The Jury’s Still Out . . .

In my post “The Party May Be Over” I discussed land contracts, which are an excellent exit strategy.  I’ve used them over the years to enable my tenants to buy their rental homes from me.  For clean, wonderful tenants who can’t obtain a mortgage for whatever reason, this is a great way to provide them with the joy of homeownership. 

The tenant gives me a down payment, usually $2000, and I draw up the land contract.  Basically, I’m the bank.  The tenant pays 10% interest on the loan, and is responsible for all maintenance, etc.  I retain title of the house until the last payment is made, and I do periodic checks to ensure they are taking care of the property to my satisfaction.

Back in 2008, the government instituted the Housing and Economic Recovery Act (HERA) and also the Secure and Fair Enforcement Act (SAFE Act), both of which were instituted as a result of fraudulent practices by mortgage brokers, who lent money to buyers who weren’t really qualified to purchase homes.  We all know what happened after that.  Many of those buyers purchased adjustable rate mortgages.  They were okay paying the original $800/mo. mortgage payment but when that payment jumped up to $1300 (or more)  three years later, they were in serious trouble!  Thousands defaulted on their loans, and here we are today.  There were 2.8 million foreclosures in 2009, and the 2010 forecast is about the same.

Back to the SAFE Act . . . which requires everyone who performs mortgage transactions to get a mortgage loan originator’s license.  This affects all mortgage brokers in all states, and the licensing is tougher to obtain and it’s costly.  As with all laws, the devil is in the details.  Am I defined as a “broker?”  What are the definitions?  And what is the definition of a mortgage transaction?  Does a land contract fall under that definition?   

I recently listened to a teleclass given by Griffith Law Group which covered this issue.  Evidently, the state regulators have taken land contracts out of the definition, at least for the time being.  Since there’s no transfer of deed involved and we investors retain legal title, the definition doesn’t apply to land contracts.  There is some ambiguity however, and oftentimes these definitions take a year or more to become crystal clear.  So, would I do a land contract right now?  I might, because I’m somewhat a risk taker, but I also think the original version of this law was a bit severe and the interpretations will result in it loosening up a little.

If you’re not willing to take the risk, you can get around it by paying a mortgage broker to actually write a note/mortgage for you for the land contract.  (Make sure he/she has gotten the mortgage loan originator’s license which is now required.)  It’ll cost somewhere between $500-750, but it will keep you legal.

The other option, which is also a great exit strategy (I discuss it along with the land contract option in my book) it the lease option.  If your buyer may qualify for a loan in three or four years, this is an excellent plan for both of you.  Hook him up with a credit restoration company like DSI, Sky Blue or Lexington Law, and draw up the option agreement.

So in closing, the jury’s still out and the party may NOT be over!  Stay tuned . . .

The American Dream

Yesterday was a good day.  No, make that a wonderful day.  My tenant Jesus and his lovely family gave me the last payment on their house.  They are now homeowners.  To give you a little background, they first rented from me in 1996, shortly after the birth of their first child.  I was thrilled with their tenancy . . . clean people, excellent payers . . . a landlord’s dream.  They returned to Mexico after renting from me for a couple of years.  In 2000, I received a call from Texas.  They were on their way back to Indianapolis and had saved my number, and were wondering if I could accommodate them, now a family of four.  I happily put them in one of my duplexes.

In 2003, Jesus asked about the possibility of buying the house from me.  His sister lived in the back apartment and they were very happy there.  I sold them the house on land contract.  He gave me $7000 down (in $100 bills!) and we set up the payment schedule, at 9% interest.  For people who have marginal credit or no credit (like Jesus) this is an excellent way to purchase a home.  He’s never been late on a payment and has improved the home in many ways.  Here are a couple before/after exterior pictures:

The interior changes are more dramatic; as his family grew to three children, Jesus made the attic into additional living space and added another bathroom.  It looks professional. 

I explain the ins and outs of land contracts in detail in my book, The Landlord Chronicles: Investing in Low and Middle Income Rentals:

“The major advantages to land contracts are the following: 

  • I don’t have to claim all the profit in the year I sell the property; it’s spread out over the life of the loan (check this out with your tax advisor)
  • I have no responsibility for repairs or bill-paying at the property
  • The buyers are invested in it financially and emotionally, therefore motivated to take good care of it
  • Being the bank enables me to make more money on the sale, through principal and interest, than I would by selling outright
  • Land contracts provide long-term income, with little work involved

I’ve had people in tears after being given the keys to their homes.  These are people who never dreamed they’d be able to own a home.  Although land contracts are a great moneymaker for me, providing these dream homes for my buyers makes me feel part of something wonderful…for these families, the neighborhood and the city as well.  I love it.”

(If you’d like to check out more of my book or purchase a copy, you may go to www.authorhouse.com and click or their book store, or you may contact me personally at barb@thelondlordchronicles.net.)   Re: land contracts, with HERA and the Safe Act (see “Is the Party Over?”) my ability to do these without a mortgage loan officer’s license may be restricted.  The jury is still out . . . everything depends on the interpretation of the law.  I’ll keep you posted . . .

The Party May Be Over . . .

For many years, I’ve used land contracts as one of my exit strategies.  For those of you who aren’t familiar, here’s a biref scenario:  Let’s say I have a trusted tenant who is tired of renting and would like to buy the house he’s currently renting from me.  Robert’s done a great job of paying on time, and he keeps the house clean, inside and out.  The problem is, he has bad credit.  He made some poor choices in the past, and there’s no way he could get a mortgage in today’s economy, even though he as a couple thousand dollars he could put forth for a down payment. 

This is where I come in.  I can be “the bank” for someone like Robert.  With a website like www.bankrate.com and a financial calculator, I take his $2000 down, and structure the deal.  I set the sales price, determine how much per month he’s comfortable paying, and go from there.  I discuss this stategy at length in my book, The Landlord Chronicles, which will be available through www.authorhouse.com by late July, or directly from me at barb@thelandlordchronicles.net.  The land contract is an excellent way to provide your tenants with the joy of home ownership, and also make a great deal of money in principal and interest payments over the term of the loan.

Unfortunately, with the abuse in the real estate market that occurred throughout the early 2000’s, which allowed unqualified people to obtain loans, the government has cracked down on mortgage loan originators.  As part of the federal Housing and Economic Recovery Act of 2008, each state is being required to pass its own set of rules that will oversee mortgage brokers, to ensure against fraud in the future.  In light of what happened to thousands of uninformed individuals who bought homes they had no business buying, then lost them within a few years, I quess this is a smart move on the part of the government.

However, this extension of HERA, called the SAFE Act (Secure and Fair Enforcement Act) requires all people who handle  home loans of any kind to be licensed.  This includes you and me.  At first I thought, “No big deal, I’ll just get licensed.”  Not that easy . . . it’s expensive, and you have to jump through lots of hoops along the way.  So, my land contract days are done, for now.

But, the party isn’t necessarily over.  We investors can still use the lease option as an exit strategy.  It’s similar to the land contract, in that you plan on selling the home to the renter.  But it hinges on the renter being able to qualify for a loan at some point in the future.  You and he can set that date between the two of you.  He pays extra (usually $100 or more) per month on his rent, and this applies to the down payment.  If he defaults, you can evict him easily, through the small claims court, just like a normal renter.  I discuss this option in my book as well.

If you use the lease option, you may want to research a good credit restoration company to help your tenants repair their credit.  So, is the party over?  Not necessarily, but the keg with the imported beer just ran dry . . .   🙂