Are their 3rd Party Options for Structuring Seller Financing?
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
Are their 3rd Party Options for Structuring Seller Financing?
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesAs a California RE licensee, you can facilitate the transaction. The CAR has a seller finance addendum in Zipforms (form code SFA) that covers the required issues. The title company can draw the note and deed of trust, and may be able to answer questions related to escrowing the impounds.
Typically, HOA dues are junior to a recorded deed of trust so the seller shouldn't have to worry about non-payment of those (review the HOA bylaws to verify). Property taxes are senior, so they DO need to worry about those. The seller could just hire a tax service to notify them of missed tax payments, so the complexities of impounding can be avoided (title company should be able to help with this).
If they really want to impound taxes, one option is to hire a loan servicing company to service the loan and manage the impounds. There are serving companies that specialize in servicing private money loans.
If you are unclear of all of the nuances, ask your broker for assistance. If your broker can't help, you might consider having a real estate attorney review the seller finance addendum (or use the CAR legal helpline). If you are representing both sides, you should especially consider having an expert review the addendum.
All of the above is just a real-world example, not legal advice, so proceed at your own risk and carry good E&O insurance that doesn't exclude seller financed transactions.
24 Replies
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
Not legal advice, but my understanding: The CA version of the Safe Act remains silent on most seller financing. It just addresses who can negotiate and originate. Currently licensed mortgage brokers are allowed to negotiate and originate, so I'd find a mortgage broker that will do it for a fee that is agreeable to the seller. An attorney would be of no help, IMO, unless they are also a licensed mortgage originator.
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
Hopefully a CA mortgage broker will chime in who has done some of these deals. The seller wants to impound HOA dues, prop. taxes and parking fees to guarantee they get paid, so it's not exactly just a straight principle and interest deal.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
Shari: I think the additional challenge is that your buyer's loan falls under "consumer loan" which has everyone concerned about all the recent regs. But a good mortgage broker should know how to make a complete file.
I don't know how many mortgage brokers post on BP. You might want to ask your question under Does seller financing require mortgage broker, or something like that, so that it gets a MB's attention.
- 14yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
As a California RE licensee, you can facilitate the transaction. The CAR has a seller finance addendum in Zipforms (form code SFA) that covers the required issues. The title company can draw the note and deed of trust, and may be able to answer questions related to escrowing the impounds.
Typically, HOA dues are junior to a recorded deed of trust so the seller shouldn't have to worry about non-payment of those (review the HOA bylaws to verify). Property taxes are senior, so they DO need to worry about those. The seller could just hire a tax service to notify them of missed tax payments, so the complexities of impounding can be avoided (title company should be able to help with this).
If they really want to impound taxes, one option is to hire a loan servicing company to service the loan and manage the impounds. There are serving companies that specialize in servicing private money loans.
If you are unclear of all of the nuances, ask your broker for assistance. If your broker can't help, you might consider having a real estate attorney review the seller finance addendum (or use the CAR legal helpline). If you are representing both sides, you should especially consider having an expert review the addendum.
All of the above is just a real-world example, not legal advice, so proceed at your own risk and carry good E&O insurance that doesn't exclude seller financed transactions.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
Brian Burke Are all RE CA licensees allowed to facilitate seller financing in this manner? I thought they had to take the additional training and licensing exam that was required by the CA version of the act (and the background check)?
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
I answered my own question. From the CA Dept. of RE Safe Act FAQ:
Q. I am a broker or salesperson arranging seller carry-back notes in residential sales of 1-4 unit properties. Do I need a Mortgage Loan Originator License Endorsement on my DRE license?
A. If a seller carry-back note is an extension of credit that is arranged by a licensee who is completing the terms of a sale of a property and the activity does not include compensation for residential mortgage loan activity, then a Mortgage Loan Originator License Endorsement will not be required. If the activities include taking an application and negotiating the terms of a residential mortgage loan, and the licensee is compensated for the mortgage loan activity, then aMortgage Loan Originator License Endorsement will be required.
Don't you just love these federal regulations that leave more questions than answers and create huge gray areas?
Nice that we all have to worry about becoming criminals over the victimless crime of seller financing....
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
"If the activities include taking an application and negotiating the terms of a residential mortgage loan, and the licensee is compensated for the mortgage loan activity, then aMortgage Loan Originator License Endorsement will be required."
That's very gray! Does it mean as long as I don't do any of the above or all of the above? Of course I have to take an application or the other agent has to take an application, and someone has to negotiate the terms. Maybe the law means the seller should be in direct contact with the buyer over these two issues. I would not be compensated for any mortgage related services but I would get a commission on the sale.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
I know. First it says "extension of credit arranged by licensee" is OK. Then it says taking an application and negotiating terms isn't OK. Isn't taking an application/negotiating terms the same as "arranging"?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
"I talked to a mortgage broker and he said he wouldn't touch it with a 10-ft. pole because of the new regulations."
That's the whole point.They don't want to touch it because of how grey area it is and undefined.
You have to find someone who is willing to put their stamp on the deal to get paid.Someone will be willing to do it if you call around enough.I would not want the risk falling on you.
- 14yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
F Foster, the MLO endorsement requires 20 hours of specific education, and taking a state and federal test, and submitting fingerprints for a background check. The whole process was a pain. You can google NMLS and you'll find all the requirements and process.
Shari, you are getting paid a commission for selling the house, not for arranging the loan. The loan is incidental to the transaction, that's why the exemption was created.
Hello B Burke and thank you for your informative reply.
When I know in advance, what problems to expect, I will prepare to make my Owner Finance transactions more acceptable.
I am trying to understand what it is that a qualified Mortgage Loan Broker does to give approval to the owner finance transaction.
Is he taking the place of the underwriter? Is there liability exposure because he reviewed the buyer's application?
Why are so many brokers saying No Thanks to this income opportunity?- 14yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
F Foster, That's really the whole point of my message, that a mortgage broker is unnecessary in this case. If a real estate agent calls a mortgage broker and tells the mortgage broker that they are doing a seller finance deal, and asks the mortgage broker to arrange the loan, the mortgage broker will probably tell the real estate agent "That's your job!"
The mortgage broker is a necessary component of any transaction where conventional or hard money financing is desired, but seller finance deals are outside of the mortgage broker's scope. Even if a mortgage broker were to assist, they would seek some type of compensation for doing so, which would raise the cost to the buyer unnecessarily.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes14y
F Foster Your question is a good one. I've yet to get a straight answer from anyone since the Safe Act passed. In that time I've done two seller financed deals, with no assistance from or involvement of an MLO. Because the buyers were investor buyers known to me, I decided the risk was small of any issues. I've also arranged for buyers to sell to me via seller-financing. Since I'm the buyer, I've decided there's little risk that I'll go after the seller for violations (if any) of the Safe Act. I'm an investor buyer, so those loans aren't for my primary residence.
I think the concerns you are hearing here is over a different issue which has to do with consumer loans. Regardless of whether you are an approved MLO and regardless of whether it's seller financing or a bank loan, consumer mortgage loans now require a ****-ton of disclosures and a complete and airtight file. It's unlikely that your average seller (like you and me) would be trained and up-to-date on every last document and disclosure required to properly originate the loan. Assuming we could get that right, the regs carry over into the collection and foreclosure process if the borrower should default. You have to attempt to contact the borrower and offer this that and the other thing before you can legally file a notice of default. You have to be aware of moratoriums on foreclosure for active military. Seriously, there's just too much to keep up with.
All goes well until a borrower defaults and decides to get legal help to keep the house and/or go after the lender for loopholes. There's no way I could create an airtight loan file and I'm pretty good with paperwork. I believe consumer loans should be regulated. But things have really gotten out of hand when lenders become responsible for whether or not a borrower can afford a loan. Not to mention scary things that are happening in BK court like cram downs or elimination of secured debt.
Sorry for the rambling. I'm disappointed because right about 2009 I decided that seller financing might be the right long term investment for me. I dislike land lording, but love paper. The Safe Act passed and confused the heck out of me. I'm still wondering how I can make creating paper work, but it I think I'll be staying away from offering loans to owner occupants until I can better understand the risks.
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
In the situation I originally posted about, it is an owner-occupied loan of a first-time buyer and it will be carried for 5 years, so there is plenty that can go wrong like K.M. Poe describes. If it were a flip where the exposure is only a few months and it's with an experienced investor I think a judge (in a potential lawsuit) would be less sympathetic to the buyer whereas with a first-time buyer owner-occupied I think the seller better have everything in perfect order if they did the deal themselves. As a Realtor, I'm not even sure my E&O would cover me for lending practices but I don't want to have to rely on that.
I found an escrow officer that has been doing lots of notes (she says hundreds) and she's not afraid. I still need to call a few more mortgage brokers to check if they would do it. I'm sure it would be for a fee but it's better than a lawsuit.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
Shari, I think you are right about the judge.
I'd proceed with great caution with a title plant/closing agency that thinks they can originate loans, not the case IMO. Hundreds really aren't very many loans, a good law suit may take a 1000, they just haven't had the luck of the draw yet.
As an RE Broker you can facilitate the transaction, you can not really process the loan (obtaining loan documents necessary for underwriting) underwrite the loan, that requires a mortgage type. An attorney may originate, process, underwrite, set loan terms and conditions and close it, technically he/she must personally do that as there are questions about having their paralegal even do the paper work!
Regardless of what CA is, there are issues with HUD and compliance at the national level, when state law is insufficient or does not address the intent of the SAFE Act, it will default to the national act, that may be determined by HUD and could be brought up in any future legal concerns. Just saying, if anyone messes up, you could have a CA finance examiner and a HUD IG type talking to the judge and my bet is placed with the HUD IG!
What do you want Mr. Note holder is a thread here on BP and several brokers chimed in where we discussed in detail many of the aspects of seller financing. I suggest you read through it.
There are some other considerations to seller financing, after the closing.
1. Your liability with being involved goes with the term of the note, anyone involved can be brought into the problems after the closing until it's paid in full and released.
2. There are servicing companies, sorry can't think of the name, but google seller financed servicing and you'll find several. The one I would go with (me myself) is in Washington State. They will underwrite and do the loan as well as service the loan.
3. If you seller takes a note and ends up having to qualify for state benefits, like medicare/cade, say due to an auto accident and ends up in a nursing home, that note will be brought out in the light. Same with bankruptcy or in an estate. With that in mind, see # 1. and 2. above.
4. As a RE broker, you may facilitate the deal and assist in the closing of the note and deed of trust (mortgage) and if your seller later wants to sell the note and it is not properly originated (see #1. above) the note could be worthless on the brokerage market, it could be a flip of a coin with a buyer.
Actually, I'm not seein alot of gray areas at all, there are some, but it's pretty clear as to who can originate a residential seller financed note.
Now, if you seller is selling and they occupy the home to be sold, there are exemptions from compliance, but again, you better document this and be in a position to prove such occupancy, see #1 above again. CYA!
Good luck
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
@Bill Gulley--Can Washington State do the entire process for my seller? Also, I did a Google search and couldn't find a company called Washington State--can you double check the exact name or provide contact info?
(FYI--my seller does not live in the property; it's an investment property but the buyer will buy owner-occupied.)
Shari - I know of one real estate licensee (DRE Broker & NMLO) that has tried to offer this service (installment sale assistance) to real estate brokerages however her big issue is getting paid, especially when the deal doesn't go through.
Since my model, for many years, has been to work with attorneys (probate estate and trusts) I've had some experience in this. I'm also both a DRE licensee and direct lender.
As a licensee, you're trying to put a deal together and get paid a commission. I suggest you buy the Seller Financing book from First Tuesday, a publisher that specializes in CA continuing Ed here.
Next, I would lay out the issues and solve them systematically. I see:
1. Seller wants assurances that HOA, taxes & insurance is paid. Easy! Get a full service loan servicer to handle that. It's cheap, too.
2. You, as broker/agent are expected to provide some sort of due diligence as to the buyer's qualifications for your seller. You can provide this by obtaining some of the typical items required by an actual lender (application, income & credit report).I'm always concerned about control, in addition to compliance and the big item (getting paid!). The few people you have that can screw up your deal, the better. I love working with attorneys, for example, however few a creative visionaries (with possible exception of a few high-end ones). So, I try to minimize reliance on attorney's assistance and having client control.
Your job, as I see it, is to have the tools available to put the deal together without too many moving parts, and this can sometimes be daunting...but lucrative!
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
@Rick--I've already done #2 and got all buyer's critical info like credit report, Fannie Mae app, etc.
I'll start looking up some servicing companies.
I just remembered I know of one RE attorney that isn't too expensive--I'll call him to see if he's done this.
Shari - try FCI in Anaheim Hills, CA or Del Toro in San Diego. There are plenty of others. Also, basic servicing normally does NOT include tax, insurance ( or senior lien) monitoring unless you asked it for it, usually at a small extra charge.
There are plenty of others. Since it's not you paper, you probably won't be too concerned with customer service levels but might get an earful if it's poor.
[P.S. - Any relation to Sam Posey?]
- Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes14y
Rick--Actually, my ex-husband's nephew is a Sam Posey--about 22 years old or so now.
I found a couple of services. Complete Cash Flow Services is pretty cheap at $18.50 per month and $75 set up fee.
All--
I called the CAR legal hotline and the attorney I spoke with told me my involvement in arranging seller financing is "not a big deal, there's not much to it, no problem with doing this as long as I use the CAR form SFA (Seller Financing Addendum)." - CA · Member since 2011 · 762 posts · 182 votes14y
Originally posted by Shari Posey:
"If the activities include taking an application and negotiating the terms of a residential mortgage loan, and the licensee is compensated for the mortgage loan activity, then aMortgage Loan Originator License Endorsement will be required."That's very gray! Does it mean as long as I don't do any of the above or all of the above? Of course I have to take an application or the other agent has to take an application, and someone has to negotiate the terms. Maybe the law means the seller should be in direct contact with the buyer over these two issues. I would not be compensated for any mortgage related services but I would get a commission on the sale.
Shari Posey, "...and the licensee is compensated for the mortgage loan activity...", if the only fee you get out of the sale is your brokerage commission, you are not being compensated for the loan activity, so, no MLO endorsement is required. If in addition to the commission specified in the listing agreement there was a line item fee in the closing statement that said something like "loan fee $450", you would need the endorsement. That's how I read it.
- CA · Member since 2011 · 762 posts · 182 votes14y
Originally posted by K. Marie Poe:
F Foster Your question is a good one. I've yet to get a straight answer from anyone since the Safe Act passed. In that time I've done two seller financed deals, with no assistance from or involvement of an MLO. Because the buyers were investor buyers known to me, I decided the risk was small of any issues. I've also arranged for buyers to sell to me via seller-financing. Since I'm the buyer, I've decided there's little risk that I'll go after the seller for violations (if any) of the Safe Act. I'm an investor buyer, so those loans aren't for my primary residence.K. Marie Poe, I think you are right about it being a non issue when selling to an investor. As seen in the excerpt below from the DRE website, a "residential mortgage loan" is primarily for personal, family, or household use. You are not making the loan for this purpose, therefore you are not a MLO.
Q. What is the definition of mortgage loan originator?
A. Mortgage loan originator means an individual who for compensation or gain in expectation of
compensation or gain takes a residential mortgage loan application or offers or negotiates terms
of a residential mortgage loan.
Q. What is a residential mortgage loan?
A. A residential mortgage loan is any loan primarily for personal, family, or household use that
is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a
dwelling or residential real estate upon which is constructed or intended to be constructed a
dwelling. Dwelling means a residential structure that contains one to four units, whether or not
that structure is attached to real property. The term includes an individual condominium unit,
cooperative unit, mobile home, or trailer, if it is used as a residence.
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