Are Lonne Deals Dead - SAFE Act?
Hard Money Lender · Sea Girt, NJ · Member since 2012 · 125 posts · 37 votes
Obviously there are plenty of threads discussing the SAFE Act and how they impact Lonnie Deals. I understand that these laws may differ from state to state but my question is a simple one.
I'll make an overly simple example:
There's a mobile home worth $6,000 that I can buy for $2,500.
I buy it and it needs no rehab so I look to sell it with owner financing for $6,000 at 12% interest.
This is where the SAFE Act comes into play but what if I just sold the mobile home interest free for a higher amount?
Let's say instead I charged $9,000 which I would collect over 3 years. (I can do this because the buy is more worried about the monthly payment than the total price.)
To me that sounds more like installment payments for a piece of personal property than a mortgage...
Am I missing something? Has anyone tried that? Is that legal under the SAFE Act?
BTW, if you can buy something at some price and the item was basically exposed to the market, advertsied for sale, the value is what it sold for, not 2.5 times more. Just because you can get some nieve simple minded person to sign an agreement doesn't mean it's worth more.
Bill- I am one of those "investors". It is ironic the above numbers were given. 10 years back, I bought a mobile home from an owner who tried to sell it for $5000 cash but was unsuccessful. I offered $2500 cash and sold it for $6000 on a note. My buyer put $1000 down and ended up making $800 payments since this was what she had been paying in rent. She paid it off quickly and owned her home. Is she the naive simple minded person you are speaking of? Am I the unscrupulous investor who took advantage of my seller and buyer? To me it was win-win-win. The seller couldn't find an end user with that much cash-the buyer could not pay cash and couldn't get financing. I took a risk and stuck my neck out. That's why a those in business deserves a profit, isn't it? Some deals I made money on Some I lost. I don't hear complaints when wholesalers did nothing more than inform another of a deal. Just my thoughts. No hard feelings. I enjoy a lively debate.
Anthony,
anything will work as long as it is not under a microscope. If you are small time, I would not worry. Just take your chances. If you are really building a business, I would team up with a mortgage broker to run things through for the proper disclosures and just factor it in to your cost. That is just my 2 cents.
Well I can tell you are a real estate investor - always looking for the creative angle to get around the law Oops, comply with the law :-)
Yes mobile homes are personal property but unfortunately I believe the language of the SAFE act specifically deals with mobile homes.
From Ned Carey's response I will add that mobile homes are most certainly added in the language for the Safe Act.
In Virginia (where you are not located), here are your options - each state ratified the safe act with their own interpretation.
- If you deal 3 or less "finance" deals in the year you are exempted.
- If you are a registered small investment company with the Small Business Administration you are exempted.
- There are possible exemptions with real estate licensing...
I may be wrong, but this should be the site you can go to and find the exemptions/requirements for each state:
http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx
It's the NMLS site, National Mortgage Licensing System.
And to answer your theory, unless you pass the title to the buyer and have an unsecured loan, it doesn't matter if it's 0% or 100% interest (to the Safe Act, Dodd Frank might limit interest rates, though it's tough to say that applies to personal property - I don't know). The key to the Safe Act is the security. If you have security you've created a mortgage. And that's their key.
Which, by the by I wouldn't pass the title on to the buyer...unless they put down more than you paid and then still you'd be risking your profit.
If you are going to do more than 3 of these this year consider a lease/option but be careful of your option sales price. It needs to be market value for the home. Other than that find a buddy mortgage broker or attorney and pay them $150, $250, $50, whatever you can get to get them to close the deal for you. But remember, technically you can't even talk terms to the buyer, only the attorney or mortgage originator can do that.
Hope that helps. Sounds like a good deal and you should certainly jump all over it!
Blue Ridge Mobile Homes
As I have written here before, the SAFE Act is only a small part of the problem. It is also important to understand that while a state can pass stricter laws, they cannot pass easier regulations regarding the SAFE Act. There is NO de minis in federal law and the feds were specific about that in their Final Rule on the SAFE Act.
Moving past the SAFE Act, there are a host of federal compliance issues that people have ignored in the past that just can't be ignored anymore without significant risk, and some relatively new ones that can be very dangerous to ignore. If you make even one loan or do a single lease option you must have a formal Compliance Management System in place and working in order to avoid serious consequences.
A Compliance Management System must consist of:
1. Written Policies and Procedures for every compliance issue that applies to your situation.
2. A formalized training program to train everyone from the top down in those policies and procedures.
3. Trained Compliance Officer(s)
4. Trained Reporting Officer for AML (may be the same as the Compliance Officer in a small company)
5. A system of either internal audit (frowned upon but legal) or a contract with a qualified third party audit firm to audit the successes and failures of your compliance management system.
Achieving this is not difficult nor does it have to be expensive in relation to the size of your operation, but to operate without it opens one up to major fines and prison sentences. Enforcement will not normally come from the states, but it could in some states like PA and some others.
Even very small operators need qualified help to figure out what they are going to do and how they are going to do it. One solution is to come to us for help, another is to join a state manufactured housing association for some limited help, and finally you can also turn to a qualified regulatory attorney for help. The point is, you will need help to be legal and compliant.
It is going to be interesting to see how the Feds end up enforcing these laws and compliance issues on the manufactured housing industry. Those flipping mobile home via Lonnie Deals, Lease Options, Rent to Owns, Retail Installment Contracts, Personal Property Trusts, or whatever other vehicle is used to convey the property, while TRYING to stay compliant, should all take note of Ken Rishel 's comments on this subject.
It is unfortunate that the Manufactured Housing Industry could not get together to get small balance loans excluded, like the automobile industry seems to have accomplished. Yes people actually live in manufactured homes, mobile homes and trailers.
Most of these folks choose this route because it is affordable.
Why the Fed would not support efforts for more Affordable Housing is beyond me!
It is such a shame that investors can no longer assist buyers in purchasing a modest mobile home. The regulatory office in Alabama told me they were "protecting the buyer". How are many of these people going to own their own home? That must be the reason most of the parks that I have visited are rental parks.
And how many "investors" think they are helping people by financing $2,500 mobile homes for $6,000?
To the original question, they fact that you don't charge interest has no bearing at all on the financing arrangement. If you have any agreement of any kind whaatsoever that requires any payment of any kind that is applied to any sale that ultimately facilitates the granting of title, that agreement is an installment sale. By not charging interest you will alsohave an imputed interest for taxes by the IRS.
BTW, if you can buy something at some price and the item was basically exposed to the market, advertsied for sale, the value is what it sold for, not 2.5 times more. Just because you can get some nieve simple minded person to sign an agreement doesn't mean it's worth more.
In addition to what Ken mentioned, there is also the FCPB, they can just look at a deal and find it as a bad business transaction, in line with fair trade practices. Recently in my area a broker got nailed for mail fraud since he used the mail in connection with his wheeler dealer RE practices.
Those that make light of these financing issues need to get another attitude and newbies take note. Understand too, the reason for all the crack downs on investors financing deals is directly related to all the "investors" who have been screwing people, so you brought it on yourselves by condoning such practices or doing them. :)
I'm using an originator for my deals, but just for conversation Bill Gulley, any idea how many law suits and or prosecutions have been filed against these type of offenses?
Two in my area to date, one Realtor seller financing without a license but don't know what the damage is, it's probably not over.The other was a mortgage broker in using the seller financed notes as collateral to pool funds, unregistered security, originations not in compliance, investor fraud, mortgage fraud, mail fraud, you name it, he's by now in the state motel.
Just to add to the conversation, does anyone know what a cram-down is in a loan in bankruptcy or court action? (Yes, it's a leading question) :)
You all do understand that any contract in violation of law is not enforceable in court, don't you?
Let's assume that they guy in the robe just looks at some smaller investor type selling a mobile home for a quick $6K profit and financing it doesn't really feel like hitting the seller up for a $10K fine, the judge thinks that the seller just did something beyond his level of awareness, but just nullifies the note and security agreement and allows the deed to remain in place. :) He just lost his $6K profit and his costs in buying the property. This type of action has been around waaaay before the SAFE Act.
I'd guess that if an investor got caught in one deal, chances are good he'd lose his note as a slap on the wrist, no doubt, he can't let an illegal contract stand, if he's in a good mood and he's not ticked off, he may consider the equity of the situation. But, then why are you there in the first place (?) what's the big picture of the deal ? If the same guy got caught on one and it was found he'd done 20, 30, 50 deals in violation, he'd have some hefty fines, if people were found to have been injured or cheated, where others lost money, I'd say he's probably on the way to the state motel.
As a past regulator and lender that's about what I've seen. It has alot to do with the intent of the violator, the extent of the violation, damages caused and if there were any other violations or criminal acts. We also have a selective law enforcement system. If a cop sees that the valve stems on your tires didn't come to a full stop at a stop sign, it doesn't mean he absolutely will give you a ticket, but he can.
IMO, you won't be headed to jail if you sell an covered property on a contract for deed/note, some 25K deal, but you will lose the deal and your collateral, this is a standard outcome for various lending and collection violations, loss of principal and interest as well as the security. But, as the facts unfold, if you are found to have been dealing from a predatory position, you'll lose your interests as well as being taught a tougher lesson with fines and perhaps visits to the probation office. If after that you screwed over some little old lady and her life savings, expect to be showering with others and having your mail read for awhile!
Sure, you can weigh the consequences and see how long you can get away with something, just understand that you can't keep your dealings a secret.
In today's reality with the formation and implementation of the CFPB and all kinds of publicity about investor and mortgage fraud, to the point that even some circuit judge in the flat lands of Kansas or hills of Arkansas is aware of the new laws, they will be looking at your deal. I have no idea what they will do, I'm just pretty sure it won't be in your favor. :)
What type of fee are you paying for this?
What type of fee are you paying for this?
1% of the sales price. Small price to pay for sound sleep!
1% I'd say is a fair deal, for real deals, I don't think $60 would cover a $6,000 note on a MH deal.
I do understand finding a MLO is a problem, an attorney may do it. :)
To the original question, they fact that you don't charge interest has no bearing at all on the financing arrangement. If you have any agreement of any kind whaatsoever that requires any payment of any kind that is applied to any sale that ultimately facilitates the granting of title, that agreement is an installment sale. By not charging interest you will alsohave an imputed interest for taxes by the IRS.
BTW, if you can buy something at some price and the item was basically exposed to the market, advertsied for sale, the value is what it sold for, not 2.5 times more. Just because you can get some nieve simple minded person to sign an agreement doesn't mean it's worth more.
In addition to what Ken mentioned, there is also the FCPB, they can just look at a deal and find it as a bad business transaction, in line with fair trade practices. Recently in my area a broker got nailed for mail fraud since he used the mail in connection with his wheeler dealer RE practices.
Those that make light of these financing issues need to get another attitude and newbies take note. Understand too, the reason for all the crack downs on investors financing deals is directly related to all the "investors" who have been screwing people, so you brought it on yourselves by condoning such practices or doing them. :)
Bill Gulley thanks for your input. Not sure why you are putting "investors" in quotes. Are you inferring that one would not be an investor in that case? The whole idea of predatory lending or "taking advantage" of people is just silly in a free market.
When two able bodied people enter into an agreement on their own free will, that should be the end of it. There should be no regulation on the matter.
The fact that there is regulation cause me to start this thread and make, as I stated, an "overly simple" example to illustrate my question. I'm not sure that a snarky response was needed.
Well Anthony, that might be your opinion of our free market system, but it's certainly not reality. It's not the Wild West anymore and there are laws, regulations, rules as well as ethics. Being able bodied has nothing to do with contracting in business, btw. :)
BTW, if you can buy something at some price and the item was basically exposed to the market, advertsied for sale, the value is what it sold for, not 2.5 times more. Just because you can get some nieve simple minded person to sign an agreement doesn't mean it's worth more.
Bill- I am one of those "investors". It is ironic the above numbers were given. 10 years back, I bought a mobile home from an owner who tried to sell it for $5000 cash but was unsuccessful. I offered $2500 cash and sold it for $6000 on a note. My buyer put $1000 down and ended up making $800 payments since this was what she had been paying in rent. She paid it off quickly and owned her home. Is she the naive simple minded person you are speaking of? Am I the unscrupulous investor who took advantage of my seller and buyer? To me it was win-win-win. The seller couldn't find an end user with that much cash-the buyer could not pay cash and couldn't get financing. I took a risk and stuck my neck out. That's why a those in business deserves a profit, isn't it? Some deals I made money on Some I lost. I don't hear complaints when wholesalers did nothing more than inform another of a deal. Just my thoughts. No hard feelings. I enjoy a lively debate.
Carrie Collyer, any comment with the above post? :)
Sorry- apparently I hit "send" prematurely. I accustomed to other formats :)
There are MANY solutions to the SAFE Act. Don't let it slow you down.
There is a 1 hour audio by Lonnie Scruggs called Solutions to the Safe Act. It's free after you opt in.
You also get Lonnie's Create Your Own Economy audio for free.
One solution Lonnie suggested which completely circumvents the SAFE Act is to rent the mobile home to the "buyer" for a specific numbers of months with the agreement that they get the title to the mobile home at the end of the lease if they make their payments on time.
There are so many ways to solve the SAFE Act. See Lonnie Scruggs' site for all the details
I suppose where the SAFE Act says "ANY FINANCING ARRANGEMENT" and using words like "ANY AGREEMENT" "CONVEY TITLE" "ANY ARRANGEMENT" "CIRCUMVENT THE INTENT" just doesn't sink in to those that are in the business of selling "ways to do things".
Seems the laws just provide the gurus with more material to devise schemes to sell. You can bet the free stuff just leads to the stuff to buy so you get all the secrets.
The payment of money, regardless of what you might like to call it, or anything of value that might be exchanged with any promise or agreement to grant title to any kind of asset IS a financing arrangement. Money paid over time to acquire ownership is an installment financing arrangement...period! Ask any attorney
The very best way to avoid issues the SAFE Act is to COMPLY! It's not that hard to do, just get an attorney. :)
Lonnie Scruggs' free 1 hour audio if full of solutions and there's nothing to buy to get the secrets. They are all in the 1 hour audio. It's not just Lonnie, other MH investors explain how they are handling the new rules and regulations.
Some mobile home parks will not allow rentals, so you have to come up with solutions to sell with seller financing and comply with the law.
A simple solution is to use a mortgage broker. They don't have much business these days and will be glad to handle your MH buyer transaction for a few hundred dollars.
Another solutions, which saves a bundle in taxes is to not buy and sell the mobile home.
Instead, get an option on the mobile home. Tell the seller exactly what your plan is. You'll help them find a buyer who will buy with seller financing. Then you'll buy the note at the price the seller needs to get. (Remember owner occupants are exempt from the SAFE act). You'll help the seller structure a note to sell the mobile home with seller financing.
When the deal closes, you buy the note.
The seller gets the cash they want. The buyer gets a home.
Because you bought a note instead of selling a mobile home YOU DON'T HAVE A HUGE CAPITAL GAINS TAX.
Win win for everyone.
There is always a way!
Unfortunately, in the United States, they are making it harder and harder to do business. Too many rules and regulations.
Yes, that basically works,except unless you are an attorney or a LMO, you can't legally assist the seller in setting up the note.
What you could do is have note terms that you would be willing to buy. You can't underwrite the note before it's made. I'd still suggest a LMO be involved.
I suppose to you could have step by step instructions and sample notes in a booklet, that you might give someone to read through, that's as close to getting involved as you should get. But, for you to suggest how a note is structured in a deal is an illegal activity in every state unless you hold the applicable license(s).
Another issue is you showing the property and discussing the note terms to the buyer, now you're can be an agent.
The discount on the note, when it's paid is the same at regular income as you MH sale. Interest is interest income.
If that is going to be the strategy that will fly, otherwise, so long as you use your money to buy the notes. Using OPM can become a note brokerage issue. The more you do the higher your profile.
The same basic strategy is used with real houses, selling a portion of the note for the seller's money. :)
I like Jackie's win-win approach, with some tweaking for compliance. :)
The short answer is NO they are not dead. Folks are still doing Lonnie Deals all over the united states and there are many that owe a lot to Lonnie-ME included. I just read in another post that Lonnie has passed away. Rest in Peace Lonnie Scruggs-
Marc very correctly pointed out that there are still a whole lot of people doing Lonnie deals so the idea they are dead would be incorrect when measured against that standard. Perhaps the better question is, "Can Lonnie deals still be done legally and profitably?" which is another question entirely.
They can be done, but not like they used to be done. As much as most of us here may hate it, things change. The very advice we were giving small operators a year ago will be out of date in January of 2014, as the rules promulgated by the CFPB in the last couple of months have added to the burden of those engaged in lending on manufactured homes to consumers.
Come January of 2014, using an MLO who is not your direct employee to originate loans for you to avoid licensure both as a lender and as an MLO will no longer protect you - if it ever did. (There were complex relationships that had to be set up to be legal that few besides our clients ever bothered to set up.) The rule changes mean you will need licensure to service loans, and you will need a full Compliance Management System for loan service as well in order to be legal.
To do Lonnie deals that include you as the lender has become very complex and is about to become even more so. You can rail at the government for "putting small businesspeople out of business" but it will do you little good because they do want small business people to go away. The very fact a business is small makes it harder to track and regulate (which many of you count on) and the federal government hates that so they want you out of business and replaced by larger entities that are easier to track and regulate.
Will they catch you next week? Probably not. Will they catch you eventually? Probably so. When they do catch you, bankruptcy is almost certain and there are possibilities of prison.
Are there solutions? Yes there are. Are they easy? No they are not, but they are doable if you are willing to work at it.
You could start by asking Julie Anderson for a complementary subscription to The Chattel Finance Newsletter by emailing her with your complete contact information. (See the offer on our website.) You should join your state manufactured housing association so you can learn even more about solutions and also meet community owners who might work with you. There are Lonnie dealers that do both and that are actually growing in size since they took the trouble to become legal and compliant in their lending.
I'll second Ken's reply basically and to compliance. I wouldn't say the govt. wants to kill small business so much as to any difficulty to track you, as if they are interested in you, you can be "tracked" or had very easily.
Dept of finance in Mo. had this older af-american lady who was an undercover regulator. She would call Realtos and say she had a disability and need transportation to go see a house, guess what, that's part of the access for ADA, they had to comply. She'd come in with fake ID and apply for financing, put properties under contract that were staged, answered ads and listings applied for leases and she was good at it! She nailed hundreds, perhaps more. I bet she generated more fine income for the state than other taxing/fee schemes the state has.
If the govt thinks you're a public problem in your business dealings you're not smart enough to out smart them, it's just a matter of time, if a regulator wants to nail you, you're most likely nailed.
Gotta understand, the financing of a RE deal has been around a long time and "investors" have been screwing people for a long time, sometimes it's an intentional scam or unfair practice, often it's arising out of the lack of knowledge, maybe both, bottom line, officials are feed up with it.
Add to that the fact that there are larger players that can profit while keeping in compliance that running off the unknowing and scammer types means more business and profits.
It also means more income for the state or govt at least to pay costs to enforce compliance. An example, FDIC does not receive tax payor dollars, income is from premiums paid and fines.
I'd say the intent of recent changes is in reaction of public abuse and the potential profits for banks and other larger players, not that a small guy can't be tracked or held responsible, it just hasn't been worthwhile to nail the bad ones in the past. Now, with the changes, there's teeth in the bite and it's worth chewing up the bad ones.
Listening to gurus, mentors, authors or any program type might be like being defended in court for murder by your insurance agent. I suggest you talk to a good attorney and compliance types. There are many advisors out there, some sound very authoritative, they state statutes, case law, or my attorney advised this or that....most don't have a clue. In this area, I'd say do your due diligence on the advisor before you follow thier advice. Ken, is a specialist in compliance issues, it's a full time job keeping current. Yes, he has a dog in the fight with his compliance business, but he's also correct! IMO
I don't think I said Lonnie Deals were dead, perhaps on life support, but if you become compliant then by all means, make money! :)
I agree that the rules have changed guys! Compliance is an issue to be contended with. Also-the cost of compliance and the liability, of being considered a lender are prohibitive to entry into this business. I think think real problem right now is that there is such a small fee to be made on a small balance loan, that few lenders have figured out how to make the risk worth the reward. Still folks (complaint and not) are doing Lonnie Deals (many use this same concept w stick built homes as well) all over the country, every day.
Because of the difficulties involved in getting compliant, there are only a handful of operators out there that are even trying at the moment. Ken Rishel your newsletter has been educational to me and, as you know there is a lot more to compliance than just the SAFE Act. There are no easy answers. The first step in creating a marketable note is creating a compliant note and, I have been sending folks Ken's way for that education. I am not aware of anyone that has stepped to the plate to offer compliance education for the stick built boys and would be curious if anyone out there knows if there is such an animal?