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.
Curt - As you know we have talked privately about your needs. Since our specialty is chattel lending on MH we can't really help you beyond the recommendations I gave you, which I hope will solve your problem.
For the record, we consult on chattel lending only. I believe our staff is the best in the manufactured housing industry and we have solutions in that area for all size chattel finance operations. We do not however, claim any real expertise in single family real estate.
Further, one of our staff talked to the community discussed above in 2008 and they told us they were going to fly under the radar until one of the big guys got busted. Food for thought.
Bill Gulley
Hi Bill, I think you quoted from the Safe act bill, an interest rate cap of 6.5% over prime, which prime today and for the past year has been 3.25%
I guess it doesn't mater that I think 6.5% over prime is too low for an individual who's risk management has to price in risk one deal at a time where a bank can price risk in over 1000's of loans...
I don't understand the math I saw somewhere in this thread:
6.5% + 3.25% = 9.75% max interest our notes can indicate today, but there was an adjustment for closing costs that reduced the max down to 9%. The example had $5k closing (which seems very high) per the total loan amount, had some effect on the interest one could charge.
What is that math so I can correctly calc the max interest I can put on a note?
MH folks take note I feel. The interest rate on these MH notes will be so low that alone kills this lonnie deal business. You won't be able to price risk into the note.
tnx curt
It is not 6.5% over prime, it is 6.5% over APOR which can change every Monday. For loans under $50,000 which would be most MH loans the rate maximum is 8,5% over APOR. A calculator is here: http://www.ffiec.gov/ratespread/newcalc.aspx Bear in mind this does not compute for HOEPA status.
A quick follow up:
I must disagree that this kills Lonnie Deals. The current APOR would allow and interest rate of 11.75% on loans under 50K. If the sales price of the home reflects a sufficient markup, and the operator really knows how to service, collect, and regain control of the collateral, there is still a very good profit in each deal.
The bigger problem is the cost of compliance, which means successful Lonnie Dealers are going to have to adapt to a whole new kind of program which at least 60 that we know of have done, and done quite successfully. It does require agreements of cooperation with community owners to work so the LD is going to have to have a good working relationship with the communities in which they place and/or sell homes.
I do stick built house owner financing (least its what I want to do) and don't understand the spread value that website returned for my 9%/15yr entries. I got back 5.49 spread. What does this mean and how do I determine the max interest rate given this confusing bits of info? :)
I read that site's help and it was not clarifying. It was written for a different audience.
tnx curt
This is the problem with trying to use the internet. People assume they can just Google and read. Unfortunately, it doesn't work that way. The people who do truly understand and are also up to date invest huge amounts of time (or staff time) getting that understanding, and, either keep it to themselves, or charge for it like Rishel Consulting Group does. (We spend a whole lot of money on attorneys, and employ - which costs money - real experts on our staff who have years of experience and a whole lot of continuing education to know what we are doing when it comes to advising others. To me, that justifies charging for it.)
The calculator I led you to is the least complicated of the ones commonly available for free. We have one our clients use that does include the HOEPA calculations as well that we had designed specifically for MH needs. We do not have one for site built.
The other problem is I have to be careful about advice in an open forum without compensation because it creates liability problems.
I suppose someone could decide to check APOR every Monday and calculate manually for both HMDA and HOEPA using the spreads. Remember that APR includes more than just interest rate.
Understand that many states have recently become fed up with people not knowing even the basics of what a lender is suppose to know and have begun testing people for their knowledge before issuing any licenses. I believe this is part of what Bill Gulley is talking about. We only disagree, because part of what we do is to educate people in what they need to know to run a finance operation.
In your case, if you take the advice I gave you, you can have someone else worry about what rate you can charge that day, and recording and filing the HMDA reports. Of course that will not get you out of compliance altogether as you still need to have a Compliance Management System for Red Flag, Safeguard, the Disposal Act, Patriot Act, OFAC, and Anti-Money Laundering and now Advertising. (Those we can help you with as the rules are very similar.)
Good Luck!
Curt, missed your question, sorry.
I've bought and sold many properties on a hand shake and did a contract just before closing for them to close on. Don't know if anyone does that anymore, you can always use a first right of refusal flowered up enough to make the buyer of an old MH feel better I guess.
I don't recall say that on the interest spread but maybe so, the first thing to check on is your state usury law, you'll find that dealers, MLOs, finance companies, registered lenders and banks may be exempt but read them carefully as they apply to individuals doing seller financing, don't assume that because you are doing a deal in your LLC that you have an exempt note.
The related laws that Ken mentioned apply to RE as well.
I just thought too, as Ken mentioned a finance company, that might be a better route to go as I really don't see there being any advantage in setting up a lending company and only doing your own deals, especially less than a dozen or so. I also see other issue if you were only doing your deals and may question the independence, dual control and self dealing issues if you are selling and doing the origination, processing and servicing. There is a difference between your business being only for your own dealings and a few deals that arise from public deals. Dealerships usually have an F&I guy, even a department, separate from the sales staff and management, like car dealers, larger organizations don't have these issues but a one guy shop can have problems.
Another point is that if you agreed to repurchase any defaulted note from a lender who did your deal, a repurchase agreement, that would really sweeten the deal for them if you can show the ability to buy it back or at least take the collateral, sell it and pay them off. You'll still have servicing issues if you modify a note or continue collecting payments. Basically, something can be worked out to limit or eliminate the lender's risk.
I'll say too that Lonnie Deals, financing a sale, isn't dead at least for dealers or those doing a volume business, but for one guy trying to spin 6 deals a year, I suggest they do something else. If you read between the lines of the basic SAFE Act, the mention of mobile homes, the mention of lease-options or rent-to-own, the mention of balloon restrictions and interest rates, it's clear to me that much of that was targeted at Lonnie-deals, seller financing by real estate operators where it applies to non-owner sales with short fused balloon notes and churning a property. It's designed to knock off the unethical dealings and that has made it very difficult for any individual operator to work under. It would be easier to open a pawn shop!
I agree with Ken too that you can't just read internet, especially forums, and rely on such to form an opinion much less operating guidelines for a finance operation. You must know where to look, many regulations overlap as there is an alphabetic soup of agencies that can deal in a finance transaction.
Ken hit it on my comments as to knowledge, I know Ken has a business, but I've seen a thousand bankers that were dumb as a rock in many areas of compliance, liability concerns, underwriting or prudent practices. You can't go through a shake and bake course and walk out as an expert. Neither Ken nor I learned what we know in any class or seminar or in a year, it takes long term exposure to different situations, good communication with other professionals, accountants, attorneys, title folks, securities advisors and insurance to mention a few. While you don't need to be an expert to manage a small finance office day to day, you better have expert sources to go to as those with limited knowledge are swimming at the deep end. :)
Bill Gulley and Ken Rishel - I sure like you two. Knowing deep end swimmers in my native profession, I have deep respect for anyone who has spent the time, devotion, self-education and friendships to do that. It's a way of life.
Potential dumb question here.
Is it safe (enough) to rent MFH (sincere rentals - managed and maintained for the purposes of cash flow), acquire a lot of them (not sure how many would make it worthwhile for Ken's firm to work with someone), and when you have enough MFH rentals, then you contact a firm like Ken's to correctly begin selling your MFH inventory with financing?
At the point you have enough MFH housing inventory in your rental portfolio, you continue to bring in rental inventory, as well as sell some off the top (this is the system the company uses). Does this make sense? k - it's fair to shoot holes now : ).
Stephanie Dupuis, the SAFE Act does not apply to renting unless the lease agreement is more than three years, which could become a problem for any residential property. So long as there is no security interest held in the property which you may have with any installment arrangement you should not have an issue with the SAFE Act.
Good idea building up a rental portfolio and doing bucket loads of business later on, but taxes could be an issue sandbagging your sales. That could be very worthwhile. :)
Thanks, Bill - that's helpful.
Stephanie Dupuis Here in metro Atlanta most MH parks where bought by corp owners who progressively converted all rentals to ownership as a means of getting rid of problems (take note). Then they shut out investors from their parks (take another note). Just search BP for how they do this. MH parks who still allow rentals also want to shut out investors.
If your plan is to work MHs your first stop is to the MH park office and explain your business and see if they'll allow you to rent out MH's.
I'd be very surprised if you'll find enough parks to make it a viable plan. Parks can change their interest in working with investors at any time and generally I view the trend to be to shut out investors! IE what if: you own a rental and the park sends you a 3 months sell or leave, the park is converting to owner occupant only?
This thread is about owner financing MH's re Safe Act, not renting MHs. There's a reason for that. Renting MHs is s tough business model!!! That's why investors want to owner finance to a less transient MH occupant.
But you may live in an area where parks have rentals (still) and are investor friendly (for now). I drove some nice HM parks, a pond, play ground, nice homes... But the park owners saw me as a competitor and they have some powerful tools to keep investors out. IE all renters or buyers MUST be approved by the office and you pay land rent even if the MH is empty (you're between renters).
The easiest rental model is renting out (SFR) houses in good school districts. For our company our written purchasing guidelines states we can only buy in great schools 5 or better areas and we never hear from our renters or have problems.
Doing the math on MH rental or owner finance I don't see much of a reason to get into the business today. Land rents for $400 / mo around GA. The max folks can afford to pay is between $650/mo up to at the very (very) most is $800/mo. That means either renting or owner financing you have $250 to $400 / mo cash flow out of which you have to pay for insurance, taxes, maintenance and replace what walks off. For the hours spent in each deal, why work for $100 to at most $250 a month net? The Parks really do have an advantage and always will they can work slim margins with volume.
Just saying; verify the numbers and logistics of a business model in your area before you spend much time. We went through quite a few ideas before settling on SFRs in good school districts in small cities in GA.
curt