Dodd Frank Act Impact on Seller Financing for Investors with Richard Roop
May 29, 2015
Dodd Frank Act Impact on Seller Financing for Investorswith Richard Roop
What you will discover
Dodd-Frank impact onBuying with owner financingSelling with owner financingBorrowing from private lendersLending as a private investor
How to be exempt
What to do if not exempt
How to capture more profits due to F.E.A.R. by other real estate investors and the tighter lending guidelines
Disclosure
I am not an attorneyAnd I do not play one on TV
Seek legal advice as needed
This is not legal advice
These are my opinions
OK?
What is it?
The Dodd–Frank Wall Street Reform and Consumer Protection Act
Commonly referred to as Dodd-Frank
The act created the Consumer Financial Protection Bureau (CFPB), to protect consumers from large, unregulated banks
CFPB works with regulators in large banks to stop business practices that hurt consumers, such as risky lending
What is it?
Dodd-Frank also establishes new rules that impact seller financing
Two exemptions exist for sellers who finance residential property containing 1-4 units
The seller finances only ONE property in any 12 month period
The seller finances no more than THREE properties in any 12 month period
GOOD NEWS! Dodd Frank does not apply to:
Sellers who finance the purchase of 5 or more units, vacant land, or commercial properties
Sellers who finance to non-owner occupants or investors
Hard money and private lenders who finance real estate investors
1) Impact on Buying with Owner Financing
NONE
As a real estate investor, you can buy a property for investment purposes with owner financing
The Act does not apply to you as the buyer, or to even to the seller, if you are not going to occupy the property yourself
So any type of owner financing you get when buying is exempt including
Seller carry back first liensSecond liensBuying subject to existing financingLease options
1) Impact on Buying with Owner Financing
The Act does not apply to the seller because you are buying as an investor.
It only applies to them if they sell to an owner occupant
And even if they did, they may be exempt under the one (1) per year category
2) Impact on Selling to an Investor with Owner Financing
NONE
You may sell any property you own to an investor and the Act does not apply
This includes an investor who will rehab, flip or rent the property.
Your investor buyer can also have the intent to resell the property with wrap around owner financing (if you allow that) such as a contract for deed, agreement for deed, installment land contact, all-inclusive deed of trust or wrap-round mortgage.
However the Act will apply to them (not you) if they resell and finance an owner occupant buyer
3) Impact on Borrowing from a Private Lender
NONE
A key to buying and investing in property without banks is funding your deals using private money
If you use the private money as an investor and secure it with property you will not being using as a primary residence then the Act does not apply
Your private lenders are not impacted…
4) Impact on Loaning Money as a Private Investor
NONE
Buying, holding or creating privately held mortgages with real investors is a great why to earn above average returns protected and secured by equity in a property
If you make loans to investors who will not occupy the property themselves, then the Act does not apply
What the investor eventually plans to do with the property does not change this, as long as they do not move into it
4) Impact on Loaning Money as a Private Investor
Making private loans to owner occupants comes with host of other rules and regulations (in addition to Dodd-Frank) that you should follow…plus other potential pitfalls.
So unless you get familiar and comfortable will these added complications it is recommended you only do private real estate lending with investors
5) Impact on Selling to an Owner Occupant with Financing
New rules to follow!
Exemption for one (1) per year by seller is a natural person, a trust or an estate
Exemption for three (3) per year by seller is a natural person or organization
Otherwise use or become a licensed mortgage loan originator
Exemption 1
The seller finances only ONE (1) property in any 12 month period and:
Seller is a natural person, a trust or an estate, and
Seller did not construct the property, and
Financing does not result in negative amortization, and
Balloon is OK
Financing does not adjust for the first 5 yearsThen no more than 2%No more than 6% total
Exemption 2
The seller finances no more than THREE (3) properties in any 12 month period and:
Seller is a natural person or organizationCorporation or LLCPartnership trustEstateAssociation, etc. and
Seller did not construct the property, and
Loan is fully amortizedNo balloon payment, and
Financing does not adjust for the first 5 years, and
Borrower has the reasonable ability to repay the loan
If not exempt
Use a residential mortgage loan originator
Write a “qualified loan”
Wait 120 days before foreclosing
No negative am or balloon
Fixed rate for 5 years
Builders can not offer financing
Consider borrowers repay ability
Consider 8 factors
Qualified Loan
No negative amortization
No balloon
Amortized over 30 years or less
No excessive prepayment penalty
Underwritten based on highest interest during first 5 years
Income, assets and debts verified thru 3rd party reports
Credit history need not be verified
8 Factors
Current and expected income and assets
Current employment status
The monthly payment on loan
The monthly payment on any simultaneous loan
Current debt obligations, alimony and child support
Monthly debt to income ratio
Credit history
120 day rule
Wait 120 days to start foreclosureLoss mitigationLoan modification
If you do more than 3 deals per entity, the Act applies
Being exempt
1 per year as a natural person or trust
3 per year per entityLLCSpouses LLCIRASpouses IRAAnother LLC, etc
Finance non-owner occupantsPrivate lenders financing investorsSellers financing investorsInvestors financing investors
Work arounds
Sell beneficial interest in a trust
Sell an LLC
So up to 14 exempt
Tighten up your guidelinesMore money downOr rent until closed
SAFE Act
Passed a few years ago and implemented state-by-state.
Basically required that you use a licensed mortgage loan originator to sell properties with owner financing.
The simplest solution was to hire someone to handle the paperwork and disclosures, passing on the cost to as one of your buyer’s closing costs.
SAFE Act
Since then many states have amended the act to allow a number exempted deals to be done each year without needing to comply.
For some investors in some states, creating additional entities made any limits a non issue.
However other states had no exemptions unless you were selling your personal residence and you had to be or use a mortgage loan originator even for one deal.
SAFE Act
From a practical matter it seemed that if you were not in compliance with the SAFE Act the likely result of being targeted by regulators was the requirement to
Get licensed, orComply, orStop whatever you were doing
Investigate your state’s SAFE act
Situations
Buying with owner financingNo problem
Buying with private or hard moneyNo problem
Selling with terms to investorNo problem
Selling with terms to homebuyerMust comply!Or rent until closed
Dodd Frank Act Impact on Seller Financing for Investorswith Richard Roop
Call Deena at1-800-557-3171 Ext. 109
Or visitwww.RichardRoop.com