Legislators and lawmakers are in charge of creating specific laws to help govern citizens. Some of these laws are created because of a need; others are put into act as a reaction to a certain problem. I’m going to go over some of the current legislative movements, but as you are preparing to buy and sell properties, it’s important to keep abreast of any changing laws and legislative acts that might affect your investments.
Don’t let any of these laws discourage you from following your real estate investing dreams. They might slow you down a little bit, but in the long run, they’ll help protect your business. Plus, working with mortgage brokers and title companies helps keep you on top of any legislative changes that have been made, or are being considered for actual laws.
Two major legislative changes I want you to be aware of in recent years are the SAFE Act and the Dodd-Frank Act.
SAFE Act The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, also known as the “SAFE Act” The intent is to protect consumers while reducing opportunities for fraud and was primarily designed to regulate mortgage brokers, lenders and credit unions. However, within this act, there are certain components that apply to seller financing, such as the principals that Filthy Riches has been built upon.
The part of the law that applies to my Filthy Riches concept is if someone selling a piece of property and providing seller financing – unless it is their primary residence – must be licensed or use a licensed mortgage broker to complete the transaction. While it may seem restrictive, it’s critical to keep us in compliance and ensure that all transactions we make are enforceable in the event that there is a default on the property.
You have several options available to you to comply with the SAFE act.
Get a mortgage license. This can prove to be a very frustrating task. In rare occasions, you can have your license quickly, but it can also take up to a year from start to finish. As many people have noted, when you’re working with government agencies, things tend to bottleneck and the process is slowed down. I really don’t suggest you pursue this route, since it really isn’t necessary.
Hire a licensed mortgage broker. If you are in a different state form the property you’re selling, make sure to hire one within that property’s state. Pay the broker a processing fee. This option is likely the easiest and most cost effective for you. A mortgage broker will likely charge between $150 – $300 per transaction, and this is actually a fee that you can pass on and charge your buyer. There is no need for you to pay for this out of your own pocket.
Only sell your property to investors who will be taking the title in their corporation or LLC name. Since the SAFE Act only applies to individuals, it isn’t necessary when selling to companies.
HUD is tasking each state to regulate the SAFE Act, so before closing any transaction, have your attorney or title company contact that state which governs the house you are selling to see if they have adopted this act. If they haven’t adopted the act, you don’t have to take any steps. However, it’s important to keep abreast of this act in case there is any updated legislation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress in 2010 and signed into the law by the President. The intent is to protect consumers from Wall Street and Lenders, limiting the risk to the financial system. It also addresses the issues of large financial institutions that rely on the government to bail them out because of the economic impact if these institutions fail.
Within the act, though, there are some sections limiting real estate investors in using the option to provide seller mortgages to residential buyers.
The Federal Reserve Website explains it this way: “The revisions to the regulation, which implements the Truth in Lending Act (TILA), are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal would apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans).”
So what does this mean for us? Basically, any seller who sells property with the seller financing option is required to use all the disclosures that a traditional lender would.
Although the law was signed into effect several years ago, few attorneys or title companies have a good grasp on what this will mean when closing transactions. At this point, make sure you ask them if they are compliance with both the Dodd-Frank and the SAFE acts, and you have done due diligence.
Also, make sure you prepare your loan documents using Docmagic.com and always have your borrower sign a Truth in Lending and Good Faith Estimate.
As a side note, let me tell you a little about docmagic.com. It’s a fantastic website that helps you prepare all loan documents. I use this and strongly suggest that everybody in this business use the tools on this site. Founded in 1988, DocMagic, the flagship product of Document Systems, Inc., has become a great tool for the mortgage industry. Made up of mortgage industry professionals and computer experts, DocMagic helps provide a fast and efficient way of creating customized closing loan documents.
Again, laws are ever changing and lawmakers are working hard to ensure that proper regulations are in place to protect US citizens. These laws cover all aspects of our lives and people in our business are no different.
Maintain a good relationship with mortgage brokers and title companies to ensure you have the most up to date information necessary to keep your real estate investments and transactions running smoothly. Ignorance of a law does not preclude you from being held accountable; you need to make sure you are aware of any changes. Ask questions and tailor your business practices to comply with these laws.