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

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1-800-557-3171 Ext. 109

Dodd Frank Act Impact on Seller Financing for Investorswith Richard Roop

Call Deena at1-800-557-3171 Ext. 109

Or emaildeena@richardroop.com

Or visitwww.RichardRoop.com