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 . . .