibbons - Free REI Resources - www.DontBeAOneTrickPony.com


Bill G.

Real Estate Investor from Springfield, Missouri

Nov 20 '13, 02:27 PM


LOL, Thanks again Brian.

"Mortgage Forms" are forms like the 1003 application, I was hoping for a new application....

"Mortgage Disclosures" are not to the underwriting or processing, but the Good Faith Estimate, Adjustable Rate Mortgage Disclosure, HUD-1, and the new, Know before you owe.

Again, this applies to lenders, RMLOs, not investors,



Aaron Junck

Real Estate Investor from Sioux Falls, South Dakota

Nov 26 '13, 07:18 PM
1 vote


So how will this all affect those of us that currently have properties that we have lease options on? Are they grandfathered in? or are we going to have a headache soon? I sure don't care to pay someone to collect rent in order to comply.



Aaron Junck, Premier Investments
Never stop moving forward!


Bill Walston

Real Estate Investor from Northeast TN, Tennessee

Dec 06 '13, 08:12 PM


Originally posted by @Aaron Junck:
So how will this all affect those of us that currently have properties that we have lease options on? Are they grandfathered in? or are we going to have a headache soon? I sure don't care to pay someone to collect rent in order to comply.

@Aaron Junck, Dodd Frank doesn't come into play until January 10, 2014 and applies only to contracts on or after that date. Contracts prior to that date are excluded.



Bill G.

Real Estate Investor from Springfield, Missouri

Dec 06 '13, 08:40 PM
1 vote


Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.

If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem.

I'd be getting with my "buyers" and explaining the new laws and how they are affected, they are involved too. Servicing is a big benefit to a buyer, educate them, split the cost, I'd say you could skate by making a modification in order to comply with new regulations. Get help! :)



Aaron Junck

Real Estate Investor from Sioux Falls, South Dakota

Dec 07 '13, 04:32 AM


awesome!

Don't collect the option consideration upfront and don't allow any rent credits to go towards the purchase price. :)



Aaron Junck, Premier Investments
Never stop moving forward!


Pat L.

Real Estate Investor from New York

Dec 07 '13, 05:00 AM


Originally posted by @Bill G.:
Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.
If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem. :)

@Bill Gulley

Quick question(s)...

I assume by a 'financing agreement' it includes Investment properties that you currently hold financing on. So as of Jan 1st, these are also required to go under the control of a lic servicer. Correct??

However, could the servicing requirement be avoided by adding a % ownership to title even though you hold the financing.???

e.g.:- together we buy a property (investment or OO), I finance it & show a % ownership recorded on title. Can I collect loan & escrow pmts or are we still required to go through a lic., servicer.??

thanks in advance.



Bill G.

Real Estate Investor from Springfield, Missouri

Dec 07 '13, 06:38 AM


Pat, had to think about that one, came close to saying I'd be speculating, but another sip of coffee gave me more confidence IMO to it's my guess the answer is no.

With a contract for deed, title is held 100% by the lending seller, the fact that a lender has an interest in title is irrelevant, it's a financing contract on residential property subject to the Act. With that logic, having an interest in title that secures a note won't exempt you from compliance. :(

However, I believe you're addressing your 401K loan you asked about with respect to tax treatments of a DIL, if so, this loan was made to a rehabber as I understood it, that would be a commercial loan exempt from the Act. If you seller finance the next sale to a owner occupant next time it would fall under compliance requirements, if sold to an investor company it would be commercial. :)



Bill G.

Real Estate Investor from Springfield, Missouri

Dec 07 '13, 07:04 AM


Originally posted by Aaron Junck:
awesome!

Don't collect the option consideration upfront and don't allow any rent credits to go towards the purchase price. :)

I think you meant "do" collect the option fee up front and don't do rent credits :)



Pat L.

Real Estate Investor from New York

Dec 07 '13, 07:38 AM


@Bill G.

sorry to bother you but snowed/iced in you're a captive sage/tribal elder ...

(The 401k was an entirely different issue.)

1. We have existing 1st note mtgs out on Investment properties. The Investor then submits (Mtg & Escrow) via direct deposit monthly. BUT as of Jan 1st these pmts now must be submitted through a Lic Servicer?

2. As of Jan 1st any new or existing OO mortgage note payments are to be submitted through a Lic., Servicing Co.

3. Contract for Deed. Assuming no portion of monthly pmts are credited to the final price. This arrangement per se is not constrained by the need for a Lic. Servicer as we are effectively collecting 'rents'.

4. An Investment Property is titled to a Trust. Beneficiaries hold ownership by virtue of % capitalization. Rents received are distributed to the beneficiary(s) providing the financing (as their capitalized entry to the trust). Would the entire mortgage/loan servicing issue becomes moot.

thanks



Bill G.

Real Estate Investor from Springfield, Missouri

Dec 07 '13, 08:06 AM


First, It's not Jan 1, but the 10th or 14th or so, as to servicing, you need to look at who the administrator of your qualified tax plan is. If it is a bank or other exempt regulated financial institution that is "collecting" payments, I'd say there is no worry. There may be an issue as to providing statements required, tax filings as your administrator probably isn't doing that, they could, my guess is they aren't. So such duties are required loan servicing functions and if you do it, then you may have an issue.

A contract for deed is a financing purchase agreement, not a lease with rents. Even if the payments received yield no profits or payments toward the equity sold, if it pays an underlying mortgage, it's paying toward an equity position. Any financing arrangement that provides for the buyer to acquire title to that OO property is an issue, doesn't really matter what we call it.

A lease that offers no arrangement to acquire title is not a financing agreement.

Your #4 needs to be dumbed down for me, your "capitalization" thinking, can you better define that. The Act covers any person or entity, there is no exemption based on your entity being a Trust. :)



Bill Walston

Real Estate Investor from Northeast TN, Tennessee

Dec 07 '13, 10:02 AM
1 vote


Originally posted by @Bill G.:
Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.
If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem.

I'd be getting with my "buyers" and explaining the new laws and how they are affected, they are involved too. Servicing is a big benefit to a buyer, educate them, split the cost, I'd say you could skate by making a modification in order to comply with new regulations. Get help! :)

True, Bill, but the question I answered was about lease options in particular. A TRUE lease option is not a financing agreement. There is no servicing requirement.



Curt Smith

Real Estate Investor from Clarkston, Georgia

Dec 07 '13, 10:09 AM
1 vote


So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.

Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.



Curt Smith, Sweetgum Properties
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Telephone: 678-948-7151
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