Dodd-Frank Impact on "Seller Financing" for Buyers

Saint Martinville, LA · Member since 2014 · 34 posts · 8 votes

BP Nation,

From what I understand, the Dodd-Frank Act mainly effects the seller when it comes to a "seller financed" deal. Are there any impacts on the buyer? I will be targeting "100% seller financed" deals this year in order to purchase rental properties. Is there anything I should be weary of? I also don't want the seller to be at risk as well.

Thanks,

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Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

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Actually Nick, there can be issues on the buyer side, the DF Act includes originators and the "maker" of loans, the "maker" of a note is the borrower, not the lender. The DF Act only pertains to consumer financing on home loans, not commercial loans, buying rentals will be a commercial aspect so long as you don't live in the property.

Another matter is who presents the deal, who constructs the agreements, who drafts the note, often it's an investor buyer who has the sales pitch and sells the deal to an owner. Doing so means you take responsibility for what you propose and get an owner to agree to, so if there are any financing snags ultimately you can be on the hook, that includes predatory dealing or financing.

Now, you said 100% financing and not putting the seller at risk. Don't see how that is possible unless the seller retains title until a certain amount is paid (down there in LA you have a Bond for Deed) otherwise you'd need to pledge other collateral sufficient to reduce the risks normally assumed by a seller financing a deal, if you don't and things go south, talking a seller into taking back all the financing without collateral and causing him a loss will be an issue for you. Good luck :)

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
Actually Nick, there can be issues on the buyer side, the DF Act includes originators and the "maker" of loans, the "maker" of a note is the borrower, not the lender. The DF Act only pertains to consumer financing on home loans, not commercial loans, buying rentals will be a commercial aspect so long as you don't live in the property.
Another matter is who presents the deal, who constructs the agreements, who drafts the note, often it's an investor buyer who has the sales pitch and sells the deal to an owner. Doing so means you take responsibility for what you propose and get an owner to agree to, so if there are any financing snags ultimately you can be on the hook, that includes predatory dealing or financing.
Now, you said 100% financing and not putting the seller at risk. Don't see how that is possible unless the seller retains title until a certain amount is paid (down there in LA you have a Bond for Deed) otherwise you'd need to pledge other collateral sufficient to reduce the risks normally assumed by a seller financing a deal, if you don't and things go south, talking a seller into taking back all the financing without collateral and causing him a loss will be an issue for you. Good luck :)
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Nick Deshotels
OP
Saint Martinville, LA · Member since 2014 · 34 posts · 8 votes
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Thanks @Bill Gulley ! I appreciate your insight. As far as risk for the seller, I was referring to risks associated with violating the DF Act specifically. I understand your points. My goal for 2015 was to target at least 2 buy and hold properties with seller financing aside from my normal Wholesale deals. I'm still gathering all the necessary information regarding "100% seller financing ", so that I can keep myself out of any future headaches. I'm currently reaching out to an attorney from our local REIA in order to ensure I have my facts and contracts in order.
Thanks again.....
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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The best thing you can do is to talk to an Rmlo who has done many many many seller financing transactions with the new Dodd Frank and safe act laws
Check out RMLO @terry
@Terry Lewis undefined
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Nick Deshotels
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Saint Martinville, LA · Member since 2014 · 34 posts · 8 votes
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Thanks @Brian Gibbons
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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@Nick Deshotels
I think Louisiana is a great place for people that need to get qualified with their debt to earnings ratio and you can help buy on lease with option but get them for the proper underwriting w a RMLO
Also it's important to understand what a good FICO coach can do so the renters can get mortgage, I use www.upgrademycredit.com
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Nick Deshotels
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Saint Martinville, LA · Member since 2014 · 34 posts · 8 votes
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@Brian Gibbons My intent would be to offer the seller the option to "seller finance" in order for me to purchase the property and avoid traditional lending. I'm trying to go this route to avoid the larger down payments needed for traditional lending. I don't have an abundance of liquid assets or "private money" assets in place, so this is why I'm looking to pursue this strategy. I'm marketing for wholesale deals, but I'd like to purchase 1 or 2 homes this year with creative financing. Is my approach too problematic?
Thanks
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Bill Gulley
Bill your comment that dodd frank does not apply to commercial loans is on its face accurate. however many states do not consider loans on 1 to 4 unit commercial ( owner occupied or not)... For instance here in Oregon you must be NMLS licensed to originate notes on 1 to 4 units regardless of use. Comerical is described as 5 units or more.. Or property that are not for occupancy.. construction loans etc.
Now the state were Nick is working you could very well be correct however its not a blanket statement for the entire country.. Now many states have an exclusion or exception for one time or a few of these a year.
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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@Jay Hinrichs
I wish you would start a blog "everything you need to know about Oregon real estate investing"
:)
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Brian Gibbons
Whats a Blog ?
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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See http://weblogs.about.com/od/wordpresstutorialstips/tp/10StepsStartWordPressBlog.htm
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Joe C.
Rental Property Investor · Katy, TX · Member since 2013 · 64 posts · 13 votes
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@Nick Deshotels
I was just preparing an offer asking for seller financing on a triplex (in CA) a few minutes ago. The seller financing addendum came with a disclosure to the seller that said something to the effect of: seller can do seller financing up to 3 times a year depending on the terms of the loan without being subjected to TILA Act requirements.
Disclaimer: I am a licensed Realtor but not RMLO or Attorney. Check with your attorney to confirm.
I didn't want to copy and paste the exact words onto here for violating copyright laws from CAR.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Brian Gibbons
I just know by experience our state is Dodd Frank Nazi's they are very very strict and will for sure come down on un licensed folks.. especially those who were doing HML rehab loans. I have seen more than one that got cease and desists .. They did not fine them but they shut them down. So they just had to go find a broker to do their deals .. not the end of the world however like I said every state is different in their position of what constitutes a commercial loan.. For instance just over the border in Washington Bills comments are completely correct if you originate a loan on a non owner occ for commercial purpose no license required
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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Originally posted by @Joe C.:
@Nick Deshotels
I was just preparing an offer asking for seller financing on a triplex (in CA) a few minutes ago. The seller financing addendum came with a disclosure to the seller that said something to the effect of: seller can do seller financing up to 3 times a year depending on the terms of the loan without being subjected to TILA Act requirements.
Disclaimer: I am a licensed Realtor but not RMLO or Attorney. Check with your attorney to confirm.
I didn't want to copy and paste the exact words onto here for violating copyright laws from CAR.
I have a problem with the CAR forms so I use the RMLO
See @Terry Lewis
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
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@Jay Hinrichs
We went over this aspect a year ago in the DF infancy. I stopped mentioning loan classifications due to the different applications and rarity of that interpretation. I agree, it was my position (still is) that there is more to defining commercial loans than what investors recognize. It appears that the general interpretation is that a business use is sufficient, DF doesn't define loan classifications but specifically describes 1-4 family dwellings.
While DF sets regulatory requirements to be overseen by HUD, states are free to apply their own requirements so long as the intent of the DF Act is followed and they may be more strict. If in the future any state law is determined not to cover the intent of DF, then the DF Act shall apply as interpreted at the federal level.
Here, all I can do is to speak to the DF Act at a federal level, certainly can't break it down for 50 states. There will be differences state by state as to loan classifications, type of security interest, purpose of the loan and who the lender and borrower is. Anyone doing seller financing should do their due diligence at the state level.
In that light, I'm correct and others mentioning specific state interpretations will add to the conversation to their specific requirements, but doesn't mean the federal side is totally discounted.
TILA was incorporated into the DF Act, I read the original draft as to modifications, I skimmed it and it appears to me that (seller financing was originally exempt from TILA), in those covered transactions that TILA will now apply. IMO, that follows the logic of covered loans being originated by a licensed originator will be able to apply TILA, where in the past some homeowner probably couldn't comply.
BTW, I think everyone knows that mobile homes are single family dwellings, on or off their wheels. MH dealers are under DF with modified restrictions. Chattel liens under DF is not my area of expertise, I haven't studied that area and we have a member, Ken Rischel, who is in loan compliance for that.
Lastly, I will caution everyone about using a RMLO, that is another area where due diligence should be done. You can have someone who was selling cars last year and who took a 20 hour course, past a test about as difficult as a real estate license exam that is now a RMLO. You may find a RMLO with good salesmanship skills and who has an imagination, they may strike off doing things they have no knowledge of but cater to investor needs. You can be at risk as well as those who originate financing contracts. Endorsements of a RMLO by anyone should consider that endorsement a little deeper, the endorser's financial compliance experience and underwriting knowledge need to be part of that assessment. If you're selecting a RMLO based on "marketing" aspects beware. :)
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Bill Gulley
from my limited experience in the lending world I think there are 12 states that make the stricter interp about the 1 to 4 unit.. One just needs to check with their state..
In practice MLO's will have a very hard time doing these deals, at least the one's I know there is not enough money in it for them and a ton of risk. I could see the day were some one makes a specialty out of it and corners the market on seller carry back.. Although with each state pretty much having an exemption for one time or doing just a few a year. Its probably a moot point for most sellers.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
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Jay, I'm working on it! Seller financing and private lending is much more involved now than can possibly be approached by someone with a 20 hour course and it's not quite mortgage origination under conventional thinking. It's more to predicting the future than looking at current qualifications. Non-profit organizations have much better data and experience than do conventional lenders. Being a certified HUD credit counselor certainly adds to the art of underwriting these deals. If I were King, I'd take care of this stuff! LOL
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Taylor Shields
Real Estate Investor · Lake Oswego, OR · Member since 2014 · 64 posts · 29 votes
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@Nick Deshotels
Exemptions of Dodd Frank allow for most seller financing without headache. If someone is selling more than 3 properties with SF per year then they will need an MLO, in most states, but like Jay said, each state is different, so you better check for sake of your seller.
If your seller is an individual or trust and have will only be selling one property per year they can have balloon payments. If it is an adjustable rate then it must be tied to an index and must be fixed for a min of 5 years. Cannot exceed 2 points of increase a year. Cannot change more than 6 points from the original rate. Seller does not have to qualify the borrowers ability to repay.
If seller is an individual or trust and will be selling 2 to 3 properties per year or a buisness selling less than 3. There cannot be balloon payments or adjustable rates. Seller must prove borrowers ability to repay
Some other points:
In regards to presenting seller financing to the seller. Understand that every single seller is different and a deal should be custom to them. If you are wanting to avoid headache down the road don't try to cram people into a seller financed cookie cutter.
You need to find out what they truly need and what they are going to do with the money from the sale of the property. Once you know those things then you will know if there is an opportunity for seller financing.
Seller financing shouldn't be presented as "seller financing". It should be presented as them being an investor in your company with capital secured by real estate with monthly interest.
You owe it to your investors (sellers) to have a high degree of real estate finance fluency. You need to be able to explain Notes and Deeds of Trusts and Maker/Beneficiary agreements ect ect...
I would suggest putting together some kind of credibility kit. A professional portfolio of some of the properties you have flipped, your credit score, qualifications, ect, anything that can make you more credible.
Include in your Maker/Beneficiary Agreement a clause that specifies there are no prepayment penalties and a clause that gives you the first right of refusal to purchase the note if the beneficiary decides to sell it or is approached by a note buyer. In that scenario the note usually sells at a discount. Your attorney can help you with this.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Taylor Shields
good thought on being able to match any offer to buy the note in the secondary market.
WE had a substantial ( seven figure) LOC with a bank that got taken over and were able to step in and buy our own debt at a big discount... About the only thing good that happened to us during the GFC
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Taylor Shields
Real Estate Investor · Lake Oswego, OR · Member since 2014 · 64 posts · 29 votes
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@Jay Hinrichs
Wow! You must of had a good relationship with the bank. Haven't heard of this on that kind of scale.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Taylor Shields
24 years with the same banker they had done a correspondant deal with the bank that got taken over and we were able to buy our debt at discount.
on larger loans 3 to 10 million its common for community banks like this to partner with other community banks.. Its all behind the scene's of course. Bill Guilly I am sure could fill us in on the intracacies and J martin as well.
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