Seller Financing??

[Jack Lee]

Hey guys,

How do you go about getting seller financing? Do you just ask the seller if they are familiar to the topic and then give them more information?

In addition, what if the seller uses an agent? Do you just pass the word to the agent?

Thanks

[Ned Carey]

One good question to ask when screening sellers is "Which is more important to you, selling fast or getting top dollar?" Or you can ask "Do you need the money right away or can I pay you over time?" The answer gives you an idea how to structure your offer.

If they want top dollar you can say "I can pay top dollar if I can pay you over time. "

I have found if I ask about "Owner Financing" they don't understand the term or how it works. I spend a lot of time trying to explain the concept of seller financing. "Can I pay you over time/" is something anybody can understand.

[Jack Lee]

Ned, that is so simply brilliant. Lol I was trying to formulate strategies trying to explain seller financing to the seller.

What about if the owner still has a mortgage? How do you guys structure the deal?

[Ned Carey]

If the seller has a mortgage it makes seller financing much tougher, both to do and to explain.

The owner can do a "wraparound." This means you pay him and he pays the mortgage. This can be good for sellers be cause if they have a low interest rate and they charge you a little more they are making a little money on the mortgage. EX; Mortgage is $100K, interest rate 5%, Purchase price $120K. The owner gives you a $120K mortgage at 6%. The owner is making 1% on the first $100K

You could also do the deal "subject to the existing Mortgage." In this case the original mortgage stays in place and instead of the seller sending in payments, you as the new owner send in the payments. Then you could pay the seller some extra on top of that; either up front or over time. To sell that kind of deal you can say "If I take over your mortgage payments until I can resell or refinance the property does that work for you?"

Both of these have pros and cons but I am sure both have been described in much more detail here on BP.

Good Luck - Ned

[Bill Gulley]

As anyone does their research here pay attention to the date of the comments as new laws apply. The SAFE Act has changed seller financing, including all kinds of installment sales where the seller basically has a security interest in a residential property. :)

[Ned Carey]

Very good point Bill Gulley. However my understanding is the law applies to the lender not the borrower. I wonder how much risk the lender is taking because I am never going to bring it up.

Does it apply to all residential or only owner occupied residential?

[Jack Lee]

Thanks,

So I should just entice the seller into the agreement and let them deal with the consequences should there be an issue?

This sounds rather entrepreneurial. I like it.

[Bill Gulley]

The SAFE Acy applies to all residential 1-4 family properties including mobile homes as well as lots zoned residential. Owner occupants usually have an exemption while all non-owner occupied fall under the Act. In many states there are exemptions for one, up to four transactions in a year, however there is no exemption that I know of for dealers, those in the business. So, if most of or even a significant amount of your income comes from RE, you may not have an exemption. Anyone doing seller financing should study the subject in their state. And, notes are classified by the type of security given so having an LLC sell a single family home does not make it a commercial loan it's still a residential loan.

Jack, what about a seller suing you for inticing them into an illegal transaction through you offer and your documents? Starting off, I suggest not to start with the idea of trickery or deceit, or doing deals where any part of a transaction is illegal. Reputation counts in RE.

We have not seen the impact of this Act yet, but issues may arise from:

Bankruptcy by the seller or buyer, death and estate issues, interest must be documented to the IRS and agencies could check there, foreclosures being contested, notes being sold and purchased that are non-compliant, as well as other issues....

We have no idea what the ramifications will or might be. The penalty is on the one who originates, negotiates, processes and anyone participating in such activities, so it's not just the seller or note holder.

I have not checked in my area yet how Realtors are addressing the issue, as it appears that if any Realtor assists in devising note terms they could well be in violation of the Act.

The Act has some requirements for the loan or financing provided and the origination should be accomplished by a licensened mortgage originator or an attorney, if you can find one.

It appears to me that so long as you are dealing with a mom and pop owner, who are not in the RE business selling their primary residence that seller financing can be accomplished in most areas.

HUD is the adminsitrator of the Act and they have instructed that each state adopt similar laws as the Act. If HUD determines that any state has failed to address the issues within the scope and spirit of the Act, then the federal law will then apply. HUD may make any determination as to applicability to any residential transaction.

Clearly, it is best to consult with an attorney in your area before you begin a seller financed transaction or business based on such transactions. Good luck!

[J Scott]

Originally posted by Bill Gulley:

In many states there are exemptions for one, up to four transactions in a year, however there is no exemption that I know of for dealers, those in the business.

Bill Gulley -

I'm considering doing an owner financed deal, and I'm curious about this statement...

According to the SAFE ACT "final rule" that I was able to find online (issued by HUD in June 2011) it sounds like an individual or a business is only subject to the SAFE ACT if engaged in owner financing on a "habitual" basis (meaning definitely more than once). It doesn't say anything professional RE folks being exceptions from this exemption.

Is that a state rule you're talking about or is this somewhere else? I'm planning to call the state Dept of Banking and Financing this week, but curious if you had any additional info...

Here is what I found online:

http://www.in.gov/dfi/HUD_Final_SAFE.pdf (Bottom of Page 7)

[Account Closed]

J Scott Each state was required to create their own legislation per the Safe Act, and put into action by....2010, I think. It is there that you'll find your state's definition and requirements for mortgage originators. Hopefully it addresses the issue of seller financing more specifically than CA. The CA version appears to require a licensed mortgage originator on all loans, including seller financing, to owner occupants (personal/family/household loan) but does not require a LMO to create seller financing to an investor buyer (commercial loan). But without case law, who knows. I've done two loans to investor buyers since the Saft Act, without too much concern. And I negotiated one seller to sell to with me financing. Since I'm the borrower (and it's not a owner/occupant loan), I decided that there was little chance that the seller/lender is at risk. I won't be holding them responsible if I default and I won't be suing them. :)

Please let us know what you find out about how it works in GA.

[J Scott]

Bill Gulley, K. Marie Poe -

Thank you for that information, K. Marie...that makes sense and puts Bill's comments more into context as well...

Based on how the SAFE ACT is written, would it be legal to hire a Licensed MLO to originate the loan for me (do the paperwork, provide TIL docs, etc), or is it actually illegal for me to do the loan at all, if I'm not personally a licensed MLO?

Or were you saying that the entire federal version of the SAFE ACT is no longer in place and now the state defines EVERYTHING?

Thanks again for your help!

[Account Closed]

J Scott As far I know there is nothing preventing you from making the loan. It's the offering and negotiating and accepting applications, etc. that is covered by the Safe Act. That being said, some of my hard money lenders no longer do owner occupied equity loans. The loan file has to be airtight and it's all in favor of the protecting the borrower to the extreme. When the Safe Act first passed, a lot of private lenders and note people I know said that all we'd have to do when seller financing is use a broker to originate the loan and everything would be fine. I'm not so sure. If I offer the property to a buyer in an ad with "seller financing", is that offering loans? If I say I'll take 10% down and 6% interest, is that negotiating?

Hopefully you can find out more from a LMO/broker in your area if they will originate a loan for you. In CA, lots of the agents take the DRE training to become LMOs. I'd assume someone in your brokerage is an LMO?

I don't think the entire Safe Act is superceded by the state versions. The states were required to pass laws having to do with when an LMO is necessary, who is an LMO and what the training requirements for licensing would be. In order to do that, the states were stuck trying to interpret the Safe Act and Dodd Frank which is vague on seller financing. Hence some of the state laws are silent on the specifics of seller financing.

[Tyler Carson]

Just so I am perfectly clear on this subject. Are you discussing owner financing when they own the property outright? The way it was explained to me by my realtor was that that would be the only advisable way to do owner financing (ignoring the SAFE Act, which wasn't discussed). He said that if there was a mortgage on the property that I would be exposing myself to the risk of a due on sale clause.

What type of experiences have you had with this?

[Account Closed]

Tyler Carson I think your question is mixing two things. J Scott and I talking about selling a properties that we own free and clear. If we find a buyer who has a down payment and worthy credit, we become the lender by allowing the borrower to pay us the balance over time. It's just a like a regular loan from a bank. There's a promissory note and a mortgage. If the borrower doesn't perform, we can foreclose. The Safe Act was passed to protect borrowers from lenders but isn't entirely clear (IMO) on if and when it's allowed for a seller selling their own property to "originate" the loan.

As for taking over properties subject-to outstanding loans: If you take over a seller's loan that isn't usually referred to as "seller financing" . That's usually a contractual arrangement between the seller and the buyer. The sellers give me the deed, I take over the existing financing. They aren't offering me a loan. Indeed, if you get a deed and take over financing, you are exposing yourself to the due-on-sale clause. There is no due-on-sale jail. If a loan gets called due by the lender, you go to Plan B (pay off, refinance, or assume the loan). The Plan B is supposed to be in place before it becomes necessary. :)

Hope that was more clarifying than confusing.

[Bill Gulley]

K. Marie,good comments but providing any wrap is providing financing, the seller is providing basically the money they got from thier lender.

The SAFE Act trumps state law, if HUD determines that any part of any state law adopted failes to address the intent of the SAFE Act, the federal law will be followed.

The whole thing about any transaction that provides any financing arrangement for a residential property is that the loan is to be originated by a MO/Broker. Origination and processing as well as any negoiation of loan terms is defined in J. Scott's link, I believe, looks like it does.

The Act specifies "any transaction or scheme....that provides any financing arrangement" (I'm pretty sure those are words used, from my readings) so it's not just a seller providing a note and deed of trust as a mortgage, but any sub-2, wrap, contract for deed or lease option when possession is also given, beyond one year. But it says "any scheme" that ispretty clear to me:

One was a rent it for 15 years and you get the title, that's nothing more than an installment contract, doesn't matter how you color the pig, it's still a pig!

Commercial loans are exempt. IMO, buying one SFD to flip it could be a commercial loan if the flipper has a commercial record and income from such activities, if it's a first timer, how does he prove the intent, if it's not sold say within a year? If a buyer is buying 6 houses ate one time, or vacant lots zoned for residential, and the buyer is a contractor, I'd say that flies. A person buying one vacant lot that a residence could be built (in the event there is no zonning restrictions) that would be a loan covered under the SA.

Best way to avoid the pit falls is simply have the loan originated, processed and closed under a licensee, make sure they stamp/seal the contract and you're kinda home free.....if they pay it, you still have many other issues, but most are on the mortgage broker.

An attorney may originate the obligation as well, even better, if you can find one.

Many closing companies have closed these deals for years and believe they don't have a problem, but actually, unless that agent is an attorney, they are not authorized todo so any longer, a closing company is not a mortgage originator!

What's the cost for non-compliace? I'd say mostly on the seller first, then a listing agent as the seller will likely look to them for failing to inform the seller as well as participation in the origination (to some extent they are exempt to administrative work) anyway, but while these people may get their hand slapped, the buyer can also lose. As I mentioned, death, tax liens, bankruptcy, law suits, divorce and qualification for government benefits can expose your deal and termination of the deal is possible.

We really don't know how the chips will fall, or when if they do at all. IMO, best way to CYA is get a written opinion from your attorney in the deal.

BTW, I'd also say that any seller that negoiates a contract to sell with financing is not processing or originating the obligation, for a seller to say "no, I wouldn't accept 4%" or "I'll only doit if I got 10%" is not a loan or financing function. However, looking at a credit score or other loan verification type documents and then stating a rate to be charged is a loan origination function, it's underwriting, allow the mortgage broker or attorney topresent the seller with such information and discuss the risks and allow that originator or attorney to bless the deal struct. Realtors should not be doing underwriting or financial consultation as that is outside their expertise, just a legal advice is.

Hope that throws my 2 cents back in! Good Luck!

Ooops! J Scott

[J Scott]

Thanks Bill for the info...

I just got off the phone with the Georgia Dept of Banking and Finance, and here's what I was told:

- Any naturalized person is given an exemption of up to five properties per year to originate loans/seller finance. As I'm selling out of an LLC and my LLC is not considered a naturalized person, I am not exempt, and not not legally seller finance the deal.

- I asked about whether I could use a licensed MLO to originate the loan and then I would provide the financing...I was told that unless I was licensed, that would be prohibited as well.

Oh well...

[Rob K.]

Originally posted by J Scott:

Based on how the SAFE ACT is written, would it be legal to hire a Licensed MLO to originate the loan for me (do the paperwork, provide TIL docs, etc), or is it actually illegal for me to do the loan at all, if I'm not personally a licensed MLO?

I have looked into this and found that there are so many gray areas that a MLO won't touch a deal like that with a ten foot pole. They are afraid of breaking some type of unforeseen law.

In my state, they are working on legislation right now that woiuld put more definition into this. I met with a land contract expert last week. He said they are trying to set a limit as to how many land contracts you could do in a calendar year. They are hoping to get ten. Anything over that number would require an MLO.

There is such a huge gray area now that everyone has there own opinion. I've talked to several experts in the field that say land contracts are not covered by the Safe Act. Others say it's ok to do them as long as the property was either owner occupied and/or the purchaser is an investor and not an owner occupant.

I've always believed that if there is no victim, there is no crime. The government should let two consenting adults (buyer and seller) engage in any transaction that doesn't victimize anyone.

Hopefully this will be resolved soon. I've bought and sold lots of houses using seller financing and it has been beneficial to all. I am purchasing a house this week with seller financing and gettign excellent terms. No closing costs and 6% open ended terms. The seller is happy to get that type of return in this climate and I'm happy to use the rest of my cash for other purchases. It's a win-win.

[Bill Gulley]

It certainly varies state to state.

I'd caution saying someone is an expert, (unless they are more than 100 miles from home, LOL). "Land Contract is specifically described in the federal SAFE Act as an example of a financing transaction. Most experts need to read more and rely less on opinion I guess.

PS. Don't get ruffeled Rob, I know several of these so called experts, even in government, so it wasn't about your assessment, but rather their claim I'd guess. :)

[Account Closed]

K. Marie,good comments but providing any wrap is providing financing, the seller is providing basically the money they got from thier lender.

Bill Gulley Indeed, offering to sell with a wrap is seller financing and would fall under the requirements of the Safe Act. But a straight sub2 is usually contractual and not usually a loan offering. I deleted the additional paragraph I wrote in my original answer about wrapping and AITDs because Tyler is a new investor and I thought the subject was already confusing enough.

It's not possible that investors aren't seller financing their properties, just like they always have, regardless of the new laws. So what is everyone doing? Ignoring it? I haven't yet met anyone who used an LMO to originate. I had an hml offer to originate for me though.

[Account Closed]

Originally posted by J Scott:

Thanks Bill for the info...

I just got off the phone with the Georgia Dept of Banking and Finance, and here's what I was told:

- Any naturalized person is given an exemption of up to five properties per year to originate loans/seller finance. As I'm selling out of an LLC and my LLC is not considered a naturalized person, I am not exempt, and not not legally seller finance the deal.

- I asked about whether I could use a licensed MLO to originate the loan and then I would provide the financing...I was told that unless I was licensed, that would be prohibited as well.

Oh well...

J Scott Thanks for report back. Putting seller financing aside, something is so not right here about the information you got about lending money secured by real estate. I've lent money in Georgia secured by a promissory note and mortgage and I didn't' have to be licensed. In CA you don't have to be a licensed mortgage broker unless you are lending over a certain interest rate. There must be thousands of private individuals who aren't licensed lending money in GA. Are they all breaking the law? :)

As for what you are trying to do: would you benefit from deeding the property out of the LLC and selling it and owner financing it as an individual? If you are planning to sell the property to an owner occupant there are still all the disclosures and regs to consider, but it can be done. 5 props a year seems generous and I can't help but wonder if that was meant to preserve the old school business model of offering seller financing.

[Bill Gulley]

J Scott, Just read your above post about call the GA Fin. Dept.

The part about using a MO and it still being unacceptable just doesn't sound right to me, not saying that isn't what the guy/gal said.

An insight to these gov. types. They can be wrong, especially on new legislation. They usually don't want to be bothered by the public, they have work to do and coffe to drink. If you ask two different people at different times, you could likely get two different answers.

You really have to watch your tone of voice and how you ask the question. If it sounds like you are disagreeing or looking for a way to accomplish something they don't really like to be involved with, you are more likely to get the ...no, you can't do that, no, you can't do that either...

And I'm not saying you asked in any ill manner.....

Maybe you can't get it for this deal, but here is what I suggest you do.

Write a letter to the General Counsel,call and get the name, like Dewey Hammer, Esq. and title, Chief of legal Counsel, at the Department of Finance and write a letter asking for a "written opinion" as to certain aspects would be legal in the state of Ga. This will then go to an attorney who is on staff and I have had very good responses to issues, they will provide an opinion in writing and while vague to your specific example, it is a good way to guide your business. After all, if you ever get sideways with the dept of finance, that is the person who will ultimately get involved and look at the issue and if you did what they suggest, you can remind them that you followed their advice.

This may be harder for individual investors to get, such offices usually reserve comments for other agencies, but as a regulated Realtor facilitating transaction in the state, they may comment due to your licensee status.

I'd suggest you provide three simple examples, a seller owner occupied, an investor with our without a business entity and an installment contract where part of the amount financed is assumed by the buyer. Actually, that could be two with the financing question for each I guess.

These are or should be the most common situations and from the response to such questions, you should be able to apply the preceived rule in other areas.

As to individual investors, you can certainly try to get a letter of opinion, stating you are in the business and "that such business constitutes a significant amount of the business conducted" that may help, as if they think it's just one homy trying to sell a house, they will tell your to see your attorney!

Anyway, this worked well for me in many instances and is the best way to go, IMO, other than getting a letter in blodd from your attorney and them doing it for you. Good lcuk

[J Scott]

Bill Gulley -

Good suggestions, thanks...

The guy I spoke with this morning was really nice and seemed genuinely interested in being helpful, but he certainly didn't know the rules offhand. When I asked about whether I was allowed to seller finance, he said he'd call me back, and did an hour later with the statute that said my LLC couldn't do it.

I followed up with my question about involving a licensed MO in the transaction, and I could tell by his response that he was making an educated guess as opposed to knowing for certain the answer.

Unfortunately, at that point, it's not like I can say, "It doesn't sound like you're very confident with that response...can I ask someone else?" :)

You suggestion about writing a letter asking for a formal response is a very good one...

[Bill Gulley]

And, sometimes you can catch one on a good day, lol! Kinda what I was thinking. Good response time, Mo is usually the next day...:)

[Account Closed]

Originally posted by J Scott:

I followed up with my question about involving a licensed MO in the transaction, and I could tell by his response that he was making an educated guess as opposed to knowing for certain the answer.

Unfortunately, at that point, it's not like I can say, "It doesn't sound like you're very confident with that response...can I ask someone else?" :)

You are truly diplomatic. And maybe this is where I go wrong, because I am not always tactful, but I usually say "I really need to be certain, can I speak to someone else who will confirm that."

A few weeks ago I asked my banker if I could get an approval for large POS purchases at any time. He said yes. I asked 24/7? He said I assume so. I said assuming wasn't really what I was looking for, please check and call me back. He called back had been totally wrong about all of it. It was the assuming that gave him away.

Hope you find the right answer soon!

[Joseph C.]

K. Marie Poe

Where did you find your info on the CA SAFE ACT. I have done a limited Internet search and can not seem to find code sections. I like to read the actual law in its long form. I find it gives me better understanding than the cliff notes versions.

I am currently working on a deal to purchase two properties. Seller financing may be what works best for the seller and I. I want to make sure I'm operating legally.

[Account Closed]

Originally posted by Joseph C.:

K. Marie Poe
Where did you find your info on the CA SAFE ACT. I have done a limited Internet search and can not seem to find code sections. I like to read the actual law in its long form. I find it gives me better understanding than the cliff notes versions.

I am currently working on a deal to purchase two properties. Seller financing may be what works best for the seller and I. I want to make sure I'm operating legally.

The stuff I've read re the CA implementation of the Safe Act is mostly from the CA DRE and various legal blogs. But I have read actual code and revised code, just don't know where. I'm pretty sure if you work backwards from the DRE info you should be able to get the actual code numbers.

If you're the buyer in a seller financing transaction, IMO you don't need to concern yourself with the fed or state Safe Act. None of the laws and issues that I read pertain to the buyer getting the loan. The seller/lender would be on the line if you were a disgruntled borrower and claimed you were wronged and then were able to claim the seller/lender originated the loan without being licensed. Additionally, I'm assuming you are buying the properties as an investor with a business purpose? If so, those loans are exempt, as the Safe Act applies to consumer loans.

I have a property I'm buying with a down and seller financing in escrow right now. The seller should perhaps be concerned if they are originating a consumer loan. But they are not. The seller may not even know what the Safe Act is.

None of what I say is legal advice. It's barely advice. :)