Thoughts on current LC and new Dodd Frank law

11 Replies

OK I know the Dodd Frank law has been discussed many times and I'm not necessarily asking about particulars on the law. My question is for anyone understanding it much better than I or others possibly in my situation. I currently have a LC and good relationship between the buyer. However my contract is set up with the $4000 down and my key worry they accumulate $100 a month towards their down payment. Made this deal before I knew about all this Dodd Frank stuff. I did have my lawyer write up the contract but he never said anything. I will be checking into a lawyer with specific knowledge on the matter but wondering other investors thoughts? Thanks

Shawn what is the question?  

What is worrisome about $100 of the lease payment contributing to the option?

What is your concern as it relates to Dodd-Frank?

If you have any agreement that provides any payment that is credited to a purchase price, you have a financing arrangement.

Dodd-Frank may or may not apply to you, but you still have a financing arrangement.

While you may be exempt from the DF Act, you are still subject to predatory lending issues, too much financed, over priced property, borrower placed in a position where they can not perform, lacks ability to pay, and other matters may apply. Even if it is a commercial transaction, individuals are under different rules than regulated institutions.

Credits may be agreed to, but when it comes time to refinance the obligation, lenders will look to the fair market rent that is determined at that time as to the amounts they will allow as equity. Usually that amount is less than the agreed amount and a buyer won't have the equity they think they do and fail to qualify. One reason options and leases need to be under separate agreements.

You may need to speak to a lender (bank type) and then your attorney, many RE attorneys may not be familiar with D-F and financed contracts. Good luck :)  

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

My main question was to the credit I am giving them since the DF law since I've seen in other discussions that's what one big issue is with doing LC now. Also if others do this and their thoughts.

Also this is a SFH not commercial so I'm a little more worried about DF law.

Originally posted by @Shawn West :

My main question was to the credit I am giving them since the DF law since I've seen in other discussions that's what one big issue is with doing LC now. Also if others do this and their thoughts.

What is an "LC"? Do you mean a lease-option, lease-purchase, rent-to-own junk?

The credit is considered a financing arrangement, covered by the D-F Act, any financing. If you are giving credits, then you are financing. You are then subject to financing regulations.

Don't know if others are doing it, would it  matter? Some people rob banks, should I just rob a bank? There are other web sites to find justifications to do the wrong things in RE, not so much here.

Now, a Land Contract doesn't have rent credits, principal amounts are reduced in a note and they are a financing arrangement.  :)

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

Thanks for discussing with me Bill. Yes by LC I mean Land Contract and in the contract my lawyer wrote up it has an addendum with the credit. When deciding to do it i told him i wanted to give the person insentive to make them feel like their putting some money towards something. He said doing a LC with addendum was best in this situation.

Also I'm not trying to justify doing something I shouldn't with others experience. Actually more less trying to see what others are doing in their situations that they are crediting buyers since the DF law.

I am no expert at the financing part which is why I thought bringing a lawyer into the mix would help. Obviously I was wrong about that and it looks like I am falling under financing so liable to the new law. Is there any way to get it completely lagit? I read something about hiring a loan office with a license or something to take over?

This post has been removed.

Sorry, not sure why that posted twice.

This is getting a little messy.

As Bill mentioned if this is a land contract or contract for deed it is not a credit from rent but rather a payment with interest and principal.  Each payment will have an amount that is allocated toward principal reduction.  Typically it is not a static amount like $100.

So your $100 concept makes it sound like a rent credit but you have Land Contract which does not have rent credits.  See the confusion?

Also, I don't understand what this "addendum" to the Land Contract is or even would be.  The Land Contract is an installment contract to purchase the property over a term.  For the most part it is all inclusive of itself.  An addendum really should not be needed.  So, what is the addendum for?

You sold the property for $X and took a $4,000 down payment. That sounds fine. You granted an equitable interest in the property and upon payment in full will deliver the legal interest. That is a typical LC/CFD. There is likely a rate of interest that is being applied to the 'loan amount' ($X - $4k = Loan). That obligation will have a time defined by number of payments or maturity date. It could be structured to pay to zero or have a balance upon maturity which is balloon.
What are the terms of your contract?

It will be easier to comment if we don't have to guess at what you have and how it is setup.  I am also still not clear what your actual concern is.  Is there something here not in the open yet that is concerning?  You have already extended the credit so a LO will not help you there.  In regards to collecting payments, you can use a licensed Mortgage Servicer.  That may be a good idea if you are the one servicing this contract as I do not get the impression you really understand what you have and presume how to treat it also follows suit.  If you have been accounting for this improperly that indeed will need to be cleaned up since it sounds like you may have not given proper credit to the Buyer/Borrower's payment to principal.

Stop making this about a regulation that you do not really understand and make it more about what you are doing and how it was actually setup.  Don't worry about trying to insert things you have heard.  That just confuses the details of the story.

Originally posted by @Dion DePaoli :

This is getting a little messy.

As Bill mentioned if this is a land contract or contract for deed it is not a credit from rent but rather a payment with interest and principal.  Each payment will have an amount that is allocated toward principal reduction.  Typically it is not a static amount like $100.

So your $100 concept makes it sound like a rent credit but you have Land Contract which does not have rent credits.  See the confusion?

Also, I don't understand what this "addendum" to the Land Contract is or even would be.  The Land Contract is an installment contract to purchase the property over a term.  For the most part it is all inclusive of itself.  An addendum really should not be needed.  So, what is the addendum for?

You sold the property for $X and took a $4,000 down payment. That sounds fine. You granted an equitable interest in the property and upon payment in full will deliver the legal interest. That is a typical LC/CFD. There is likely a rate of interest that is being applied to the 'loan amount' ($X - $4k = Loan). That obligation will have a time defined by number of payments or maturity date. It could be structured to pay to zero or have a balance upon maturity which is balloon.
What are the terms of your contract?

It will be easier to comment if we don't have to guess at what you have and how it is setup.  I am also still not clear what your actual concern is.  Is there something here not in the open yet that is concerning?  You have already extended the credit so a LO will not help you there.  In regards to collecting payments, you can use a licensed Mortgage Servicer.  That may be a good idea if you are the one servicing this contract as I do not get the impression you really understand what you have and presume how to treat it also follows suit.  If you have been accounting for this improperly that indeed will need to be cleaned up since it sounds like you may have not given proper credit to the Buyer/Borrower's payment to principal.

Stop making this about a regulation that you do not really understand and make it more about what you are doing and how it was actually setup.  Don't worry about trying to insert things you have heard.  That just confuses the details of the story.

 Hi, sorry for the confusion here. Yes it is in percentage form and just balances out at around $100 a month. Without showing too much I'll attach the percentage and payment portion of the contract and part of the addendum. The addendum is for extra credit to the buyer for paying extra but strictly optional. What I'm worried about is I'm technically doing the financing for them and I'm not licensed and yes I don't know much about the new law which sounds like what im doing is illegal. Just curious if it is illegal for me and what I should do to rectify it. Obviously I don't want to be breaking laws.

Hope the attachments are there for people to see. Basically the house sold for $120,000. Is assessed at $110,000. Down payment of $4000 brings it to a balance of $116,000. Payments are $1200mo. Percentage is 11.580. Three year contract.