Dodd Frank and Lease Option!

Rent to Own a.k.a. Lease Purchase, Lease Options 50 Replies

I keep hearing all this crap... So will I or Will I not be able to do lease options and subject 2s with the DOD frank laws changing?

You can do them all day long on commercial transactions.

If it is residential and there is any financing like a note with a sub-2, you'll need to comply.

A lease is not an issue, a straight option is not an issue, applying rents toward a purchase price or financing the option price is an issue.

ANY scheme that finances a purchase transaction is an issue in residential transactions.

There are a couple active threads up now on the issues. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thanh,

I suggest you talk with a lawyer, who is experience in the Dodd-Frank law not someone on the Internet that might know and might not.


Joe Gore

@Bill Gulley Why do you say that we still can do lease option rent to own and only issues is apply rent toward purchase price. As I know that, Dodd Frank Act make buyers harder to get loan from the bank, meaning closing in the end of the term is mostly impossible. If we know it is hard to close in the end of the term and still do Wholesaling lease option, take money consideration and disappear, is that a right business to do?.

A good link @Thanh Nguyen is http://www.greateraustinhomes.com/dodd-frank-safe-act-owner-financing-and-you/

Updated almost 3 years ago

And this one http://www.asreb.com/skins/asreb/standard.aspx?elid=66&aid=318

Originally posted by Thanh Nguyen:
@Bill Gulley Why do you say that we still can do lease option rent to own and only issues is apply rent toward purchase price. As I know that, Dodd Frank Act make buyers harder to get loan from the bank, meaning closing in the end of the term is mostly impossible. If we know it is hard to close in the end of the term and still do Wholesaling lease option, take money consideration and disappear, is that a right business to do?.

Misunderstood, if it's commercial, Dodd-Frank is not a concern.

No, it really doesn't making institutional lending "harder" just a little different. For example, qualifying ratios have been increasing making it easier to qualify, use to be 36% dti, now it's 43% and at a bank it can go higher.

Let me be clear, never apply rents toward a purchase price, you can search that here on BP and find several threads about the appraisal issues and what is allowed to be credited.

States do have exemptions for owners selling their owner occupied homes, pointed out in the link Bryan provided. Be careful about sources of information on the internet, but you'll see that on many sites, it's consistent from the CFPB sites, which is the best place to get information along with the Act (s). State sites will give you the specifics as to exemptions, don't read anything into what you read if it's not crystal clear.

While there can be exemptions, the lender will still need to comply with what we call prudent lending practices, there can be rules, like 43% dti ratios, but there can be compensating factors such as a borrower receiving future reliable income (might be rare) or debts falling off within 6 months. These are areas that are known to mortgage originators and loan officers, not so much with the public or even the best investors. Another example might be a co-signer not living in the property, in some cases such income or guarantees can be used, in conventional fannie mae lending, it's not.

While you can read a list of things you must have, name, ssn, income, contract with a sale price an a loan amount requested, you'll need more information and verification by certain documentation to actually justify making the loan.

So, reading a list as explained in the link provided, while correct, it won't put the average (or even above average) investor in a position to do underwriting.

Point is, to do those "exempt" seller financed notes, you, as a lender will be liable for the loan origination. You really shouldn't take on that liability if you are not trained in mortgage lending, you should still take the deal to a mortgage originator who is qualified to do the processing and origination.

Since balloon loans are out of the question now, you may want an incentive for the buyer to refinance (I know you're buying....) you can do an ARM, but I won't go there now, but the margin is 5% over several indexes that may apply.

Another issue is having any underlying mortgage that may have a balloon that a bank may make like a 180/60, meaning a 15 yr amortization with a 5 year balloon. If you sub-2 is done 2 years into that loan, the buyer will have an obligation to buy in 3 years or the lender will need to pay it off.

Seller financing is required to be fully amortized so that it can be paid off. The reason is that in the past seller financing was all about underwriting the loan to a point in the future where a borrower could qualify for new financing, this is even harder to do than simply approving someone for a loan under a loan program as they either qualify based on the rules that day or they don't. SF meant using a crystal ball looking into the future. To do that, the underwriter has to know the lending requirements to shoot for. This was obviously a problem as you had all kinds of people out there thinking they knew how to make a loan and they had a high failure rate as a group. While this still applies in many aspects, now that a loan is to be fully amortized, the Dodd-Frank issues actually make this aspect easier as to the tasks to overcome.

No, you certainly don't wholesale take money and step aside with a seller financed contract to be assumed. If you were instrumental in facilitating that deal you could be liable on many fronts.

The learning curve for these deals has gotten a lot longer, it's not as easy as any program or strategy claims on the surface. Seller financing is not dead, but it's more complicated for most everyone.

There is also the issue of collecting payments or loan servicing, to do that you'll need a license, so I'd suspect that these exempt loans that might be made will need to be immediately assigned to a loan servicer, there will be a fee.

And again, this is for those who are exempt, it won't really apply to an investor/dealer selling non-owner occupied homes, check you state laws. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

American Banker released this today about new mortgage forms from the CFPB

http://www.americanbanker.com/issues/178_223/cfpb-releases-final-rule-on-mortgage-disclosure-forms-1063777-1.html?ET=americanbanker:e17790:699372a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=AB_Washington_Regulatory_112013

Also see http://www.mortgagenewsdaily.com/11202013_cfpb_mortgage_rules.asp

Good download links there.

LOL, Thanks again Brian.

"Mortgage Forms" are forms like the 1003 application, I was hoping for a new application....

"Mortgage Disclosures" are not to the underwriting or processing, but the Good Faith Estimate, Adjustable Rate Mortgage Disclosure, HUD-1, and the new, Know before you owe.

Again, this applies to lenders, RMLOs, not investors,

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

So how will this all affect those of us that currently have properties that we have lease options on? Are they grandfathered in? or are we going to have a headache soon? I sure don't care to pay someone to collect rent in order to comply.

Originally posted by @Aaron Junck :
So how will this all affect those of us that currently have properties that we have lease options on? Are they grandfathered in? or are we going to have a headache soon? I sure don't care to pay someone to collect rent in order to comply.

@Aaron Junck, Dodd Frank doesn't come into play until January 10, 2014 and applies only to contracts on or after that date. Contracts prior to that date are excluded.

Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.

If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem.

I'd be getting with my "buyers" and explaining the new laws and how they are affected, they are involved too. Servicing is a big benefit to a buyer, educate them, split the cost, I'd say you could skate by making a modification in order to comply with new regulations. Get help! :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

awesome!

Don't collect the option consideration upfront and don't allow any rent credits to go towards the purchase price. :)

Originally posted by @Bill Gulley :
Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.
If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem. :)

Bill Gulley

Quick question(s)...

I assume by a 'financing agreement' it includes Investment properties that you currently hold financing on. So as of Jan 1st, these are also required to go under the control of a lic servicer. Correct??

However, could the servicing requirement be avoided by adding a % ownership to title even though you hold the financing.???

e.g.:- together we buy a property (investment or OO), I finance it & show a % ownership recorded on title. Can I collect loan & escrow pmts or are we still required to go through a lic., servicer.??

thanks in advance.

Pat, had to think about that one, came close to saying I'd be speculating, but another sip of coffee gave me more confidence IMO to it's my guess the answer is no.

With a contract for deed, title is held 100% by the lending seller, the fact that a lender has an interest in title is irrelevant, it's a financing contract on residential property subject to the Act. With that logic, having an interest in title that secures a note won't exempt you from compliance. :(

However, I believe you're addressing your 401K loan you asked about with respect to tax treatments of a DIL, if so, this loan was made to a rehabber as I understood it, that would be a commercial loan exempt from the Act. If you seller finance the next sale to a owner occupant next time it would fall under compliance requirements, if sold to an investor company it would be commercial. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by Aaron Junck:
awesome!

Don't collect the option consideration upfront and don't allow any rent credits to go towards the purchase price. :)

I think you meant "do" collect the option fee up front and don't do rent credits :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley

sorry to bother you but snowed/iced in you're a captive sage/tribal elder ...

(The 401k was an entirely different issue.)

1. We have existing 1st note mtgs out on Investment properties. The Investor then submits (Mtg & Escrow) via direct deposit monthly. BUT as of Jan 1st these pmts now must be submitted through a Lic Servicer?

2. As of Jan 1st any new or existing OO mortgage note payments are to be submitted through a Lic., Servicing Co.

3. Contract for Deed. Assuming no portion of monthly pmts are credited to the final price. This arrangement per se is not constrained by the need for a Lic. Servicer as we are effectively collecting 'rents'.

4. An Investment Property is titled to a Trust. Beneficiaries hold ownership by virtue of % capitalization. Rents received are distributed to the beneficiary(s) providing the financing (as their capitalized entry to the trust). Would the entire mortgage/loan servicing issue becomes moot.

thanks

First, It's not Jan 1, but the 10th or 14th or so, as to servicing, you need to look at who the administrator of your qualified tax plan is. If it is a bank or other exempt regulated financial institution that is "collecting" payments, I'd say there is no worry. There may be an issue as to providing statements required, tax filings as your administrator probably isn't doing that, they could, my guess is they aren't. So such duties are required loan servicing functions and if you do it, then you may have an issue.

A contract for deed is a financing purchase agreement, not a lease with rents. Even if the payments received yield no profits or payments toward the equity sold, if it pays an underlying mortgage, it's paying toward an equity position. Any financing arrangement that provides for the buyer to acquire title to that OO property is an issue, doesn't really matter what we call it.

A lease that offers no arrangement to acquire title is not a financing agreement.

Your #4 needs to be dumbed down for me, your "capitalization" thinking, can you better define that. The Act covers any person or entity, there is no exemption based on your entity being a Trust. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Bill Gulley :
Except that servicing requirements kick in. There is no grandfathering in performing a service or function after the effective date, the date of the contract is irrelevant. You need a servicer's license to perform the function after the effective date. Servicers should be doing a booming business right now.
If you have a financing agreement, you'll need a servicer. If you have an option that has had the option price paid and you're not requiring payment made toward the option you don't have a financing contract. Hope you're not crediting rents under a lease, that will be seen as a financing arrangement, but if it's just paying fair market rent, no problem.

I'd be getting with my "buyers" and explaining the new laws and how they are affected, they are involved too. Servicing is a big benefit to a buyer, educate them, split the cost, I'd say you could skate by making a modification in order to comply with new regulations. Get help! :)

True, Bill, but the question I answered was about lease options in particular. A TRUE lease option is not a financing agreement. There is no servicing requirement.

So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.

Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://sweetgumfunds.com

True Bill, a true option has no performance required at all required by the optionee. Financed option price agreements are not quiet financing agreements in that a security interest is not taken, but it is an installment purchase under the Code and if the option is taken as payments are applied to the sale price. I didn't closely read the post you were addressing.

Curt, that's been the issue in residential for decades. What isn't often recognized is that the value of an option can be determined in the market and has been recognized by the IRS. Residential and small commercial investors would be required to go through a brain damaging process that would serve little economic value making it worth the effort to prove a value. Pretty much why the look to the 10% equity limitation. Now, taking an option on a 24 story office building would be a different matter. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Curt Smith :
So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.
Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.

@Curt Smith this is important.

If you are underrwater and want to sell on terms as a Seller, to a Owner Occupant Tenant Buyer, and use a disguised sale lease option, it is the same as selling on contract for deed or a wrap. There are a due on sale and other isssues. An RMLO for the underwriting of the Tenant Buyer should be considered.

Finding ways to comply with Dodd Frank and do these long term lease options I believe is a great strategy for underwater homes.

Originally posted by @Curt Smith :
So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.
Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.

Not really @Curt Smith .. Dodd Frank doesn't address lease options specifically. UNLESS you are referring to the fact that an improperly drawn lease option that is determined to be "disguised sale" is, in fact, a financing instrument. And while a lease and option transaction in excess of three years IS a contributing factor in that determination, it is not the only factor.

To determine whether an arrangement is a lease-option or a sale, the IRS examines all of the facts and circumstances surrounding the transaction. Circumstances that suggest a sale include:

* Portions of the rental payments are specifically applied to equity in the property (think RENT CREDITS)

* Title to the property will transfer to the lessee upon payment of the rental payments (ie. Total payments made actually equal the purchase price)

* The amount paid in rental payments is an excessively large proportion of the total sum required to secure transfer of title to the property.

* The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised.

* Some portion of the rental payments is specifically designated or readily recognized as interest.

* The sum of the rental payments and purchase option approximates the original purchase price plus interest and carrying charges.

* The lease requires the lessee/buyer to make substantial improvements to the property.

Keep in mind that no single factor is determinative, and that additional factors not listed above may also influence the result.

You should also keep in mind too, that it will not be the IRS who determines whether your contract falls under the scope of Dodd Frank- it will be some local judge when your PO'd tenant buyer and his attorney take you to court and sue you for the past three years payments because you didn't "take under consideration the borrowers ability to repay." I do think, though, that since the IRS "guidelines" are the only guidelines available now (other than FASB 13, a whole 'nother story) the courts will likely use them when making a determination.

Originally posted by @Curt Smith :
So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.
Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.

Not really @Curt Smith .. Dodd Frank doesn't address lease options specifically. UNLESS you are referring to the fact that an improperly drawn lease option that is determined to be "disguised sale" is, in fact, a financing instrument. And while a lease and option transaction in excess of three years IS a contributing factor in that determination, it is not the only factor.

To determine whether an arrangement is a lease-option or a sale, the IRS examines all of the facts and circumstances surrounding the transaction. Circumstances that suggest a sale include:

* Portions of the rental payments are specifically applied to equity in the property (think RENT CREDITS)

* Title to the property will transfer to the lessee upon payment of the rental payments (ie. Total payments made actually equal the purchase price)

* The amount paid in rental payments is an excessively large proportion of the total sum required to secure transfer of title to the property.

* The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised.

* Some portion of the rental payments is specifically designated or readily recognized as interest.

* The sum of the rental payments and purchase option approximates the original purchase price plus interest and carrying charges.

* The lease requires the lessee/buyer to make substantial improvements to the property.

Keep in mind that no single factor is determinative, and that additional factors not listed above may also influence the result.

You should also keep in mind too, that it will not be the IRS who determines whether your contract falls under the scope of Dodd Frank- it will be some local judge when your PO'd tenant buyer and his attorney take you to court and sue you for the past three years payments because you didn't "take under consideration the borrowers ability to repay." I do think, though, that since the IRS "guidelines" are the only guidelines available now (other than FASB 13, a whole 'nother story) the courts will likely use them when making a determination.

Originally posted by @Curt Smith :
So far no one mentioned that Dodd Frank put a limit on the length to the option period of 3 years.
Little known perhaps is that the IRS has for some time considered longer than 3 yr options, like Ron LeGrand's 5-10yr options to be taxable events as if it's an installment sale.

Not really @Curt Smith .. Dodd Frank doesn't address lease options specifically. UNLESS you are referring to the fact that an improperly drawn lease option that is determined to be "disguised sale" is, in fact, a financing instrument. And while a lease and option transaction in excess of three years IS a contributing factor in that determination, it is not the only factor.

To determine whether an arrangement is a lease-option or a sale, the IRS examines all of the facts and circumstances surrounding the transaction. Circumstances that suggest a sale include:

* Portions of the rental payments are specifically applied to equity in the property (think RENT CREDITS)

* Title to the property will transfer to the lessee upon payment of the rental payments (ie. Total payments made actually equal the purchase price)

* The amount paid in rental payments is an excessively large proportion of the total sum required to secure transfer of title to the property.

* The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised.

* Some portion of the rental payments is specifically designated or readily recognized as interest.

* The sum of the rental payments and purchase option approximates the original purchase price plus interest and carrying charges.

* The lease requires the lessee/buyer to make substantial improvements to the property.

Keep in mind that no single factor is determinative, and that additional factors not listed above may also influence the result.

You should also keep in mind too, that it will not be the IRS who determines whether your contract falls under the scope of Dodd Frank- it will be some local judge when your PO'd tenant buyer and his attorney take you to court and sue you for the past three years payments because you didn't "take under consideration the borrowers ability to repay." I do think, though, that since the IRS "guidelines" are the only guidelines available now (other than FASB 13, a whole 'nother story) the courts will likely use them when making a determination.