How do I sell a mobile home via rent to own and remain compliant with Dodd Frank?

[Mike Gennaro]

We would like to sell a mobile home via rent to own and remain compliant with Dodd Frank. We purchased the unit for $8500 in a park. I've posted it for sale on craigslist as follows and would appreciate suggestions for success and again, legal compliance:

"2 bed 1 bath 1980's 14x60 (AS IS in good condition), rent to own with $1000 down. The note is $350/month and will be paid off in only 5 years. Lot rent of $220 + $80 insurance will be included in payment each month. Your total monthly rent including insurance and lot rent will be $650..."

Best,

Mike 

[John Lowe]

I'm not saying there haven't been abuses in lending. In my opinion, the SAFE Act and Dodd Frank brought much needed regulation to the industry. Predatory loans do exist but they aren't structured like a Lonnie Deal. Lonnie didn't originate liar loans or negative amortization loans. His loans didn't have balloon payments, adjustable rates or prepayment penalties. He didn't charge points or fees. He didn't even do rent to own. Lonnie made short term, fixed rate, fully amortizing loans with low monthly payments that his customers could afford. Making Lonnie the poster child for predatory lending is like making Ellen DeGeneres the spokesperson for Weight Watchers.

I am new to Bigger Pockets, but I'm not new to RE investing. Have you read Deals on Wheels? Your assessment shows a lack of understanding of its principles. One of the fundamental concepts is what constitutes value. Some investors add value by physical improvements (rehabbers), others add value by negotiating good deals (wholesalers), others add value by improving management (turnaround teams). Lonnie added value by providing financing.

Comps and blue book value for MHs are almost meaningless. This is especially the case with MHs in parks, the quintessential Lonnie Deal. Most of the value that a MH has is a function of its specific location. There could be two MHPs next to each other and moving a home from one park into the other park could instantly double or halve its value due to the characteristics of the park (ie. lot rent, amenities, occupancy). This is readily seen in Florida in age restricted vs all age communities.

Lonnie's pricing formula was simplistic: 2-3x cost. Fellow BPer John Fedro has said that approach leaves too much money on the table. Most RE investors charge the highest price the market will bear, regardless of their cost basis. Lonnie frequently used a nominal interest rate of 12.75% (this was back in the 1990s) but for these type of transactions its irrelevant since the purchase price can be adjusted accordingly. Lonnie Deals by design are short term debts, with payment schedules of less than 4 years. They are designed to be paid off quickly, leaving the homeowner the financial security afforded by having a free and clear residence. Lonnie Deals don't rely on refinancing or loan churning. The turnover that occurs is the result of seminal changes in the borrower's life. The fact that the Lonnie Dealer frequently fairs well when this happens is a byproduct of the weak cash market that exists for MHs. Before Lonnie purchased or repurchased (repossession was rarely necessary) a home, he encouraged the homeowner to seek out other buyers. He was always the buyer's last option, literally their savior. This is the way all Lonnie Dealers that I know operate.

According to the FDIC (http://www.fdicoig.gov/reports06/06-011.pdf): "predatory lending typically involves imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics; taking advantage of borrowers' lack of understanding of complicated transactions; and outright deception." There is nothing in Lonnie's books that fits that description. His contracts were exceedingly simple: 1 page application, 1 page sales agreement, and a 1 page promissory note. The homebuyer got title immediately. Its the total opposite of a predatory loan, I'd say its unfair to the investor, offering little protection/recourse.

My definition of predatory lending is simple: is the borrower better off or worse off as a result of the loan? If you query MHP residents, you will find the answer is overwhelmingly a positive affirmation. MH home sellers and MH homebuyers will say that Lonnie Dealers provide a valuable service. There is zero institutional investing in this space (older SWs in MHPs). That's the reason the homes can be bought so cheaply and sold for several multiples higher.

I'll share how I'm going to apply the Lonnie Deal model to SFHs. I'm buying REOs and will be selling them at retail prices (Zillow/Eppraisal value) by carrying the financing. Typically this is 2-3x my basis in the property. Loan is 0% interest, term is ~10 years, monthly payment is derived based on market rent. In a couple of weeks I'll be finished rehabbing a house and will have $35-40k in it. It would normally rent for 1300/mo. I'll sell it for 125k, with 5,000 down and mortgage payments of $1000/mo + TI. My yield will be > 30%, so is it a predatory loan? Aggressive sales tactics and deception are not needed, they'll be beating down my door. Similar to what every good landlord does, ability to pay (ATR) will be assessed. With 0% interest rate its not a high cost mortgage (as defined by Dodd Frank). These Lonnie Deals will be Qualified Mortgages (as defined by Dodd Frank). Is there anything unfair or abusive about the loan? Banks won't lend to these customers and they won't lend in these neighborhoods. The only alternative available to my customer is renting. So will they be better or worse off as a result of the transaction? I'll give you their phone number so you can ask them.