Dodd/Frank Compliant Seller Financing - What works???

58 Replies

I know there's a lot of threads on Dodd/Frank and Lonnie Deals, However I'd like to hear from anyone who currently does seller financing and what method they're deploying to be compliant. 

Ideally, I'd like hear from small investors currently doing these deals.

Thanks in advance,

Dave

Dave, does that mean you want us to repeat ourselves? Read Ken Rishel's posts for mobile homes. Go to his profile page and click on his posts, best way to find them. Ken is in the compliance business for MH dealers. :)

Originally posted by @Bill Gulley :

Dave, does that mean you want us to repeat ourselves? Read Ken Rishel's posts for mobile homes. Go to his profile page and click on his posts, best way to find them. Ken is in the compliance business for MH dealers. :)

 Bill,

I've already read Ken's posts which were rather informative, although not in the most direct way. I'm looking to hear from those currently doing these deals and to get the perspective of someone on the front lines who can give a layman's explanation of what works/doesn't work.

Are you currently doing these deals yourself?

Dave

I have not seen a single post on BP about anyone, as a dealer, doing seller financing after Dodd-Frank. If anone is doing it and they are compliant, they spent good money to get compliant, I doubt they will just dump their compliance program on the internet.

That leaves the others, who might be doing it, may be think they are compliant, but I really doubt it as compliance is over the pay grade of small investors/dealers, fix and flippers, or small park owners. So, if you do get a reply, it's probably going to be wrong.

I'm currently working on a seller financed deal myself it's not a MH. Not residential but recreational that will ultimately attach to an existing residence.  Good luck :) 

Originally posted by @Bill Gulley :

I have not seen a single post on BP about anyone, as a dealer, doing seller financing after Dodd-Frank. If anone is doing it and they are compliant, they spent good money to get compliant, I doubt they will just dump their compliance program on the internet.

That leaves the others, who might be doing it, may be think they are compliant, but I really doubt it as compliance is over the pay grade of small investors/dealers, fix and flippers, or small park owners. So, if you do get a reply, it's probably going to be wrong. Good luck :) 

 That would be why these regulations get passed - to benefit certain professions who are likely in bed with the regulators. Hence why I'd prefer to cut out the middleman and only hear from those who are actually in the business. 

Dave, you didn't give us anything to go on.  Are you considering buying MHs in parks from sellers then wanting to sell them to the next occupant?

Are you a park owner who wants to sell park owned homes to the occupants to convert the park to lot rent only?

Two different paths.  The first one, small guys are still selling on terms some out of ignorance, some out of thinking they won't get into any trouble and doing it anyway.  I've been on the periphery of the DF / Lonnie threads for some time.  I have yet to hear of any compliant way for scenario #1 to be compliant.  Just sell the home for all cash, one lump sum is the only compliant way to sell MHs in parks.  But as verbosely described this model, Lonnie deals, depends entirely on a friendly park manager staying friendly.  I'd not bet my business on this weak pillar in a model.

#2, a park owner has the Sun Industries Rent Credit program.  I found in my notes these URLs.

http://www.suncommunities.com/RentaHome.aspx

http://www.biggerpockets.com/forums/30/topics/154378-seller-financing-loan-origination-service?page=1#p1033588

For scenario #2, you are a park owner.  That Sun URL was hard to pick out their program, which has no case law backing it up.  It acts like a savings account.   Some how they set the selling prices of the park owned homes.  When your "savings" equals the price of a home Poof they deed it over to the "saver". 

You can ask of park owners at:  mobilehomeuniversity.com free forum about Sun's rent credit program in action at those guys parks.

Sun:

  • Participants build lease credit with every payment during the first year of residency, as long as monthly payments are made on time. Participants can accumulate 50% of each monthly rental payment during the first year as "lease credit" that can be used as a down-payment toward the purchase of their home! Participants will continue to accumulate 25% of each monthly rental payment as lease credit in their second year. And there's no commitment to purchase - though we know you'll want to!

We do seller financing that is compliant with Dodd Frank.  We have a licensed originator that pulls credit, sends truth in lending, etc.  All borrowers have proved "their ability to repay" because they have performed on a lease with the same payment for 6 months.    We verify their income and job status when they close.  Every closing is performed by an attorney.  We have a complete file on each buyer that could be used in case a borrower files a counter suit against our foreclosure.  We also use a licensed loan servicer that sends monthly statements and calculates payoff etc.

No attorney will verify that we are completely complaint because Dodd Frank has some ambitious rules.  Also, there is no case law that I know of yet.  However, we believe we have mitigated our risk as much as possible.  The reward of seller financing single family over renting our weighs the risk.  We get nice down payments and our buyers are responsible for repairs and maintenance.  The largest benefit here in SC is the property tax savings for owner occupied houses, which saves as much as two thirds in some cases.

Originally posted by @Jason Dillard :

We do seller financing that is compliant with Dodd Frank.  We have a licensed originator that pulls credit, sends truth in lending, etc.  All borrowers have proved "their ability to repay" because they have performed on a lease with the same payment for 6 months.    We verify their income and job status when they close.  Every closing is performed by an attorney.  We have a complete file on each buyer that could be used in case a borrower files a counter suit against our foreclosure.  We also use a licensed loan servicer that sends monthly statements and calculates payoff etc.

No attorney will verify that we are completely complaint because Dodd Frank has some ambitious rules.  Also, there is no case law that I know of yet.  However, we believe we have mitigated our risk as much as possible.  The reward of seller financing single family over renting our weighs the risk.  We get nice down payments and our buyers are responsible for repairs and maintenance.  The largest benefit here in SC is the property tax savings for owner occupied houses, which saves as much as two thirds in some cases.

 Jason, 

Thanks for weighing in and sharing your experience/method.

If you don't mind me asking - How much does your MLO charge and do you pass this cost on or absorb it?

Dave 

I do owner finance deals all over the United States that are compliant with Dodd-Frank. My methodology is different from @Jason Dillard and doesn't require all the red tape he's going through (though I do have "buyers" (assignees) proof up, calculate DTI, ensure they can refinance out within 24 months, etc.).

As @Bill Gulley said, it took me six months of examination, critical thinking, and conversations with both attorneys and CPAs to weave through the maze of communistic idiocy that is Dodd-Frank.

 The methodology is very simple:

I buy properties using a no money down contract for deed on a non-owner occupied basis with a 30-60-90+ day seller leaseback with the buyer being a corporation, trust, or joint venture. The contract for deed is later assigned to a joint venture partner or entity with beneficial interest. 

The origination point of the mortgage is when my company/trust/joint venture purchases it as a non-owner occupied property further validated by the seller leaseback. 

As a result, Dodd-Frank doesn't apply. 

Avoidance, not non-compliance or evasion.  

My buyers pay about 1200 bucks to close each deal. 

@Vincent Polici 

Your non owner occupied buyer's lawyer might not agree with you on on that strategy when you have to foreclose.  But I wish you the best of luck.  I need my red tape to get the owner occupied propery tax rate. It saves us about 80k per year.  

Originally posted by Account Closed:

I do owner finance deals all over the United States that are compliant with Dodd-Frank. My methodology is different from @Jason Dillard and doesn't require all the red tape he's going through (though I do have "buyers" (assignees) proof up, calculate DTI, ensure they can refinance out within 24 months, etc.).

As @Bill Gulley said, it took me six months of examination, critical thinking, and conversations with both attorneys and CPAs to weave through the maze of communistic idiocy that is Dodd-Frank.

 The methodology is very simple:

I buy properties using a no money down contract for deed on a non-owner occupied basis with a 30-60-90+ day seller leaseback with the buyer being a corporation, trust, or joint venture. The contract for deed is later assigned to a joint venture partner or entity with beneficial interest. 

The origination point of the mortgage is when my company/trust/joint venture purchases it as a non-owner occupied property further validated by the seller leaseback. 

As a result, Dodd-Frank doesn't apply. 

Avoidance, not non-compliance or evasion.  

 Except for two things. 1. The series of assignments of debt created must be with the seller/holder's consent, probably not hard to obtain but needs to be signed off on. 2. Many attorneys miss the small print in Title XIV, something like "any method used to convey or devised to circumvent the intent of the Act will be considered a covered transaction."

#2 means there is no way around compliance, as loopholes, if there is a person in the dwelling who has entered into any type of contract to eventually obtain title or beneficial interest in title and they are making any type of payment to facilitate the transaction, it's a covered financing arrangement. 

A commercial transaction may not be tainted later on by the principal or beneficiary of an entity by them moving in as an owner occupant.

Things always come to the surface, a buyer tries to refinance, obtain an equity loan, takes bankruptcy, applies of medical benefits, gets sued, etc.

Most real estate attorneys are not well versed in financial regulatory law, need to see a specialist. :)  

@Jason Dillard

Jason, ability to pay is not based on the borrower's past 6 months of making the same payment, underwriting goes to one year for credit considerations but isn't proof of the ability to pay. Everything else sounds great! Dodd Frank requires prudent lending practices which default to secondary market underwriting requirements except that there is more leeway to qualifying ratios and income assumptions, to arrive at the ability to pay. :)  

Right O on the 6 months.  That's what we call in the South extree.  It may advance our argument in a lawsuit if need be.  More importantly, our buyers need time to save up the closing cost.  We tend to get most of their savings when they move in.  

By the way, we do a 6 month lease that the rent increases on the 7 month automatically.  This way the tenant-buyer has incentive to close.  We need the propery tax savings to make all this headache worth it.  One rental that my taxes were 1600 per year just became a "sold" home that decreases my taxes to 800 per year.  I plan to own that one 30 more years minimum.  Mulitply that times all our houses and you have a large figure. 

Jason, taking most or all of a buyer's savings, with them not having reserves is another defined area of predatory lending. I'm really losing confidence in your originator and your attorney. Not questioning your intentions, you're trying to be compliant. Might get another opinion from an experienced originator and finance attorney. 

Leasing first, a trial period, is a good idea. It is used by low income non-profit organizations in providing home ownership programs. I have implemented such programs. You can test the waters, but it doesn't hold much water, credit is not established in 6 months nor does it show an ability to pay. What it does do is it forms a relationship to judge expected performance, attitude of a buyer, their willingness to buy which are important aspects. In 6 months you can find out if a drunk can keep a job! If they can budget their money month to month.   But, leasing for 6 months is not really a loan related issue. Now, one year would become a factor. :)

@Bill Gulley

Not except for two things. 

First, everything is disclosed and totally transparent in the original agreement. I don't use fraudulent clauses or weasel clauses or acts of omission. 

Second, "there is no way around compliance, as loopholes", nor did I suggest there was and I really don't appreciate the insinuation, however, using the methodology and structure I'm using, there's nothing to comply with since the Act doesn't apply. 

It's not circumvention as I've got a well documented history of hundreds of transactions for more than a decade prior to Dodd-Frank all using the same basic methodology. 

Ultimately, we can discuss this until the cows come home. Dodd-Frank isn't a law any more than any other "law". Congress and state legislatures don't write or make law. They write guidelines. Those guidelines are subject to interpretation. This is why we have the farcical system of courts, judges and attorneys. Attorneys provide opinions on the guidelines which aren't facts. They're opinions. They then present these opinions to a judge and/or jury who renders a decision which becomes the law in each case in every courtroom in America. Juries have the power to nullify any law they deem unfair or un-Constitutional with a single stroke of a pen regardless of how many Senators and Congressmen/women spent how many thousands of hours to get it introduced and passed. An attorney's opinion isn't worth a great deal because 50% of the attorneys in America are proven wrong in every courtroom in America every single day. Not very good odds to pay for. 

"Law" is subject to circumstances and intent. As an example, if I said it's not illegal to kill someone, you'd probably say, "yes, it is!", but, that's simply not true. It's "illegal" to murder someone with malicious intent however, it is not illegal to commit the very same act in self defense nor is it "illegal" for cops to kill innocent people (which they do every single day in America). Ultimately, it all comes down to intent. 

As @Jason Dillard stated, there is no case law on this yet and yes, I think everyone intelligent realizes they're aching for someone to make an example of to get it on the books so it can then be replayed and rehashed in every subsequent case nationwide.

Ultimately, Dodd-Frank is un-Constitutional, communism at its finest and serves no legitimate purpose. Its only purpose is to further institute communistic state totalitarian rule in the U.S. and interfere in commerce. 

@David S. , 99.999999999999% of the time, lease options are a disaster waiting to happen because most attorneys and investors structure them as what are called de facto or disguised sales. I haven't done one since I learned the law in 2008. Since then, it's been all contract for deed because my intent is a sale, not a disguised sale. 

Again, it all goes back to intent. 

When you structure a lease option and transfer ownership responsibilities to a tenant, such as maintenance, repairs, taxes or insurance, and/or you provide rent credits or principal balance reduction for the option fee against a principal balance, and/or you reference the option document in the lease, and/or you quantify the signatory of the lease as a "tenant/buyer" instead of a tenant, and/or you quantify the signatory of the option as a "tenant/buyer" instead of an optionee, and/or you quantify the signatory of the lease as "seller" instead of landlord, you're heading down a slippery slope where you've unknowingly conveyed equitable interest to the tenant. 

So, the argument goes something like this when it comes time to evict:

....but your honor, I'm not a tenant. I paid a down payment that's credited against the principal balance. I've taken care of all maintenance and repairs, insurance and property taxes. I'm not a tenant. I've got equitable interest. 

And once the magistrate hears the term, "equitable interest", you're sunk as he lacks jurisdiction and now it must go through the judicial foreclosure process before you can evict. 



If you really get someone who's sharp, they'll take you through that process while simultaneously contacting the Dodd-Frank Czar to notify them of your covered transaction because you've created a de facto or disguised sale in the eyes of the IRS. 

This may be hard to believe but I just covered this in a blog post about this very topic. I did one of our Hot Seat webinars with the real estate attorney, Angelo Russo, who provides his contracts and closing services to my former student, Joe McCall (which he provides and promotes to his students), and in this webinar, he openly admits to putting clauses in the contract that he knows are in direct violation of state and federal law and the argument/logic (if you want to call it that), is the following:

1. The tenants aren't smart enough to understand the law so it's a non-issue and adds greater profit because financial and physical responsibilities can be offset onto the unknowing tenant. 

2. If the tenants do figure it out, they don't have the cash to litigate so it's a non-issue. 

This is very bad business and why the age old adage of, "hire or close with an attorney and you'll have greater protections", is a complete joke. 

You can read the recent post on this and actually hear all of this from the attorney's own mouth as I dissect and forensically audit his contracts in the webinar on my Virtual Real Estate Investor Academy website for free. 

Acquiring from an owner on terms, as long as you are not living in it, and your exit is a lease and a simple pure option, IMO, escapes Dodd Frank.  No rent credits can be given to tenant buyer.  

Seller concessions of closing costs can be offered as @John Jackson does with his lease option assignments.

The big thing is get a RMLO to underwrite a 1003 app on the Tenant Buyer on the ATR rules (see CFPB ATR rules)  If you do that, you are complying with Dodd Frank, having a registered mortgage loan originator look over the tenant buyer.  It protects you and the seller.

There is no case law.  

I still see merit in my Lease plus ROFR

and Lease plus Contract for Option to Purchase

as an alternative to the Lease with option to purchase.

And a Lease and Delayed Sale and Purchase agreement with 3% non refundable earnest money I think is much preferable to to a Lease with Option to Purchase.

Originally posted by @David S. :

@Bill Gulley and @Jason Dillard

Account Closed  is a compliance advisor, he is on a D-F task force that includes regulators in various areas. I understand that he is working on a "Lonnie-Deal" type sale that will be compliant. 

Today, you have more to worry about than just the DF Act, there are dozens of laws applied to financed transactions, and personal views as to them being fair or constitutional or politically correct as to one's thinking are totally irrelevant, laws and regulations apply and if you don't follow them in finance, you can have consequences.

There are many more federal laws pertaining to finance than real estate, state laws generally govern real estate. Violate federal law, you're looking at federal punishment, state law, you might get sent up to your local state hotel with guards. Just say'n...big difference.  

Never did I go into a bank for an examination and find them totally in compliance, never! The issue is, to what degree are you out of compliance? Some minor issue might be a comment on a report, a big blunder, ignoring law, doing it repeatedly can get you sent up the river. 

And, if you're just pawning deals out to others for origination and servicing, you're still the lender. Where is your compliance program on file? Are you registered as a lender? Do you do enough business to be required to provide a call report? 

If you're a small operation, say under 5M doing SF deals to homeowners, my bet is that you'll have significant compliance issues, because it takes money, time, effort and expertise to be compliant. One attorney or a CPA isn't really going to cut it, unless they are working for you full time. 

If you want to get away from the DF Act, start a non-profit for your low priced, low income deals and take a salary. Keep that at arm's length from your other activities. Non-profits are exempt from the Act as well as a string of other financial laws. :)

Originally posted by Account Closed:

Ultimately, Dodd-Frank is un-Constitutional, communism at its finest and serves no legitimate purpose. Its only purpose is to further institute communistic state totalitarian rule in the U.S. and interfere in commerce. 

^^^^

Well said, in addition to it being a ploy to keep overpaid consultants who are in bed with the regulators employed.

@Bill Gulley

Are the character attacks and insults really necessary because they serve no purpose and benefit no one? 

Is no one allowed to proffer experience in these threads other than you?


It's a little disingenuous for you to say I'm lost on anything when you then repeat what I just stated. 

Let's try to keep it professional and on topic so we can help people, fair enough?

I'm extremely familiar with laws as they relate to lease options and Dodd-Frank and de facto and disguised sales do fall under Dodd-Frank due to what you mentioned previously regarding.........wait for it......circumvention. 

Revenue Ruling 55-540, 4.01 states, in relevant part, “Whether an agreement, which in form is a lease, is in substance a conditional sales contract depends upon the intent of the parties as evidenced by the provisions of the agreement, read in the light of the facts and circumstances existing at the time the agreement was executed.”

To determine whether an arrangement is a lease-option or a sale, the IRS examines all of the facts and circumstances surrounding the transaction. Circumstances that suggest a sale include:

* Portions of the rental payments are specifically applied to equity in the property (think RENT CREDITS)

* Title to the property will transfer to the lessee upon payment of the rental payments (ie. Total payments made actually equal the purchase price)

* The amount paid in rental payments is an excessively large proportion of the total sum required to secure transfer of title to the property.

* The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised.

* Some portion of the rental payments is specifically designated or readily recognized as interest.

* The sum of the rental payments and purchase option approximates the original purchase price plus interest and carrying charges.

* The lease requires the lessee/buyer to make substantial improvements to the property.

So, yes, you can do a lease option that the IRS deems is a disguised sale (which most lease options are, including John Jackson's) and have it fall under Dodd-Frank. 

Not opinion. Fact. 

I'd suggest you watch the webinar we did because we had a real estate attorney, a CPA who's a bona fide expert on Dodd-Frank and another real estate investor who was taken to the cleaners over a lease option deal.