“Dodd only knows. Dodd makes his plans. The information’s unavailable to the mortal man.” – Slip Sliding Away by Paul Simon…slightly modified by The Real Estate Guys™ 😉
“And quite Frankly, my dear, Dodd doesn’t give a damn.” – Rhett Butler in Gone With The Wind…again, slightly modified by yours truly.
Yes, we’re old media guys. Plus, we’re just plain old. So we have all these old song and movie references. Classic stuff, and the lead-in for this blog about another edition of The Real Estate Guys™ radio show.
You may have heard that 2013 is coming to end. And right around the corner is a brand new year. And, like a holiday tradition, Uncle Sam is handing out brand new laws for everyone to figure out. Fun.
In this case, we’re taking about Dodd-Frank, which is a big piece of…….
…legislation…that was written by bankers to protect consumers from…bankers. Hmmm….we guess that makes sense. (Not really).
Nonetheless, there’s stuff buried in the bill that affects real estate investors, so we thought it would be a nice public service if we told you about it. We don’t think Dodd or Frank will be sending you an alert.
In the studio for this edition of legislation mitigation:
- Quite Frankly, the finest real estate investment talk show host there, Robert Helms
- His Doddly Do-Right co-host, Russell Gray
Like a holiday fruit cake, there are some strange things in the Dodd-Frank bill. And one of the most concerning items is a provision which places substantial burdens on owners of real estate who want to exit by offering residential owner-occupants seller financing.
Of course, we think this is a stupid law. Oops. We’re sorry, is our not-so-humble opinion showing? We’ll put it away and let you decide for yourself…
Here’s the deal:
If you want to sell more than 3 properties per year by offering seller financing to owner-occupants, you will now be required to obtain a national mortgage lender’s license. This means passing a test, learning a whole new set of rules and regulations, falling under the jurisdiction of yet another federal bureaucracy, and keeping up on continuing education.
Think about the ways investors use carry-back financing:
- Buy an apartment and convert it to condos. Sell the individual condos to high paying owner occupants and carry the financing to a) get a better price, b) get a higher rate of interest on the loan, c) attract a wider market (people who don’t qualify for conventional financing). Except if you sell more than three in a year, you need to be licensed.
- Same as above, except you build a little in-fill project with 5 or houses. You want to offer it to owner-occupants and carry back financing, except you can’t because you built the homes.
- Buy a nice piece of land and sub-divide it into custom home sites. Convert your equity into cash flow by carrying back financing. Except now you can only sell three.
You get the idea.
But it gets “better”…
Not only can you NOT do more than three seller-financings in a year, you can’t offer terms of less than 30 years! And no balloon payments!
Now, imagine you have a collection of properties that have lots of equity, but are in bad shape. You don’t have the time, money or energy to fix them up.
So you decide to sell them to owner-occupants who want the opportunity to fix the house up the way they want it, and earn a little “sweat equity” along the way.
You take a tiny down payment so the buyer can use most of their cash to fix up the property. You offer them an interest only loan, so they have minimal payments (all profit it to you), while fixing up the property.
They give you a higher than market price (but still well below what it will be worth when they fix it up), so you’re happy to wait for the money.
Of course, you don’t want to wait for every, so you give them a 3 year loan, with a 2 year option. That way, you collect interest for 3-5 years and then either get paid, or get the now fixed up property back.
So the buyer gets to buy the property, with enough time and money to fix it up just they way they like it. When they’re done, they think it will be worth more than they paid. They’re happy.
The neighbors are happy because your ugly property gets a facelift and proud new owner to keep it up.
You’re happy because you get to sell a property for higher than market even though conventional lenders wouldn’t touch it. Of course, once fixed up, a conventional lender will be happy to lend on it, which is how you’ll eventually get paid off.
So EVERYBODY wins.
Oops. Except that under Dodd-Frank, you can’t have an interest only loan, you can’t have a balloon payment, and you can’t have a 3-5 year loan.
So what’s the good news?
Doff-Frank doesn’t (currently) apply to sales made to INVESTORS.
That means as a BUYER, you just got a lot more attractive to providers of seller financing, because all of the owner-occupants you used to compete with for deals are now at a big disadvantage when bidding on seller financed properties.
That’s right! The law that’s supposed to help owner-occupied buyers, just put them at a disadvantage…even though they might be willing to pay more. Brilliant.
But we don’t make the rules. We just try to figure out how to adapt. And heading int0 2014, we need to think carefully about how we would use seller-financing as an exit strategy. But we also see a lot more opportunity to use seller-financing as an acquisition strategy.
So listen in to this episode and consider how Dodd-Frank affects your entrance and exit plans for 2014 and beyond.
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