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.
Marc, many of the issues relating to financing are not unique to MHs, but to SFDs, including all as defined. The mortgage industry is full of organizations, like the American Banker's Association that has educational programs for members. hen, there are the alphabet soup agencies like the OCC, FDIC, CFPB and HUD that provide public consumables to enlighten anyone willing to look things up.
There are also independant companies that do mortgage audits for existing loans and they too provide guaidance for lenders.
While Ken's company may be specializing in the MH industry, I'm sure much of what they do applies to the stick-built guys as well. :)
Just to vent a bit...Nobody's trying to prosecute Neiman Marcus, or Ebay sellers, or even Wal-mart for making a profit. It's understood. And I'd guess even Wal-mart has some items they mark up 50% or more. Mark my words, it's only a matter of time before retailers get nailed for daring to seek profit. Is there no limit to this nanny state? "Atlas Shrugged" has never been more topical.
People go to payday lenders because it's their best, or only choice. They get "screwed," yes, but aren't they complicit in the screwing? People don't get talked into doing something they don't want to do. They use the brains they have to make the best decisions they can. Jesse Ventura once said "you can't legislate stupidity," and he was right. If the gummint wants to eliminate the profit motive, they are sure doing it.
Yes, there may be little old ladies laying for inadvertent ADA violators in Missouri (or is that an urban legend?), but I wonder what happens in court. There are plenty of people doing seller-financed deals every day who don't even know about SAFE, or Dodd-Frank. Do I need to hire LMOs to run my deals through? I've started doing that, yes. Should we be fair (while being profitable) Are there really regulators scrutinizing HUD's out there, looking for possible unfair transactions? If so, perhaps they all just got laid off due to sequestration. But despite all the challenges and hindrances put up in the risk-taking entrepreneur's path, the rest of us, we'll keep doing what we do, Lonnie deals and all, in our pursuit of the American dream. And if the govt decides to kill off all the incentives to make a living, we'll join John Galt in fantasy land.
Yep, but you ain't Wal-Mart either.
As a matter of fact, HUDs are reviewed through title companies, banks, RE companies, state departments of finance and insurance do audits, not to mention law enforcement if they have reason to do so.
Youth, I suppose, there's always the ones who think they can out smart the system, the prisons are full of wise guys.
Nope, can't regulate stupid. If we could, we wouldn't need half the laws on the books.
Most regulators looking are at the state level, most are still working.
The seller finance issues haven't really hit the fan yet, wait til a note mature and the holder takes it to foreclosure, where a buyer then gets an attorney. My prediction is that the deal will stand, the note will be thrown out as unenforceable, the note holder walks with what they got and if it was predatory, a fine to boot. That is basically the penalty for violation of the Fair Credit Act, loss of amounts owed and loss of goods, if any.
We don't even know yet if such loans can be paid off with bank proceeds as they are ill concieved notes, if they are not valid obligations, the security interest is gone as well, if there is no valid security interest to be paid from disbusrements, the bank may not pay it off.
I don't think most can grasp the possibilities yet!
I wonder if the banks have thought about that yet, or the regulators, that would be a pretty good way to bring the illegal financing transactions to the surface, just don't fund them to pay them off!
I suppose if you finance full term and never try to foreclose, you'll have better luck. :)
First - Bill Gulley's post back one
It is true that much of what we do could be translated to the site built industry, but there are some very important differences which means it doesn't work very well for either side to utilize us for site built, or someone else for MH.
Plus, RCG is not interested in the site built industry. To some in MH who want everything for free, our fees and charges may seem high, but they have not looked at what all of the groups on the site built side charge. We train and certify Compliance Officers for $850.00 on the beginner module. The ABA charges $6,000.00.
I write this to make a point. We are only interested in MH because I set the company up to Help the manufactured housing industry, and our charges reflect that. We turn away potential clients from other industries because I am only interested in helping MH operators. I have been a part of the MH industry since 1975 and those are the people RCG was set up to help.
Second
Bill is correct that the risks are too great to not get legal and compliant. That there are Lonnie Dealers operating illegally is not good evidence of future low risk. With the advent of the SAFE Act and Dodd-Frank MH financing and seller financing has fallen under the scrutiny of a variety of federal regulators who have a entirely different attitude than state regulators. The creation of the CFPB has also added the 900 pound gorilla with PMS to the mix. They have been chewing up banks, credit card issuers, and payday lenders right and left. They just got an 81% increase in their operating budget. They have reserved our industry for later this year. Who in their right mind can believe they can do everything they need to do to get legal and compliant in even 3 months after they bust the first one that talks about it openly? What if they bust 30 MH Lenders and no one talks about it? How would you know?
Nothing about this is easy, but it is doable. If you examine the potential fines and penalties and weigh that against the cost of getting legal and compliant and doing so still doesn't make sense with any solution (there are at least 3 for different sized operations), then getting out may be the best option. It doesn't make sense to make money for five years ( or whatever) only to give it all back in fines and penalties when they finally catch you.
LOL, 900 pound gorilla with PMS! Warren is now a Senator so I don't know who is heading this financial special forces group.
Ken, now we (I) know you're specializing in the MH market.
Consider a branch for the seller financing investor. Sounds like $800 is pretty reasonable to me, BTW.
There are several ways to add cogs to the flow of notes to shake them out to the surface, I'd say the cost on one deal to do things right would be a good investment....but I'm not making an endorsement here (Ken didn't pay me, LOL) but just saying, get informed. :)
What are the penalties for violating the SAFE act?
If I was a total scumbag could I go around buying homes on financing from investors that are in violation of the SAFE act and make a profit?
Ken Rishel and Bill Gulley
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.
Hello Gentleman,
Can the above be outsourced on a contract basis? Hiring employess or needing to learn my lawyers, bankers, CPAs jobs seems a little extreme and distracting from my primary goals. That is why we pay others for specializing. imho
I do think this may be a great marketing tool: "SAFE Act Compliant" : )
This has been an eye opener... Though dissappointing with Lonnie books already on order. : (
Thank you.
Some of it can be outsourced, if you have enough volume to interest the companies that offer 3d party services to handle your lending under their licenses
You can outsource the construction of your compliance management system, but not the running of it, to firms like mine to set up the non lending portion.
There are also solutions for low volume operators that are a bit more cumbersome but reasonably inexpensive and easy to operate.
Feel free to email me for information.
The enforcement of SAFE Act and Dodd-Frank will not come from law enforcement, but from the disgruntled purchaser of a property seller/privately financed.
The buyer has some dispute with the private seller/lender and stops making payments. The seller/lender forecloses and tries to take the property back.
The buyer gets an attorney who figures out that the seller/lender has violated the Safe Act, etc and since that is criminal with potential fines and prison time, uses that as leverage against the seller/lender.
Whether the seller/lender even knew about Safe Dodd Frank is totally irrelevant. Ignorance is no excuse for disobeying a law. In the negotiations (civilly, if ever there was a misnomer...) the buyer's attorney says, "We won't persue criminal charges against you, Mr. seller/lender if you drop the foreclosure against my client and give him the house free and clear."
And as Dirty Harry is wont to say, "Do you feel lucky?"
Anthony
Check 3 local REIA clubs presidents ask for a referral for the best real estate attorney.
Connect with them for a compliant strategy. This person will be a valuable long term team member.
Paul
Michael Spindler, as Ken mentioned, yes, and I suggest that anyone doing any kind of seller financed deal use a servicer.
You can also find (should be able to find) a mortgage originator and work a deal with them providing the funds, but that's a money loan not an equity loan. Lending equity is an installment transaction and if you do many deals (enough to live on) you'll be a dealer, so you'll need to comply as a dealer. The problem is on the origination, not so much the servicing as that can be covered.
I think it would be easier (if your life depends on MH deals) to buy them or put them under an option and flip them to a real MH dealer, maybe as a turn key deal. Sell them to Marc!
David is correct, I doubt regulators will be hiding in the bushes, it will usually be your buyer who feels like they got screwed, they will seek help, some attorney or Realtor, or mortgage type will get ticked off enough to point them in the right direction, file complaints and there you go to see the guy in the robe with that little gavel. As I said, it's just a matter of time before what you do in RE catches up with you. :)
Bill Gulley
When the SAFE act was first proposed my initial thoughts were:
a). Either I or somebody I already know and deal with can just get licensed, how hard could that be? But after looking into it, it was much harder than I had anticipated, it was something like 2,000 hours of apprenticeship, hardly worth the time and effort and costs for doing a few deals. And perhaps that was one of the intended consequences that small time operators would be out of the business and a "professional" mortgage broker would emerge. As an aside, while there were certainly bad actions on the part of mortgage brokers, the punishment exceeded the crime from what I personally heard about.
b). Get an existing licensed mortgage broker to "foster" the mortgage deal for a small fee. I was thinking $300 to $500. A small price to pay for legalizing the process and making for sound sleep filled nights. I did approach several mortgage brokers and met with universal disinterest. One broker that I talked to didn't say so exactly, but I got the feeling that he did not want to:
1. Risk his license for a few dollars on a flakey deal.
2. Felt that seller financing was taking business away from him, so why help the competition.
I talked to another mortgage broker, whose business was waning, and he talked to his attorney, who advised him against the idea. The attorney told him that he could not oversee a mortgage deal that he was not a part of and that it would be illegal and open him up to liability.
Another licensed mortgage broker that I talked to had another non-real estate full time job and was only doing mortgage brokering part time. She was also a real estate investor. And she was licensed in multiple states and I suggested that she could make a
nice little business if she marketed this service for investors. And she belonged to several REIA groups in different states. A ready made audience for legally sanctioned seller financing. She did not see it as positively as I and decided against doing it and instead got a full time job selling cable installations.
Three strikes and I was out!
Ken Rishel, David Krulac, Bill Gulley, Paul Timmins,
I hope we did not hijack this thread from the original poster. : )
Thank you all for your input. I believe the safest course of action will be to get with my local REI club and see what the locals are doing. If there is a bigger player, in compliance, maybe I can get "in", to some degree.
If not, I may have to consider more conventional routes to investing. Too bad... I love the "Rent-A-Center" business model. : ) In a way, I am glad I am not yet ready with the funds. Get to thoroughly evaluate every option before risking a dime.
Thanks again.
Michael Spindler
You might want to check the state law where you are investing, as many states have exemptions for low volume. Here there is no exception presently but a new bill would allow unlicensed mortgage lending of "less than 4 per year."
Hey Bill Gulley
I'm young and really like financing deals and getting note income. I'm thinking about just getting my MLO license. If I got the license would that work or what would I have to watch out for? I wouldn't be doing loans for anyone but my company.
Thanks
Summoned three times...LOL
David, I agree, it may be tough finding an originator in some states as the laws vary. In the end, as I mentioned, you may need to sell or assign some deal to a MO and have them do it, or have them make a loan from cash and then someone could purchase the note. I have not given this much thought really as to how to, I did this for years and I have a completely different approach to underwriting seller financed as you need a crystal ball more than underwriting guidelines to meet at the time of a contract. I wouldn't have a problem doing it at all, but I certainly understand those who don't have sufficient experience with off center deals would not want to get involved.
As each state began putting out their version of the SAFE Act I didn't keep up with all the variations, so it's best to check in your state law.
From my last reading of the federal outlines, it appeared to me that the MLO was going to be about the same degree of difficulty as a real estate broker's license.....not much. I have not heard of 2,000 hours being required, but IMO, that is insufficient, just under one year. That's hardly sufficient to originate secondary market loans unless that individual has other directly related loan experience.
As to getting a license for your own business; it wouldn't hurt, but at each turn of this issue it seems like problems appear. Really, I'm not trying to kill seller financed deals! It won't be worth doing for 10 or 20 deals a year IMO.
If you read the requirements for a lender (if not made by the state, then federal, then by the industry to deal with you) you may well need an office, a business location. You need a toll free telephone number. Posted business hours, signage, registrations, license, continued education, insurance, bonds, cash assets and you may have reserve requirements. I can tell you that having stated business hours like 9-5 M-F means you'll need someone else in an office if you expect to go meet people or go have lunch. I don't see a one person office being practical. You'll tick off a Realtor that decides to drop off a copy of something and your door is locked!
I'd just suggest you no longer spin Lonnie Deals as they were constructed. Seems to me as I've mentioned many times, the section on seller financing of the SAFE Act looks like it was designed to shut down such deals as they specifically included mobile homes and even residential lots or land that can be used as residential. It reeks of targeting mobile home deals, by those "dealing in" the business.
Guys, really, who is going to buy a MH that was sold to you for 3K and sold to them for 15K? How smart are they really? Are these stable buyers? There are socio-economic elements to these deals and you need the ability to manage personalities and be able to kick them out if necessary. Not saying all buyers are such n such types, just saying there will be good ones and bad ones. I'd rather, if I had to do deals like this, rent it to them a bit higher than market if possible and then just sell it to them on a hand shake later on! I can see where I could do a letter of intent saying if you rent at this amount and never miss a payment, keep the place in good condition (not maintenance) at the end of five years you may buy the MH at it's book salvage value of five hundred dollars. No contract, no note, no nothing other than a rental agreement. It's personal property, just like a car. Different if land is included. :)
Bill Gulley
I'd rather, if I had to do deals like this, rent it to them a bit higher than market if possible and then just sell it to them on a hand shake later on! I can see where I could do a letter of intent saying if you rent at this amount and never miss a payment, keep the place in good condition (not maintenance) at the end of five years you may buy the MH at it's book salvage value of five hundred dollars. No contract, no note, no nothing other than a rental agreement. It's personal property, just like a car. Different if land is included. :)
Thank you! Light at the end of the tunnel. : )
Second thought, I'd probably get decent homes and rehab them. I'd get with a low-income housing organization, like Habitat for Humanity. No-profits are/can be exempt from the SAFE Act. I'd sell to them, they can put their "clients" in there or if my buyer qualifies under their housing program they can turn my buyer into their client.
I'd use a non-profit as a conduit, I can sell to them as a commercial deal on a note. More like a MH dealer selling to another MH dealer or floor planning inventory. In fact, if I were to do anything like MHs, that's what I'd do, feed a non profit homes for their inventory. :)
Ken Rishel Might you over view how an investor who does 2-4 owner financed deals a year can follow the regs post Jan 2014? IE use your or some other company's services?
We did one 15 yr amortizing owner finance deal of a house closing 4 months ago. Used an originator that cost $695, but am not using a servicer. Sounds like post Jan 2014 I have to use a servicer? I researched the GA regs and we where 100% compliant: held title in a personal name (no entity), use an originator, closed at a lawyers office. We won't sell this note. It's like rent without the toilets, so why sell it? BTW my reason for not using a servicer is not to be cheap. For fear of having some bricks fall on me here, it was a strategic decision to keep my viability low from the regulators even though I did my best to be compliant. I did not want to make it easy for the Banking division to sapeana the servicer for the lender names, which I heard happened.
FWIW I called around in Atlanta/GA and only found 1, that's it, just one loan originator who'd do an owner financed deal. He spent 1/2 hr on the phone to the borrowers for that $695, no paper work, no credit checks (I had to do that part). A rotten value if you ask me.
I hope more orgs enter the market to help investors be compliant. They'd do themselves a favor by speaking at their local REIAs about SAFE act compliance.
curt
Bill Gulley
Bill I'm just trying to learn / figure this out... Earlier in this thread you shot down what sounded like a similar comment, rent for NN years then sign the title over. Sounds like your proposal. IE "terms" even by another name in a court room are still a licensed lending activity. What is the fine print differences? No mention of a sale, keeping that handshake?
How does your proposal differ from extending terms and this come under the Safe act and state licensing requirements?
tnx curt
Just to note, you are not hiding anything by not using a servicer. There is no reason to as you used an originator and attorney and it's fully amortized, as to originations, that's compliant, it's on the originator, not you.
Without a servicer you are about to have administrative duties that you are assuming the risks for, I'd not do that especially on a 15 year basis. Servicing adds value to the note. You may not have any intent to sell the note today, but you can't say it will never be valued.
You could become injured or become incapacitated and your assets may well be valued. You could end up in bankruptcy, your assets will be valued. You could die and your assets will be valued. You could be sued and your assets will be valued. You may want to get financing and your assets could be valued.
Not having servicing means you are taking the liability for servicing, there is more to it than accounting for payments, checking that taxes and insurance were paid. If there is an insured loss, you'll have legal and collection issues, if there are late payments you'll have legal issues, not having taxes paid may not be an event for accelerating the note to maturity but advancing funds to pay the taxes, so you'll have legal issues. Do you know when your loan must go to a non-accrual status and account for the interest? Do you have errors and omissions insurance to cover loan servicing..(?) that's a specialized area, like the difference between your car insurance and boat insurance, your LLC liability is not for loan servicing if that's what you do as a lender. I know you don't have E&O, but errors can be made and your feet can be held to a larger fire from servicing issues than from origination of the note.
Let's say I missed a payment and just won't pay for three months. You call the note and begin foreclosure. I claim I sent the payment and you threw it away as it never cleared, nor did you accept my other payments and I claim you are predator seller in a wrongful foreclosure who refused payments. I can tell you what the likely outcome is with a note holder collecting his own payments, you'll be ordered to accept the payments and eat your attorney fees. You have something to gain is such dealings, you will walk in at a disadvantage. OTH, a servicer who is registered and conducting business with no skin in the game will be viewed as giving testimony that is unimpeachable compared to an individual note holder.
More issues arise from borrowers in SF deals more than from any regulator. Real estate attorneys are often unaware of loan servicing issues. You can be fined one and a half times the amount owing, lose all amounts due as well as the collateral and that just under the Fair Credit, and as an individual, you can't really report, you'll need to provide proof of payments. :) :) :) :)
Servicing benefits the borrower as well, get them to split the cost and do yourself a favor, get a servicer, IMO. :)
Kurt asked
@Ken Rishel Might you over view how an investor who does 2-4 owner financed deals a year can follow the regs post Jan 2014? IE use your or some other company's services?
The Problem
For low volume operators doing less that 12 deals a year, the solutions are few, and sometimes cumbersome.
For Large and Midsize Operators
Rishel Consulting Group offers solutions for those whose volume is large enough to justify setting up their own captive finance company. The size matters because there are costs (not all of them to us) in getting the company set up and compliant, and there are costs (again, not all to us) in administering the Compliance Management System as well as the lending operation itself. Even with help from us, a company is going to need someone whose time is devoted to the finance operation.
For Operators who Lack the Personnel or Can't Justify the Set Up Costs
Those operators doing at least 12 deals a year may be able to attract the help of a 3d party lender like Green Hill Financial. With less volume than that none of the three firms offering this type of service I am aware of will take you on as a client. They too are going to charge you for your help. Their charges will range between $600-$750 to originate a loan, and (for small volume operators) around .0035 for monthly service of the loan. For that everything is done under their licensure and by their staff including collections. You send them the customer and supply the funds and home, and they make and care for the loan.
Given the change in rules this year, the use of MLOs and Mortgage Broker firms to originate your loans is not going to work in January of 2014.
We did one 15 yr amortizing owner finance deal of a house closing 4 months ago. Used an originator that cost $695, but am not using a servicer. Sounds like post Jan 2014 I have to use a servicer? I researched the GA regs and we where 100% compliant: held title in a personal name (no entity), use an originator, closed at a lawyers office. We won't sell this note. It's like rent without the toilets, so why sell it? BTW my reason for not using a servicer is not to be cheap. For fear of having some bricks fall on me here, it was a strategic decision to keep my viability low from the regulators even though I did my best to be compliant. I did not want to make it easy for the Banking division to sapeana the servicer for the lender names, which I heard happened.
In our opinion, this is no longer a workable solution despite the fact that we were teaching both the MLOs/Brokers how to do this legally (most of them were not doing it legally) as little as a year ago to help small operators
FWIW I called around in Atlanta/GA and only found 1, that's it, just one loan originator who'd do an owner financed deal. He spent 1/2 hr on the phone to the borrowers for that $695, no paper work, no credit checks (I had to do that part). A rotten value if you ask me.
and illegal as well
I hope more orgs enter the market to help investors be compliant. Because of the high cost of getting into this, it isn't likely
For Small Volume Operators
Rishel Consulting Group has been working on a solution that is low cost and legal, and workable for several years. We have been testing it for over a year. We have one and it does work in all states but one. We currently have about 60 community owners using it without problems.
No Cost Offer
You can subscribe to our monthly finance newsletter at no cost which contains lots of articles on chattel finance from legal and compliance issues to articles on day to day operations. Just email us with your complete contact information and request it.
You can also obtain a free copy of the industry white paper by either asking your state association or emailing us for a copy of this comprehensive report. Again, it is free.
I hope this helps.
Another source of good information is through state MH trade associations. For example the New York association is going to be having an event on October 23-24 at the Turning Stone Resort (about 1/2 hour from Syracuse, NY). There will be a number of speakers there including two of our people that will handle two different topics. There is a charge to attend, and I'm sure it is higher for non-members, but whatever it is, it will be reasonable.
They can be reached at 800-721-HOME
For those that actually own communities you might want to consider attending the George Allen International Round Table on SEPTEMBER 18-20 in Bloomingdale, Illinois. You can get information from 877-MFD-HSNG
DFI Halts Community from Lending
The Department of Financial Institutions has issued an order to Cloverleaf Park LLC in Clintonville to stop acting as a mortgage banker, loan originator or mortgage broker with- out the appropriate state license. DFI found that Cloverleaf made loans and serviced those loan in 2011 and 2012.
Cloverleaf was ordered cease and desist from conducting business or acting as a mortgage banker. The order extended to directors, officers, employees, agents, successors, assigns and other person’s participating in the illegal lending. The order will remain in effect and enforceable until such time as any provisions of the order is modified, terminated, suspended or set aside by DFI. Therefore, the order follows the people involved even if they move on to other businesses.
Fines and Penalties have not yet been assessed as DFI is considering fining all individuals as well as the corporation.
Ken Rishel I reread your longer piece above dissecting prior posts from folks (like me) and generally saying all are doing owner financing illegally. :(
Your posting about an enforcement action against sounds like a MH park doing lending within their park. Yes the parks are the easiest to find and prosecute.
You mentioned: Green Hill Financial
We want to continue doing owner financing of houses to a market of buyers we like and like working in. Much like folks who like MH's, parks and the buyers, I want a way to be legal going forward with selling houses.
I've been reading all of the lease option, contract for option and contract for deed threads and none of those models are as attractive as genuine owner financing. In Georgia no one likes contract for deed and CFD under Safe Act probably isn't a solution but I'm guessing.
Ken, can you refer me to an org or a set of steps for my owner financing houses in the $60k to $90k selling / financed price range. We do 3-5 per year.
Curt