Selling house to tenant while keeping my low interest loan
Columbus, OH · Member since 2013 · 23 posts · 3 votes
Selling house to tenant while keeping my low interest loan
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesThis is like old world (prior to January 10th 2014) and new world (after January 10th 2014).
The old guard of lease option and subject to selling to owner occupants are fighting tooth and nail to find a way around Dodd Frank and CFPB. Included in tactics are denial, constitutionality, misuse of exemptions, far out legal theories, etc.
I HATE Dodd Frank and CFPB too! However, it is DANGEROUS to act as if it doesn't exist, and/or use dubious legal theory to try and not comply. The semi socialist government we now deal with will go to extremes to enforce all provisions. We must recognize the Act in any transactions that may apply. Of more concern to me is the private attorneys that will convince owner occupants to sue lenders; if you're sued you lose even if you win in court.
I hate to say it, but I am afraid we will find that many real estate models concerning the sale of houses to people unable to qualify for conventional financing will no longer be viable. This is as simple as understanding that what works with owner financing at 10% does not work at 5%, or that risks, liabilities, servicing fees, underwiriting fees, professional fees, etc. have increased tremendously. I for one will NEVER be involved in a owner occupant loan again; as far as I am concerned it not worth the risk, aggravation or costs.
26 Replies
- Real Estate Agent · Charleston, SC · Member since 2013 · 424 posts · 99 votes12y
Have you considered Seller Financing? Require more (30%?) cash down, and offer him a decent rate, even with his dings. This gives you some cash to cover any chance of him defaulting, and you could reasonably give him an interest rate of 4%-5%. If you have to foreclose you'll have made the down payment free and clear to take care of any damage that may be done, and you'll be getting twice the rate that you're paying. Plus, you may be giving him a competitive rate compared to what any bank would. Private Money/Hard Money is usually 10%+ but I think that may be unreasonable. I've never done this before so that's just my two cents.
- Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes12y
research owner/seller financing it may be an option given the summary you provided. Be sure to review all the posts on Dodd-Frank law too. Good luck!
- Columbus, OH · Member since 2013 · 23 posts · 3 votes12y
My wife and I talked about owner financing, but we wondered if you can owner finance something that you have a lien on. I don't know. Maybe I should talk to a real estate attorney. Could be worth the money.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Search "Subject-to" transactions, you sell subject to the existing lien(s).
If he is living in that property Dodd-Frank will apply, the buyer needs to qualify and you will need loan/contract servicing.
How do you intend to sell if you have intentions to return?
What makes you think he would qualify at a high rate and not lower? Dodd-Frank will have an impact on that determination. :)
- Rental Property Investor · Queen Creek, AZ · Member since 2013 · 368 posts · 191 votes12ySeller financing as Jason stated would be an ideal solution for both of you. Require a sizable down payment to cover any incidentals. You can get change your position with seller financing and have positive cash flow on the property.
- Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes12y
I agree with @Jason Eyerly on this. However, use lien theory practices instead of title theory and you'll save yourself legal effort down the road if you need to foreclose, because evicting is easier. Western states (anybody from California knows this really well) practice this a lot.
Find a local attorney (not just any attorney but a real estate attorney) who has experience with this, probably back in your town where the home is located.
I think taking up seller financing is a great move and there a billion ways to pull it off. Banks won't lend, and as long as your buyer/tenant has a well paying job with a good history of not "quitting" or "losing" jobs, you're probably going to be alright. Lots of folks have reestablished their careers & incomes, but credit scores and bank regulations are making it difficult. You could probably get a bit more on the interest than 4-5 percent; no reason to let it go for now-market rate.
I've been involved in lots of these so I'd be glad to help if you ever want to bounce ideas back and forth. If you're looking to simply liquidate and prefer short term, give him a two year note, coach him on increasing credit worthiness, and force him to refi at the end of two years, with a possible one year extension with an associated fee.
Good luck!
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Well Justin, what you suggested with a 2 year note is in violation of DF for OO notes that are not qualified obligations. The security allowed will be dictated by state law, you don't choose what theory you lend in.
To get assistance you need to run it by an attorney and probably a RLMO, getting involved with investor types in seller financing usually lead to issues regardless of the deals they did, especially in another state. You don't occupy the property so the DF Act appears to apply to your deal.
Sub-2 is your arrangement to utilize now. 30% down is unusual in SF deals overall, 20% is usually the goal, many are down at 10%. :)
- Real Estate Investor · Member since 2013 · 866 posts · 487 votes12y
Dodd Frank does not apply to every lending transaction. Not even every residential lending transaction.
@Dan Griffin, @Justin Polston and @Jason Eyerly gave you some good advice. Find a local attorney where the property is located. This doesn't have to complicated and the attorney can structure it so everyone is protected.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Duncan, DF can apply here, the tenant lives in the house, that means it's owner occupied. Next, the seller is not living in the property as an owner occupied seller and is the landlord, so that exemption is out. The seller may have an exemption as to high risk loans not being a dealer, we don't know that.
You give bad advice in this area Duncan IMO by your endorsement, except that the OP needs to see an attorney and yes it can be simply done.
Your obstinate posts will be ignored. :)
- Real Estate Investor · Member since 2013 · 866 posts · 487 votes12y
Obstinate?
I've often noticed people accuse others of what they do themselves.
For example... Definition of Obstinate.
@Dan Griffin, an attorney is what you need for this transaction. All the theory in the world about whether Dobb Frank applies or not is not going to help you with your immediate need.
- Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes12y
Originally posted by @Bill Gulley:
Search "Subject-to" transactions, you sell subject to the existing lien(s).
If he is living in that property Dodd-Frank will apply, the buyer needs to qualify and you will need loan/contract servicing.
How do you intend to sell if you have intentions to return?
What makes you think he would qualify at a high rate and not lower? Dodd-Frank will have an impact on that determination. :)
The ATR rule is the Dodd Frank major concern.
See http://files.consumerfinance.gov/f/201308_cfpb_atr-and-qm-comparison-chart_V2_final.pdf
- 12yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
This is like old world (prior to January 10th 2014) and new world (after January 10th 2014).
The old guard of lease option and subject to selling to owner occupants are fighting tooth and nail to find a way around Dodd Frank and CFPB. Included in tactics are denial, constitutionality, misuse of exemptions, far out legal theories, etc.
I HATE Dodd Frank and CFPB too! However, it is DANGEROUS to act as if it doesn't exist, and/or use dubious legal theory to try and not comply. The semi socialist government we now deal with will go to extremes to enforce all provisions. We must recognize the Act in any transactions that may apply. Of more concern to me is the private attorneys that will convince owner occupants to sue lenders; if you're sued you lose even if you win in court.
I hate to say it, but I am afraid we will find that many real estate models concerning the sale of houses to people unable to qualify for conventional financing will no longer be viable. This is as simple as understanding that what works with owner financing at 10% does not work at 5%, or that risks, liabilities, servicing fees, underwiriting fees, professional fees, etc. have increased tremendously. I for one will NEVER be involved in a owner occupant loan again; as far as I am concerned it not worth the risk, aggravation or costs.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
You know you hit the big time as a guru when federal law contains your name! The SAFE Act specifically mentions "Lonnie Deals", Lonnie introduced some creative stuff, he has passed and his daughter is a member on BP, at least popped in but I've never seen posts since his passing. We also have another member who bought the rights to these out of date transaction ideas who is still selling the books.
Mentioning this, is to give an example of the consumer concerns that finally hit in federal law. If anyone gets caught up in the "do it-collect the down-take it back and do it again" the rinse and repeat stuff, you'll get nailed.
DF cleaned up much of what could be done to mess over a borrower/buyer and basically brought back conventional underwriting.
Consider that prior to sub-prime lending qualifying ratios were 24/36%, now they have raised that for the ideal borrower qualifying at 42% and still being qualified in certain instances at 50% or even a tad more! I turned people down at 42% and more, so this new ceiling is a much greater opportunity to make deals fly.
I agree with Don, those who are not really comfortable at actual underwriting or not really trust that MLO (or attorney) might sleep better not going there in residential deals.
The DF effects all seller financed methods, if a payment is made toward the purchase price, it's covered unless it's commercial or exempted under certain provisions. Seller financing is not dead, it's just changed in the new world. :)
- Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes12y
@Dan Griffin I wish you luck on finding a solution. I know a lot of folks have been chiming in on the legal aspects of the transaction, but I thought I would mention other things that you may want to think about. The underwriting axiom "Past Predicts Future" is very, very true. There is a reason that experienced lending institutions look at credit reports. Past payment history is indeed a strong indicator of future payment tendencies. If the tenant has a poor history of making their payments, it is highly likely that they will not make their payments to you. If you keep your loan and allow the tenant to basically assume payments, you will not only put yourself at risk of triggering the due on sale clause of the mortgage, but you're betting your good credit and name that the tenant (with a poor history of making payments on time) will make the loan payments on time. Please don't be too trusting. This is your good name and credit you are betting. Remember that no good deed goes unpunished. After spending more than 20 years lending for large lenders, I can say for a fact that most losses that lenders take on loans are in situations where they stretched to make a deal. Although your tenant may be a great person and may pay the loan on time, I personally have seen too many instances where similar profiles don't come through. Personally, I wouldn't do the deal simply based on what you wrote in your intro. Good luck!
- Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes12y
@Bill Gulley Obviously folks will work around the DF situation. What are your
- Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes12y
I also still defend my opinion on title versus lien. State laws will regulate financial institutions in that aspect. However, I was suggesting to not hand title over and place a lien, but to (as the seller) hold the title and hand it over upon completion of promissory note.
I just turned 25 but have been doing my own fix and flips with my own hands, but it sounds like you're way more into the very specifics of legal paperwork, and admittedly, I'm not at all. I'm only speaking upon my own exoeriences and the tips I've been given with some locals in my network.
With the rest of the responses like with @Duncan Taylor , it seems we might benefit from an entirely separate thread around DF and ways to beat over regulations.
- Property Manager · Shelbyville, IN · Member since 2014 · 303 posts · 161 votes12y
@Bill Gulley meant to say... your thoughts?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Seems what you are suggesting is a contract for deed, those now have issues with a pre arranged quit claim deed in areas as they circumvent foreclosure laws everywhere, so as a seller that can require you to foreclose, again, the theory of lien/title will be by law regardless of what your agreement may be, in the end state law prevails. A sub-2 or note and DOT is the best way to go. Flipping, doing construction on a property you're not in title to has many issues, from getting permits to insurance matters to liens, so I suggest you own then rehab. :)
- Real Estate Investor · Member since 2013 · 866 posts · 487 votes12y
Originally posted by @Justin Polston:
I also still defend my opinion on title versus lien. State laws will regulate financial institutions in that aspect. However, I was suggesting to not hand title over and place a lien, but to (as the seller) hold the title and hand it over upon completion of promissory note.
I just turned 25 but have been doing my own fix and flips with my own hands, but it sounds like you're way more into the very specifics of legal paperwork, and admittedly, I'm not at all. I'm only speaking upon my own exoeriences and the tips I've been given with some locals in my network.
With the rest of the responses like with @Duncan Taylor , it seems we might benefit from an entirely separate thread around DF and ways to beat over regulations.
There are other threads on Dodd Frank.
But, here is the thing. This is all new. The regulations aren't even dry yet. I don't have a clue how this is going to play out and no matter how much anyone claims they do because they have read this or that in the regs or the legislation they don't either.
And here's why...
Every single law ends up with unintended consequences.
My bet is somewhere in this country, right now, a lawyer and one or more interns or law students are looking for ways to have Dodd Frank not apply to something their client wants to do. Within 5 years arguments will have been made, precedents will have been set and the actual real world functioning of Dodd Frank will be different compared to anything claimed by anyone pontificating about what they think they know about the law now.
Then probably 5 or so years after that you will see some guru or coach type talking about "Donnie Deals" and how Dodd Frank doesn't apply. It doesn't matter they will only know half the truth and will probably get that part wrong too. But, it will be based on a nugget of truth created by the lawyers and their research assistants long before.
I'll give you two examples where I have first hand knowledge. GRITs and GRATs, neither of which came about directly because of legislation passed by Congress or regulations written by bureaucrats. Nope, they exist because a lawyer figured out a way to help his clients transfer unlimited wealth and permanently protect it for future generations with 100% certainty in spite of what 'experts' claimed at the time.
So, that is why I said what I did. If you want to do anything that is not bright line, specifically spelled out, you will need a smart lawyer who will figure out a loophole that will stick and have the ability to argue and make it stick.
Anyone claiming they know how this will play out over the next five years is full of bovine excrement.
- Columbus, OH · Member since 2013 · 23 posts · 3 votes12y
Thanks for the advice here everyone. Most of this is beyond me, but I do know of a real estate attorney who I met through REIA in the city where the house is. It is probably worth an hour or two of his time to see if this is feasible to do in a way that is a win/win.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes12y
Normally I am the first to say to folks go see an attorney and get expert advice. Here is what scares me about Dodd-Frank, no one knows it! It somehow slid by without much debate in the aftermath of thousands upon thousands of foreclosures and everyone was was mad at banks for having the audacity to loan to people who asked to have money loaned to them. It had hardly any debate and apparently no one really understood how badly it would hurt consumers and sellers. I easily do more realty contracts than all of the rest of the attorneys in my town combined and frankly I am afraid to do a contract where the buyer is going to live in the property. I do not understand it enough yet to feel comfortable in advising folks. I have done many hundreds and possibly thousands of contracts for deeds, deeds with mortgage back and lease with option to purchase. I have litigated many cases involving those and was always confident in advising my client, now I am not. I try to go to classes to keep up on new changes in the law, but I have yet to see a comprehensive class offered on Dodd-Frank. You might ask the attorney you go to and see if he can explain Dodd Frank to you, odds are he cannot.
I actually asked a local attorney what he thought about the Dodd-Frank Act and he gave me a blank look, he had never even heard about it. This is a sharp attorney with 30 years of experience. Its passage was not publicized much.
If your attorney cannot explain Dodd-Frank then do not have him help you.
I truly hope this gets sorted out before it really hurts the consumer. I cannot tell you what is safe other than not selling to owner occupiers. The world changed for investors on January 10, 2014. If you violate the Dodd-Frank Act you may end up being unable to collect a single mortgage payment and lose your entire investment, worse you might even be prosecuted for it. I think the odds are low if you attempted to be fair, but a 2 year note would be a huge red flag. I am sorry I cannot give you any more help.
@Justin Polston your advice was fairly good a month ago, now it is dead wrong. Please be careful. Here is a situation where a seller wants to help a buyer get into a good quality house at a decent price and the government in its wisdom may have made it illegal to do so. It is very frustrating.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
@Jerry W. I understand the frustration and the misconceptions of others concerning DF. When the light comes on everything will be viewed differently I think.
I'm not going to beat this further, but much of it is pretty easy for those who were doing conventional financing before the sub-prime era.
I've spent several hours, more than I should, trolling through the instructions for examiners of the CFPB. You can see the obvious areas of concern and how half the financial industry is touched cutting out the sub-prime lending activities. We are going back to old underwriting standards and prudent lending practices.
As I mentioned above, there is a bit of a compromise with higher qualifying ratios and plenty of room to justify making a loan prudently, off setting assets being considered for example. There are also exemptions for mom and pop selling their home or even those doing a few deals a year.
You are absolutely right, DF needs to be paid attention to. I don't think anyone who has some minor foul up is going to jail, a dealer who does 10or 20 deals that ignores the law could certainly get free room and board. I'd bet to that if there were really a minor issue, an interest rate missed by half a point, it may just be corrected, pay restitution, adjust it and move on, but it will be a great loss just paying the legal fees to do that. If the issue is more serious, like calling a balloon note and trying to foreclose I can see a real loss.
I've been through these changes before, no agency is head hunting, there will be a learning curve allowed. There are studies to be done under DF that are scheduled to be developed in 5 years. During that time, the general intent will be enforced. Primary targets are not small deals but larger lenders, they are already in line.
Common sense applies. Intentional acts ignoring the issue will get hammered, the bigger they are the harder the hammer comes down. Small errors with good intentions, no harm no foul I doubt will be worth the time or effort, cease and desist, make it right and move on.
Jerry, if I were you, I'd dig in on the finance side, few other attorneys will have the expertise and there will always be buyer/borrowers in trouble.....it's not that hard. :)
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes12y
@Bill Gulley my concern is the head hunter attorneys. There are attorneys in CA who go to the courthouse and look at foreclosures filed by non attorneys. They make a living filing lawsuits against folks for minor screw ups in paperwork. There are attorneys who make millions just going after mail order businesses just for failing to disclose part of the shipping costs on their orders, every buyer gets a $5 coupon and they get 50% of the settlement of 5 million. The ambulance chasers of the profession will use this as so many slip and fall claims. My clients come to me to get it right, not do my best guess. I have never done any underwriting whatsoever in my career. I am a bit frustrated at the lack of transparency of the government in applying such massive regulation to the simple mom and pop operations. Hopefully several good training course will pop up to get educated on it. That cost however gets passed on to consumers.
The largest increase in budget for our states criminal investigation unit is adding people to do fingerprint and background checks, along with the new computers and programs to handle it. Probably 50% or more of decent jobs require fingerprints and background checks. medical, education, banking, law enforcement, driving jobs, day cares, etc. The expenses to operate a business grow with every pen stroke of Congress.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
I'm out of vote ammo for you @Jerry W., I agree and understand what you're saying.
I didn't mean to become a financial ambulance chaser. Good points and better educated borrowers Contingent liabilities bleeding over to others involved could be another aspect, I don't know, but I'll just bet the RE brokers here have given standing orders to all agents....no seller finance deals through this office!
Admire your attitude and professional dedication, no guessing! Many do guess giving off the cuff advice, investors need to recognize that. :)
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
Good luck on finding an RE attorney whose clientele and experience will be helpful here. Both of my attorneys admitted to not knowing the ins and outs of Dodd Frank. Both have been doing only RE law for 40 years, have plenty of clients in the past who carried paper for owner occupants and are plenty familiar with "creative" deals, but this lending issue just isn't the focus of their practice ..... and won't be. They'll just advise against it (carrying paper for owner occupants). Or refer their clients elsewhere. 15 years ago one of them summed up his opinion of of LO v. sub2: "LO good, Sub2 bad". He said since DOS is always a risk, just don't do it. I thought was ultra conservative and didn't take into account a back up plan. However, if I was an attorney I might say the same thing since you never know what your client is thinking and where they'll go with your advice.
I've spoken to several hard money lenders and note buyers in the past six months. Most will no longer originate consumer loans, but some still buy the paper. While they are very clear on origination requirements (most are licensed brokers and LMOs in CA already), they are not so clear on all the new regs that went into effect 1/10.
All that being said, there IS an EXEMPTION in the new law for ONE DEAL per year by individuals, trusts and estates. One deal a year by these entities is exempt from LMO and ATR requirements (and a bunch of other term requirements). That's something people! It's a nod and concession that seller carry backs are a normal occurrence in the deposition of RE by individuals and estates. It's not meant to aid RE investors. The OP is in the exact situation that it is intended to serve: an individual selling one residence to a consumer/OO and carrying back the note.
But again, good luck on finding an attorney who has read the law and knows and understands the exemption.
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