Acting as a bank

30 Replies

What do fellow investors think of selling investment property that is paid for 100 percent.

Acting as bank.  30 years of payments.  What are costs associated with foreclosing process.

What are other benefits and pitfalls

You posed two questions.

In your mind, are they related in some way?

Separately, my answers would be:

1 - Why would you sell a fully paid for investment property?  If you're asking us if you should, that tells me you're not having problems with it...otherwise you wouldn't be asking.

2 - Foreclosure is different in every state.

There are both federal and state laws regarding owner financing, so make sure you are aware of these if you choose to O.F. 

With that said, O.F. a property (and doing it properly) can increase the price you get for the property because it opens it up to a larger pool of buyers...buyers who can not get institutional financing and therefore will pay a higher interest rate with terms more favorable to the seller.

Most investors balloon the payment in 5 to 7 years, but you could certainly do a straight 30 year amortization with no balloon.

Some states are judicial foreclosure states and some are non-judicial foreclosure states (like Texas), so you would have to address that with a real estate attorney before you consider O.F. 

If a home is not currently marketed, there is no raising of the price. 

Market value for a given area is determined by the pool of available buyers and what they are willing to pay for a specific property. Getting the highest price available in a given market for a given property cannot be remotely construed as predatory, or half the attorneys across the country who close these deals would be in jail for mortgage fraud. 

@Brian Gibbons  

 Predatory lending relates ONLY to mortgage interest rates and terms.. Nothing to do with willing buyer willing seller  vis a vi what someone will buy and someone will sell for as in the dollar amount...

conversely everyone on BP who is trying to buy at under 65% LTV or get the best deal possible would be consider a predatory buyer. ripping poor sellers off of their equity...

Originally posted by @Guy Gimenez :

If a home is not currently marketed, there is no raising of the price. 

Market value for a given area is determined by the pool of available buyers and what they are willing to pay for a specific property. Getting the highest price available in a given market for a given property cannot be remotely construed as predatory, or half the attorneys across the country who close these deals would be in jail for mortgage fraud. 

I see you are new here Guy.

That was utterly wrong.

That is NOT how market value is established by attempting to define a select market.

A price must be set in order to establish an agreement to sell. That price is then and may also be judged after that fact as, being viewed to the market value if that property were exposed to an open market under the definition of market value. Any property that is sold under a distressed sale condition can be adjusted to the market value to establish a fair and equitable price.

Claims arise from all sorts of events, as to predatory lending, but brought by the buyer or on a buyer's behalf, obviously a seller would have no complaints.  

It is not mortgage fraud on the part of any attorney, it's not even mortgage fraud, it is predatory lending!

As to the attorney facilitating any sale, if they draft the note, they may be representing the seller who provides financing, they would not be representing the buyer/borrower. They may also be acting as a settlement agent not representing either party. Regardless, they have no duty to ascertain, arrive at, confirm, qualify, establish or set the value agreed in any real estate transaction, of any kind in any state. Neither does any non-attorney settlement agent acting in the scope of that duty. Neither are a party to the Note and Deed of Trust or mortgage. A Trustee named in a Deed of Trust is not a party to the making of that agreement other than to serve after the deed has been executed, in fact, they have no duty to act as they may decline to do so. The only aspects of price they have any responsibility with will be to the proper accounting for that transaction as required by law and custom. 

Not only does Texas have laws pertaining to predatory dealing and financing, but municipalities in Texas have ordinances as well. You might search that for the Cities of Dallas, Houston and Austin, San Antonio may also.

You will find a list of practices that are considered predatory, but those matters are not an exclusive list of matters that may be deemed predatory. Predatory is any dealing where one party, either party takes gross advantage of another, gross advantage will go to what is usual, customary, deemed fair and equitable as well as being in the best interest of the public. The situation will be viewed as to the big picture, intent, knowledge of the parties and as to the extent that some tortious conduct has been committed.   

It is acceptable for a seller financed transaction to sell slightly higher as in relation to what conventional financing may have cost a buyer, a seller may not charge loan fees or points with a loan funded by equity and the price is the only adjustment a seller has available to compensate for granting the loan. That usually equates to about 3% of a sale price. And, financing does not increase the value of any property.

Matters dealing in financial aspects of loans and real estate is not real estate, financing is a separate area of commerce, business and law. Laws as well as attitudes have changed concerning financing, the change of attitudes of regulators have been brought about by new laws. The attitudes and thoughts, logic or justifications of those who have done past seller financing transactions, or think they know, have been hammered and tossed out the window......new rules!  :)

    

  

     I sincerely doubt there is a place in the US where you cannot offer a piece of property for sale for any price you dream up....hence the make me move listings on Zillow.  And what about those deals where a property doesn't appraise so the buyer makes up the difference out of pocket so the bank will make the loan.

     I also doubt any new  lending regulations apply to the sale and owner financing of a single property, you'd have to be doing at least a few deals in any given year, be a pro.

     But I am not a lawyer.  

     

Originally posted by @Jay Hinrichs :

@Brian Gibbons  

 Predatory lending relates ONLY to mortgage interest rates and terms.. Nothing to do with willing buyer willing seller  vis a vi what someone will buy and someone will sell for as in the dollar amount...

conversely everyone on BP who is trying to buy at under 65% LTV or get the best deal possible would be consider a predatory buyer. ripping poor sellers off of their equity...

No Jay, predatory will be any matter that is illegal, a 3 year balloon payment or one prior to more than half the principal reduction on a high risk mortgage is predatory. Terms and conditions matter, not just interest, but violating usury laws is also predatory.

"Willing and able" has to do with establishing contract agreements to define market value and is a legal concept of negotiation, folks are certainly free to negotiate in their best interest. This has nothing really to do with acting in a predatory manner, where I convince you through deceptive tactics that my 30K house is really worth 60K.

Buying a distressed property is not predatory, the aspect of what ever the distressed situation might be is justification for a lower price. The seller's personal financial position or their motivation may justify their acceptance of a lower price, the condition of the property justifies a lower price, but....

Telling a seller that a foundation repair will cost 30K when in fact a new pier might be replaced for 500 bucks would be predatory dealing.

Giving false or misleading information as a justification for financial gain is fraud and is predatory dealing.

There really is not a "floor" as to price in a distressed sale, some properties can't be sold for a dollar due to environment issues, there is however a "ceiling" as to price and that will be based on the market value. As I mentioned, the market value may be adjusted to reflect a distressed value.

At the moment, I can only think of one situation, I'm sure there are more that would be similar, as to a higher price being obtained than it's perceived or proven market value that wouldn't be predatory;

If both parties know something that is not public knowledge, say we know that Kroger is going to build a shopping center where this house is and they will be announcing it soon, we may agree on a much higher price than what would be shown as the market value for that property. Market value may not included some future influence unknown at the time of the sale. So, if I agreed to pay you 60K for your 30K property and you financed to me (financing doesn't really matter except in this thread) both you and I have a valid justification for paying more and financing more, as I am speculating as to price increases, a significant price increases in the near future. This isn't predatory.

You're certainly free to operate, it is that significant differences in price must be justified, justifications must be reasonable, you can't just claim a buyer was speculating, you'd need to show how there was some speculative nature about that property. 

Another example, I knew there would be, under state law, in some states, a RE agent/broker who buys a property must disclose what may be the reasonable market value of a property. If I'm 80 years old living here and own a property in Cali, and you offer me 90K for a 150K property and you disclose that but I still agree to sell, (I'm 80, I'm not going there, nor do I want my wife's old house, and I need money now for my doctor bills) that is not predatory dealing. I was not deceived, I had knowledge of the price difference and I accepted the offer.

That might be a poor example, as to my situation and age, point being I had knowledge but I chose to sell now as a distressed seller. My kids could come back on that deal with all kinds of claims concerning my ability to negotiate, contract, ability to understand what a prudent seller would do and hit on predatory issues, lots of thing could happen as to cleaning the clock of some elderly guy. Guess we could make a better example if I were 45, of sound mind, but not physically able to travel, that might fly better.

Actually, I have disclosed what a property might sell for after some issue was cured, that issue could be almost anything, from cleaning it up to major renovations to curing title or marketing issues, I did so when there was a significant price difference because doing so covered my tail end!  It's pretty hard to find an owner of a property that is not related to someone and when a seller get taken they usually hear about it. Same with a buyer. :)

@Bill Gulley Forgot.

Interest rate less than 6.5% over floating prime including points.

Must be amortizing.

Use a Licensed Loan orignator, per my business practice of using a LMLO for loans 1-3 every year. 3 loans max per person, 3 for me 3 for my wife. 3 for our IRAs is of course a fuzzy issue... I suspect it's 3 total per person including the IRA. Need case law on this one.

Qualify and doc to 43% DTI.

We set the term to be as short as possible fully amortizing.  Take the rent the house rents for and figure that as P&I and determine the term working the loan calc backwards.  Our cheap houses the term ends up being 12-13 yrs to paid off.  Buyers love this.

Rent the house for at least a year before owner financing!!!!!  IF you don't you can't claim installment sale and you'll get hit with 100% of the capital gains in the year of sale yet you won't get that cash but for a few years out.  Bad!!!  This is a fuzzy issue.  But certainly owner financing a fresh rehab you'll pay capital gains in the year of sale since it's inventory.  Again this is a fuzzy issue and simple enough to rent the house for a while.  We do rent to own, no rent credits  then owner finance.

I also follow these IRS rules to avoid having a lease w option recharacterized by the IRS as to have been a disguised installment sale.

1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319. Get a written opinion of the rental value from a qualified real estate professional.

2. Keep rent credits toward the option price to a minimum. Generally, 20% or less is considered reasonable.

3. The option price should be at or near fair market value. Get a written opinion of the market value from a qualified real estate professional. Breece Veneer & Panel Co., Ibid.

4. Try not to tie-in substantial lessee improvements with the option exercise.

5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.

6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable. See Benton, 197 F.2d, 745; Lester, 32 TC, 711. Use arm's length lease-option documents along with the counsel of qualified professionals.

@Steven Hamilton II    @Bill Walston  

The ability to get financing has everything to do with value. Take away financing and watch property values plummet. What happened to values when interest went to 13% for mortgages?

Our economy is based on credit. Take credit away and values collapse.

Bill, 

I am new to this site but not new to investing.

And neither the length of one’s responses nor the time of one’s membership creates expert status…it merely impresses the impressionable. I will not debate the issues with you because after reading many of your posts it’s clear you are a victim of the system that created you…to wit, the corrupt banking system. That’s right, the same one that came up with Dodd-Frank, S.A.F.E and the ever evolving versions of same, all to solve a problem they themselves created. Yes, I’m calling your baby ugly because it’s the truth and the truth is seldom pretty. There are still people who believe the government and our banking industry are here to help us and that Santa Claus is real…I just don’t happen to be one of them because the overwhelming evidence shows just the opposite and I too old to start wearing rose colored glasses.

Fortunately, I have well versed attorney’s (defined as those with jurisprudence degrees and decades of real world experience) who guide me so I don’t have to depend on theorists. I am sure others will wait for your impressive response, but again, I am not so new to this world that I can’t spot something for what it is.

I see I got behind quick.

@Marian Smith  

yes, the laws pertain to every covered property 1-4 family detached, there are special provisions for condos or townhomes. Anyone can ask whatever they like, asking isn't conniving a predatory deal, paying too much isn't really an issue, it becomes an issue with how the transaction was originated, marketed, presented, justified if at all, what the intentions are, if there was any deception or putting someone at greater risk, taking greater advantage of another or setting someone up to fail.

I suppose those starting out in business aren't aware of deceptive trade practices, false advertising, price fixing and manipulation of markets, torts or other matters that have been with us for years in business that are now being applied in theory more to real estate than they have been in the past. Many of the issues of predatory dealing are not really new, some of the aspects mentioned have been around a long time, just not prevalent as much in cases against crooks. These matters are now surfacing more in compliance due to the attention brought to the RE industry, more specifically, investor type dealings and seller financing.

Predatory will generally be when the screwed had less knowledge than a prudent person or was unaware of unfair tactics, methods or conditions, that or they were misled, deceived or just plain cheated.

The bad part is that there have been so many dealing in RE, as their business or just casual participants in investing that never understood that something they were doing was unethical or even illegal, there are those that really think getting all the other guys money and his blood is business, it's not, not in any business. I can't blame a kid who cheats at some game if he doesn't know the rules. If they just played the game in some alley with others and were never exposed to the rules, what they learned is pretty much how they play the game. If they don't know they are cheating how can they be expected to change? Now we have some new rules, we also have the internet where players are not restricted to playing in the alley, now the are in the full light of day. Will the cheats stop cheating? Probably not. Will others wanting to play be aware of the rules? Hope so. Will those who have not been playing by the rules now understand they were not before? Should be obvious and will they change? Maybe, maybe not. Will those wanting to deal legally and ethically in RE change or conduct business within the rules of the game? Probably so.

At least, now you know.  :)   

@Bill Gulley  

  Bill I disagree with you,  Predatory as it relates to Lending is just as I described.

Fraud Inducement to fraud, unconscionable profit,  When it comes to what one pays or sells property for is not predatory.. Predatory by Safe Act and Dodd Frank relates to lending and lending to a certain Class and lending rates and terms.. I E Sub prime mortgages.

When not telling the truth or lying to a seller about true values or repair values etc is just fraud and fraud in the inducement of contract has nothing to do with Predatory.

I submit that many who buy houses subject too that are under water are over paying by a lot but the seller is not predatory neither is the buyer.

@Curt Smith  , very true with the appraisal requirement, however, not all seller financed transactions fall under the Act, so I was addressing things more to the misguided opinion of valuations.

Yes, balloons have been modified, they are allowed according to the loan classification, 5 years and when more than half the amortized principal has been reduced, was the last I saw. 

As to the number of loans and exemptions, this varies by state, it also varies as to an owner occupant financing and a dealer financing. There is a nit more in law as to who a principal may be, the interests held by a husband and wife, how they were in title, are there comingled funds, who has a beneficial interest and as to other entities, who stands behind the door, who benefits. The catch all in Dodd-Frank is "any scheme or method used with the intent of circumventing the Act" the intent of the exemption is to allow some reasonable number of dealers, mainly small dealers or homeowners to be allowed to conduct such business, this really is anchored in the perception of public policy I think, a few deals may get someone shafted, but OTH, there is more public good that comes from allowing these exemptions in the bigger picture. If you are running 12 deals a year shifting transactions among other relatives, you business entities, your retirement accounts, you're probably going to be nailed as you are clearly beyond the intent of the Act.  

I agree with your thought on leasing first before financing, that is a very good approach, glad you mentioned it! This is pretty much the standard operating procedure for non-profit housing entities, like Habitat For Humanity, they often employ a trial period before settlement and financing. (Just a note, such qualified non-profits are exempt from Dodd-Frank, BTW). And, you're correct as to a dealer having a gain, that isn't applicable to a homeowner, not in the business, as they have other exemptions. 

Also glad to hear you don't give credits with your RTO program, but I do wish we could come up with a better name for installment transactions as RTO (I can't even say it) has a really bad reputation now. :)

Originally posted by @Jay Hinrichs :

@Bill G. 

  Bill I disagree with you,  Predatory as it relates to Lending is just as I described.

Fraud Inducement to fraud, unconscionable profit,  When it comes to what one pays or sells property for is not predatory.. Predatory by Safe Act and Dodd Frank relates to lending and lending to a certain Class and lending rates and terms.. I E Sub prime mortgages.

When not telling the truth or lying to a seller about true values or repair values etc is just fraud and fraud in the inducement of contract has nothing to do with Predatory.

I submit that many who buy houses subject too that are under water are over paying by a lot but the seller is not predatory neither is the buyer.

The only thing we disagree on, is your first sentence, you described predatory as only relating to interest rates which is not correct, Dodd-Frank covers terms and conditions, might consider Curt's and my comments as to balloon payments, that is a loan condition, not interest and if violated is predatory.

I agree with your other comments. My comments might be better understood if we to say, fraud is illegal, by itself it is a violation of law, incorporating fraudulent schemes or aspects is a predatory practice, a predatory practice is not necessarily fraud. A pigeon is a dove, but a dove is not a pigeon. :)

Originally posted by @Jeff S.:

The ability to get financing has everything to do with value. Take away financing and watch property values plummet. What happened to values when interest went to 13% for mortgages?

Our economy is based on credit. Take credit away and values collapse.

I don't really disagree with you Jeff, a property that can not be financed will be less valuable. The basic concept of value requires that the title to an asset is to be easily transferable, financing facilitates the transfer of ownership of any asset and effects its value as it is held for sale in an open market. What would happen if car dealers couldn't finance their inventory!

However, if we make credit more available, then that effects the entire market and prices rise, making credit more available to only one select property does not justify a much higher price, no more than what other credit arrangements would cost.

A note to everyone, not just Jeff, as he is dead on, but this stuff isn't just Bill's opinion, this increasing price aspect is clearly stated in predatory laws and valuations are described in appraisal requirements, financing does not increase the value of a property. Financing may increase marketability of a property to an extent, that being the cost of the alternative, but it doesn't make the dirt more valuable. :) 

Originally posted by @Jay Hinrichs :

@Bill G. 

 and since you don't have a pro account you can't push the ignore button on me !!

And, for the benefit all those who do ignore you, here is a quote so they can't ignore you!

I don't ignore you Jay and wouldn't.

But now that you mention it, is Joe Gore back again? Seems he posted in this thread, but I don't need a button to ignore folks.  :) 

Originally posted by @Jay Hinrichs :

@Bill G. 

  Not sure on Gore   but I got's to go to work now have some deals to do.

Later

Me too, I think you missed the ball on the Gore post, like there is another one. I'm outta here :)

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