All Forum Posts by: Grant Kemp

Braden, for some reason my @tag isn't working you, but I hope you see that you are able to do as many owner financed deals to owner occupants as you please. There are a couple of thresholds to be aware of in doing so: 1) once you do 3 or more in a rolling 12 month period you must comply with RESPA, 2) once you do 5 or more in a rolling 12 month period you must comply with the SAFE act.

My recommendation is to work with a state local RMLO and RE attorney in order to make sure you're staying compliant. Dodd-Frank is really not that bad, and to anyone who actually READS the law, things are set out *fairly* black and white for what we need to do in order to comply. I have clients doing 5+ a month who are unlicensed, but I originate the loan and act as the licensed individual for them in order to keep them in compliance.

@wes

@Wes Brumit That looks like a the kind of deal worth doing, absolutely. We'll need to know the area it's in. PM me the address.

Has she told you what she wants to sell it for?

@k.

@Account Closed ah good point, and thank you for differentiating that. I tend to get a lot of mud thrown my way from that particular user. However, I must respect if he disagrees with this strategy that he's getting out there and posting his thoughts.

so as far as the law is concerned nothing I described in the podcast are considered predatory. Dodd-Frank does a very good job of giving us a black and white of what the government deems acceptable vs unacceptable. There's not any mention of appraised values vs sales price in the laws, with the exception of requiring your valuation models be disclosed to your buyer if your loan hits certain requirements. All the rest of the laws pertain to interest rates and loan features.

There are two thresholds to be aware of, the "higher priced" mortgage loan and the "High Cost" mortgage loan. Basically any owner financed home will be "higher priced" which is the 1.5 or 3.5% above APOR on a 1st or 2nd (respectively) threshold I mentioned earlier. High cost is 6.5% or 8.5% above APOR. I recommend all of my clients stay UNDER high cost mortgage. That being said, Dodd-Frank even lays out the correct way to originate a High Cost loan, and in order to stay away from what they consider predatory they have disallowed certain features like:

• no balloon payments
• no prepayment penalties
• points and fees cap at 3% of loan value (depending on loan amount)

Past that there are tons of disclosures that need to be handed out for other features some may consider risky (like ARMs for instance), and even required homeownership counceling for buyers getting homes with certain features.

That being said, nothing talks about limits to sales price. At the end of the day a house is worth what someone will pay for it. That's the mere definition of "worth" or "value", and the basis of supply and demand. The typical owner financed purchase price is going to be 10% above what a retail sale would occur at, supply is much lower on an owner financed home than it is retail. And on top of that there's going to be a 10% down payment associated with the purchase, which again puts us back to essentially the same terms as a VA loan with no money down, preserving refinance abilities.

The only reason people feel like you can't sell houses above appraised value is that their used to those loans being denied. Big lenders won't approve the loan, and the only reason they won't loan the money is because they don't want to risk losing that money if they have to take the house back and re-sell it. It's the lender making this decision for the lender's risk asessment. When you are the lender, you make your own assessment of the risk and sell for what you're willing to sell for. Dodd-Frank does give very specific guidelines on ATR (Ability to Repay), so if you abide by those, there's not much of a legal footing for someone to stand on to say that you put them into a house they couldn't afford, and if you abide by the loan feature limits provided I see no footing that could say you've lend in a predatory manner.

I always repeat that you've got to do the right thing. I don't see a problem with a 10% premium on the sales price legally or ethically. Especially with appraisal disclosures given to the buyer (even though appraisals aren't required, your borrower has a right to see the comps you've pulled or any other valuation models you used [depending on if your loan meets certain requirements]). Our sales price and payments are typically controlled by the rental market. If that house would rent for $1500, that's probably going to be the PITI payment for the home as owner financing, so it's not stretching anyone any more than a rental would.

All this to say, much/most of what I'm saying here is an abbreviated version of what the laws say. When I make claims like "no balloons", just know there are many caveats that go into that statement. I'm just trying to get the main point across here without copy and pasting the entire Title XIV of Dodd-Frank lol

@Cal C. We have sold notes in the past, definitely. Most note buyers are buying at a discount, so you can't really sell notes that don't have equity in them already, but it makes no difference to the note buyer if there's an underlying lien. As long as the sales price covers the bank debt, you're good to go.

Also, you can't do a pre-payment penalty on loans that are "higher-priced" as defined by the gov as 1.5% above APOR on first liens or 3.5% above APOR on junior liens (which a wrap is). You can find the APOR by visiting ffiec.gov/ratespread

And I had trouble deciding how far to address the stuff Bill brought up, but it was devolving quickly and it looks like Josh has requested we keep off that topic. Just know that the loans we set up are loans people can refi out of as long as the other personal financing requirements are there. There's always a right way and a wrong way of doing things. You've gotta use your head and be ethical.

I'm sorry I've got no fla connections, but work often in San Antonio (in fact I'll be there on the 31st to speak at their expo). Let me know when you're ready!

@zach A.

I do provide RMLO for all of the states that accept the national UST, unfortunately Florida is not one of them. There are 39 states I can originate in, all highlighted in blue here:

http://mortgage.nationwidelicensingsystem.org/profreq/testing/Documents/UST%20Adoption%20Table%20and%20Map.pdf

lol fair enough Bill :-p that'll just be a difference in opinion for us. I definitely say include the attorney to close the property.

And even as the LLC you technically only can originate 2 loans before you must comply with RESPA and 4 loans before you must comply with the SAFE act. That being said, there's no exemptions from Dodd-Frank and the ability to repay laws for you. The only exemption there is when you're selling your homestead.

I agree with almost everything @Bill Jones said, however here are some caveats:

1. the transaction between your seller and your LLC is exempt from the dodd-frank laws due to it being a "commercial loan", but ANY way you extend that credit to an owner occupant means that you are extending credit to an owner occupant, even if you're just assigning interests. Therefore, the transaction between you and your buyer is absolutely under dodd-frank and ability to repay compliance laws. In fact, even talking about terms like interest rates with your buyer is what starts the ball rolling as extending consumer credit. I can not stress enough that you'll need an RMLO to properly comply with this side of things.

2. Recording is optional (at least in Texas and apparently in CA), but you'll need to verify that with local laws. Bill has a good idea, but it's another one of those where you'll want to weigh your options and see if you think you should record deed or not. For the record, we record every deal we do to help prevent future title issues.

3. you absolutely need to get an attorney involved, to not do so is just asking for trouble. Again, everyone has their own risk threshold, and it's not like it's illegal to do the transaction without an attorney, but the way you do it without the attorney involved could very possibly be illegal. Very rarely do investors (even the most sophisticated ones) do their closings without an attorney involved.

Outside of that, Bill I think it's awesome you've gone at this so creatively and had such long term successes with it!

@Stephen Masek you're right, there should always be contingencies and you should always hedge your bet. I do buy plenty of houses with cash, I wholesale properties, Fix and flip, hold rentals etc... I don't think it's ever wise to have all your eggs in one basket, but right now the owner financed basket is booming so about 95% of my portfolio is there.

@Cal C. you just have the seller show it to you. Then you can change the delivery address to yours

@Stephen Masek There's legitimacy in your concern, but in reality there's not much difference here than, say, taking out a HML and worrying about refi's once they're done and you have renters in them (which people do all the time). Here's the thing, every seller knows that *their* property is separate from all others. I let them all know that the worst case scenario in this transaction is that they are getting the property back. My liability here is next to none due to all the disclosures and explanations we do. Now, ethically do I plan on making the payments as/if/when properties come back to me? Absolutely...and I've made good on that promise already as I sit here debt servicing a few of my properties right now. But 1. If I have to let a property go back to the seller because I can't afford to debt service it, that's something the seller knew could happen 2. If that were to ever happen, it's only that property that's affected as far as my portfolio is concerned and 3. The goal here is to have enough cash flow to float the few properties you may have to float. For instance, my average cashflow is about $350. After 10 properties that's $3,500 cashflow. With less than a 3% default, we'd have to look at larger numbers for it to really show, but let's say I had to take even 2 of those properties back: with an average bank payment of $800 PITI, that $3500 has set up more than enough monthly income to float our payments and expenses for those 10 properties (8 cashflowing, 2 defaulted). Obviously, the apocalypse can happen and everything can crash upon itself, but I do have the fortune of partnering with the attorney that's been doing this for 25+ years, so we've got the experience to call upon that says that this is not a big concern and that it's a viable business model.

@k.

@Account Closed I'm so glad you got something out of it! I highly recommend visiting the cfpb's website, consumerfinance.gov They've got some really good compliance guides put up

@Denisha M. Those are some very kind words, thank you! You're absolutely right, you need to have a good RMLO/Attorney team in place to get this done. This is precisely why the first thing I did when looking to get serious was partner with an attorney. I'm actually able to originate in Massachusetts so let me know if you ever need help on something