Seller Financing, Lease Options or Contract for Deed?

Question

I would like to begin purchasing, rehabbing and then selling mobile homes.  Initially, my plan was to create a note and owner finance to the buyer.  I am getting the idea that because mobile homes are not treated the same way as stick built/site homes that this is not a viable option?

I am looking at what options are available to me as I really don't want to be a landlord.  Ideally, it would be nice if I could avoid foreclosing in the event of a default.  Does this leave out conventional seller financing? I guess seller financing leaves me vulnerable to Dodd Frank rules where I would eventually need to find an RMLO?  How does everyone else deal with Dodd Frank?

I am also looking at lease options as an alternative method to essentially owner finance the mobile homes to buyers.  Are there pros and cons to this method also?  Does lease option avoid Dodd Frank?

Are any mobile homes sold as Contract For Deeds where the deed is not transferred until the obligations are met?

Sorry for the myriad of questions.  My mind is just swimming with the "how to" of it all.

Thanks in advance for chiming in!

Sandy

Ken Rishel · Answer

You need to stop and learn what you don't know - and from real authorities. Most of the people on Bigger Pockets engaged in some form of seller finance are doing so illegally and often don't even know what they are doing is illegal. That does not stop them from spreading the ignorance to others here.

If you are going to seller finance a home, you are loaning money. If you are loaning money, you need a state issued license to do so. You also need to either be, or hire, an MLO. Some people here blissfully suggest you can just hire an MLO who does not work for you to cover that issue, but in many states, that is illegal and, it does not negate your need to have the proper lending license.

If you have a lending license you also have to have a compliance management system and proper record keeping. Your lending agreements need to meet state and federal guidelines as do your notice agreements. You should also have closing documents that protect you during the servicing phase. You may have to file HMDA reports because of changes late last year in the law. You certainly will have to file reports to the state or state in which you are licensed.

As many people who read here know, Rishel Consulting Group is a consultancy that helps people in the manufactured housing industry set up related or captive finance companies and keep them running legally and profitably. While all of our recommendations on if one should set up a finance company are in part based on what states someone is interested in operating in (because of licensing challenges) there is no state where we would recommend anyone doing so unless they were regularly and consistently loaning out a minimum of $50,000.00 per month and in many states ten times that because of costs related to licensing and bonds and other issues.

Regarding lease-to-own, rent-to-own, rent credit, etc these are all disguised credit transactions at a minimum and represent illegal (without a license and all that goes with it) lending. The one exception is the gray area of lease with option to purchase, that can be used in some states, but not in others. The only thing significant that one using this method gets out of doing is licensing. Calculating the actual terms of lease is complex and one mistake can create an illegal transaction. Those so engaged also need a robust compliance management system that is different, but every bit as complex as the compliance management system lenders must have in place. Since a MLO and state license are not required in the states that allow unlicensed lease with option to purchase transactions, this may be an alternative at the present time for smaller operators who are doing limited numbers of these types of loans.

If you are looking at doing less than five loans per year, there is another system that involves a formal joint venture arrangement that many Lonnie Dealers are using successfully and legally that should be explored.

Mike B. · Answer

You definitely have a few important issues to research a bit further Sandy.

Lease options are generally a good strategy when you have rental properties that you're open to selling.  You get to typically avoid the maintenance issues and you can collect a non-refundable option fee up front while you reserve the property for the tenant to possibly buy in a couple years.  You'd have fixed rental and purchase price, so it usually makes your numbers a bit more manageable/predictable.  If you're considering lease options, definitely research them a bit more and you might find a great fit for yourself in that method.

Start with truly deciding what your ultimate goal would be, then you can better devise a strategy to meet that goal.  I know you have already addressed some of that in your post.  Just a few starter questions....

Rentals - Do you want to be a landlord, hire a property manager, or neither?  Who covers maintenance and repairs?  Would you earn enough cashflow to cover all your expenses, plus a cushion for future expenses and vacancies?  Do you want to keep the property titled in your name as owner?  Are you interested in gaining appreciation on the property and depreciation for tax advantages while the tenant pays down your mortgage until you sell the property for profits later?  Is this viable with the property you're choosing?

Seller Finance - Are you up to speed on Dodd Frank? Do you want to collect interest income only?  Will you have a title company prepare your note and service your payments? Are you willing to give up ownership interest in the property?  Are you prepared to foreclose on the property if there is a default?

Just some thoughts...

John Arendsen · Answer

First, I would contact @Ken Rishel regarding your financing and  Dodd Frank concerns. Second, if you're going to be purchasing in Rent/lease MHC's best you reach out to the community owner/manager and get their blessings as they can be quite difficult to deal with at times.

However, if they think you are there to help them improve their communities long term they may be more amenable to your involvement. However, do realize that many if not most MHC owners have strict policies against subletting.

If you're investing in resident owned MH condo conversions, sub-divisions, Planned Unit Developments (PUDs), or on private lots and/or parcels just make sure the MH is not a PRE HUD MH  (built after June 15, 1976),  that the site it sits on is the first and only site it's ever been located on.

Most importantly do your homework and due diligence and make sure the area you're investing in is in the PATH of PROGRESS.  This, I cannot stress enough. If it's a blighted area with little to no growth or upward mobility anticipated anytime soon it may not be for you. A cheap deal is not always a good deal.

If the MHC is blighted, run down, poorly maintained, high vacancy factor, poor quality of residents, etc. I'd keep looking. Good tell tales to look for are really run down and poorly maintained MH's, junk heap cars strewn about or sitting on blocks in driveways, poor of no landscaping, etc.

But the single most important thing I can offer up, having been in this biz for almost 4 decades, is to do a thorough job of inspecting the MH from bottom (starting with the crawl space) to the top and inside and out.

The Mobile Home in these two photos is a 12x36 (432sf) 1977 single wide (photo above). It is located in a tiny 8 space MHP. We paid 100k for the privilege of garnering a 35 year lease with the right to sub lease it.

Realizing that it will be taken down to the mainframe (photo below) soon to include the aluminum siding, floor joists, and even some if not most of the wall framing and and rebuilt from the bottom up we still feel we got a bargain given it's only 300 feet from one of the best surf breaks on the California Coast and in one of the most popular surf communities in the USA; Leucadia, CA.

It's situated intimately in a very affluent community with the surrounding site built custom homes and estates selling in the millions of dollars. Bottom line cost is relative compared to location and needs to be evaluated as such.When this project is complete about 75k from now you won't recognize it. It will look like  quaint beach casita.

But it will bring in an easy $2000-2500/mth or a resale of about $225-250k flip were that the route we were choosing. But our model is building a passive income portfolio in coastal areas where average real estate is way too pricey for the average person.

On most circa '60's & 70's homes you will usually find them in pretty poor condition and inundated with caustic and carcinogenic chemically laden materials i.e. formica counter tops, particle board sub floors, acoustic tile, floor, wall and roof insulation, etc. It wasn't uncommon to utilize lots of formaldehyde and asbestos so don't just start pulling things apart without first having everything inspected. Airborne asbestos can be hazardous to ones health.

Now many may ask why go to all that trouble? Why not just take the old one out and replace it with a brand new one. That's an easy answer. This home is considered a "LEGAL NON CONFORMING INSTALLATION" and as such GRANDFATHERED in until such time it's removed and replaced with a new one at which point it will then have to conform with current building codes and setbacks.

So should we remove this 12x36 (432sf) Mobile Home with a new one it would have to be replaced with a 10x34 (340sf) PARK MODEL RV. Park Models are not only smaller they are much more limited and crowded on the interior that give you a feeling that you are in an RV and not a home. At least for my wife and I.

When this project is completed it will only have two rooms. An open and airy studio apartment suite with a private and enclosed full sized bathroom. Replacing the oversized and bulky furnace and water heater tank with underfloor space heating and a much smaller tankless hot water on demand we've just enhanced the cubic foot space dramatically by as much as 60 to 70 cubic feet.

There's a lot more to this story but I hope it gives you a little insight into some of the challenges and perplexities that exist with old and even new MH's be they PRE HUD trailers and/or mobile homes or HUD Manufactured Homes.

Sandy Uhlmann · Answer

@John Arendsen

I have already spoken to the park manager about my plan and he is on board.  The park is bringing in new mobile homes and is doing everything it can to improve the park in order to attract better tenants.  Although the manager does rehab some of the homes himself, he offered his help and advice because ultimately, it is his goal to fill the park will well qualified tenants who want to be proud of the home that they are (hopefully) going to be owning.  The on site manager has agreed to help me inspect the home prior to my purchase.

As for your purchase and the park that it is in, I think that is awesome!  As they say; location, location, location.  I can't wait for you to post the after photos.  It is amazing what can be done with these homes.

Seller Financing, Lease Options or Contract for Deed?

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