Does living in a rent-to-own count as an real estate interest?

[Khadijah Celestine]

If I'm living in a house under a rent-to-own contract does it count as an interest in real estate? Specifically for the purpose of qualifying as a first time home buyer, assuming the qualifier is "does not hold an interest in real estate"? Since I have an "option to purchase" contract, this counts as interest and will disqualify me?

[Bill Gulley]

@Patrick Liska

Be careful taking financing advice from snip it's, real estate investors, or those who aren't an attorney or in mortgage compliance, even originators (RMLOs) get it wrong. 

That blog is a short snip it that doesn't tell the whole story, it implies that the lender must use certain indexes and thereby an adjustable mortgage (not the case) and you can simply use a fixed rate.

Suggesting that an individual doing one deal can ignore the ability to repay and use a balloon note smacks at predatory lending activities, predatory dealing is a different animal from Dodd-Frank but Dodd-Frank also touches on predatory lending. Any loan that can be determined to have been designed for a borrower to fail can be predatory lending, if your borrower does fail then that becomes strong evidence that the terms could have been faulty under the circumstances.

Where the author got that non-compliance exemption was with an individual or Trust selling one home in a year, that is an owner occupied seller, not an investor in the business of real estate. 

The exemptions don't really mean that a seller-lender is free to do whatever, that they can or should do  something that is otherwise restricted simply because they aren't required to follow the normal process or underwriting selling just one property. 

The Dodd-Frank crack down included seller financing for a reason, it was the bunch that took the down payment, financed with inappropriate terms to buyers who could not meet the obligation, took the property back and repeated the scam over and over. 

The exemptions target those who own their home and want or need to sell, the owner occupant selling their home has different motivations to sell than does a real estate operator or investor. 

The home owner type seller is not expected to be a mortgage whiz, the level of knowledge is very low and requiring them to comply with regulations meant to curb lenders or operators dealing in financing is an undue restriction for Simple Simon. But, that's not a free ticket for Simon to deal in a predatory manner either. 

For Simple Simon, somewhere in the sales process there is expected to be a Realtor or Attorney a closing agent, title folks or others that may prepare documents to comply with local customs, including a note, rarely would Simple Simon sit down and draft their own mortgage. This is more of the unspoken protection that applies to both sides of a deal, if it becomes clear to the professionals involved, someone will usually speak up. 

A real estate operator or investor will be seen wearing a different hat, you're not Simple Simon (even if you really don't have a clue, you should have a clue). Simple Simon may get away with a balloon note without much due diligence as the motivation or intent is to actually sell the place. The operator will automatically default to the finance, foreclose and repeat type unless they can show they acted fairly, prudently, without ill intentions. For the operator or investor type that means CYA!

So, IMO, for an investor or operator financing any deal, they need to act prudently to avoid the predator lending and dealing issues aside from Dodd-Frank, while you may be exempt from the ability to pay rules, due diligence in the borrower's ability to pay is still necessary. As long as your underwriting is prudent, showing reasonably that your buyer can actually buy and that the areas of compliance were touched on then you'll have a defense against any predatory claims. That also means use an attorney!

Again, use an attorney! Investors who really understand what's going on know that they shift much if not all of their liability to the attorney as they simply rely on that attorney's opinion. The attorney doesn't just charge you for their knowledge, they also charge you for accepting the liability they take on in advising you to act! 

What you got in that snip it blog was a peep hole with off hand comments not a picture window into Dodd-Frank! :)