Recently there has been a lot of talk about some new legislation being proposed or passed in several states that affects real estate entrepreneurs. Some of the talk was rumors spread by gloom and doomers and some were real. This article will deal with the reality, the myth, what we can do and why.
What I won’t do here is whine, bitch, place blame and look for reasons not to succeed. There’s plenty of people who will do that for me and look for justification why they should be a miserable failure. For some, it doesn’t take much.
First, let me disclose I’m not an attorney and everything I write is my opinion and based on my interpretation of the proposed changes. In addition, we’re on a moving train and things could and probably will change even before you read this message. Don’t worry, I’ve even got a way to keep you abreast of upcoming changes – Stay tuned.
I’ve been around for 23 ½ years now, making money year in and year out on both residential and commercial real estate and I’ve seen a lot of changes over the years. Some good, some bad, none put me out of business or prevented me from making money in real estate. Neither will the new proposed laws or any they come up with later.
The problem states lately have been North Carolina, Maryland, and Texas. If you don’t live in one of these states don’t even begin to think these laws don’t affect you. That’s a dumb and rather naive approach.
Every Law in Every State concerning Real Estate can affect your chosen Method of Business.
Attorney General and state lawmakers are people and therefore act and react like people. When one state gets a rash of complaints about wrong doers and decides to take action, the others sit around and wait to see what happens. Why is the pioneer? Let someone else take a few arrows and blaze the trail then my job will be easy and I’ll be a hero.
If you take a hard look at the turning of most laws and when they were passed you’ll see almost all similar laws started in one state and the spread to others. In addition, in our age of technology they are all tied to a single communication link and talk frequently.
A bad law in one state can spread like a cancer, especially nearing election time for state and local candidates.
One such ad law was recently passed in Texas. In a nutshell you may not sell a house on a lease option after Sept 1, 2005. Texas already passed a law a few years ago that made it egregious to sell on land contract. Now, they’ve added lease options.
Will it stick? I doubt it. There is already movement to make some changes. It’s a vague law that no one clearly understands or can interpret with certainty.
It’s also a dumb law that only serves to punish homeowners and build business for Realtors. In fact, I could make a case that it’s unconstitutional and interferes with the rights of homeowners and serves no good purpose for society. Texas didn’t do their homework on this one and overreacted to a handful of violators, as other states did as well.
Before I go any further, let’s discuss the changes Texans should make to their business so I don’t have any Texas members considering a new business or suicide.
It’s really a simple change and may work out to be a positive one.
Prior to the new law you had basically four exit strategies:
1. Sell for cash
2. Sell with owner financing using An All Inclusive Trust Deed (AITD)
4. Lease with an option to buy
Experts tell me the law only affects the last option. You can still do the other three. Fortunately, in Texas if you choose to sell using an AITD and have to foreclose, the process wouldn’t take much longer than evicting a tenant, sometimes less, and landlord tenant laws don’t apply.
Plus, you can usually get much larger down payments from buyers you owner finance the deposits from lease option tenants.
When you sell you have no responsibility to pay taxes, insurance or maintenance. It’s all passed on to your buyer.
In a nutshell, you exchange equity in real estate for equity in note receivables (AITD), and can still cater to the 65% of potential homebuyers who can’t qualify for good financing.
I might also mention people who need owner financing are less picky and willing to pay higher interest rates and payments until they can refinance.
I remember what it was like in the early 80’s when the (prime) rate was 18%. Owner financing was about the only way you could sell a house so I built a fortune in incoming payments. Then they all paid off when rates went down.
With what my trained professionals in Texas know they could reach a $20,000 a month positive cash flow in a few months. Nothing wrong with passive income.
Yes, you’ll lose appreciation and depreciation but you’ll get some houses back and a lot less grief with tenants. Can’t have everything.
A North Carolina AG proposed a new law that would simply outlaw getting a deed subject to or selling with a lease option….
Unless You Have a Real Estate License.
I wonder who’s pushing this law.
Good news! The law hasn’t passed and changes are being considered thanks to our lobbyist we sent to North Carolina and the uproar from investors.
We’ll have to wait and see how it plays out and deal with whatever materializes. In the meantime its business as usual if you follow the rules.
In Maryland, a law passed outlawing buying a house in foreclosure within twenty days of the sale unless you comply with some egregious rules that no one can do or would.
What a brilliant move for Maryland. Again hampering home owners’ right to sell.
Guess who will take it on the chin for this one? Yep, the lenders. You don’t have to do much research to know that a large percentage of homes are sold within twenty days of foreclosure sale all over America.
My guess is you’ll see foreclosure rates rise sharply within the next year in Maryland.
If you live in Maryland you should get this law and make sure you comply. I’m told it’s a felony to even offer free advice to someone in foreclosure within twenty days of the sale. But hey, if you’re an agent you can still sell it for the homeowner. Good luck getting it sold and closed quickly if investors can’t buy it. Frankly, I’m not sure if an agent can sell to an investor. I hope not because that would negate the whole law by putting an agent between you and the seller.
So what does this Maryland law do to help the public it was supposed to serve? Does it protect people against unscrupulous investors?
Time will tell!
All I see is a stronger sense of urgency on the sellers’ part to make a decision to sell before the twenty day window starts. This can serve as a marketing tool for you to get them to react. Besides, the world does not revolve around buying foreclosures. Granted, it’s a big part of the business for some who need to adjust their marketing a little to compensate in the big picture…… no big deal.
California has had a foreclosure law on the books for several years which in simple terms mean you must follow correct procedure and give proper recession but still can buy houses in foreclosure.
Frankly, I’m not opposed to some of the proposed changes because there always have been and always will be a handful of people who run their business on the edge, looking for a quick check, not caring who they have to cheat to get it. Their actions reflect on the rest of us. But guess what! It’s the same way in any business.
Ever heard of a disbarred attorney? Realtors losing their license and getting prosecuted, doctors barred from practice, pilots drinking on the job, legislators embezzling money, presidents committing criminal acts, evangelists stealing money and sleeping with the help, teachers seducing their students, accountants rigging the books, contractors fleecing the public, bankers committing fraud, mortgage brokers altering loan applications and verifications, and……..
Pick a profession and you won’t go far to find bad guys. I say lets make the rules and enforce them on the bad guys and let the good guys conduct honorable businesses with the public’s interest at heart as well as their own. Unfortunately I didn’t get a say in the matter, which brings me to the next subject.
We recently teamed up with a lobbyist group from DC called National Association of Responsible Home Rehabbers and Investors, (NARHRI). Their whole purpose is to make our life easier by performing several functions for us…
1. Watch for proposed legislation changes in all states and keep us informed
2. Put skilled lobbyists on the ground in problem states to fight for our rights
3. Help raise our image as real estate entrepreneurs to legislators and society
4. Unite us under one umbrella and build strength as a group such as National
Association of Realtors (NAR) or National Association of Mortgage Brokers (NAMB).
Of course it takes funding to pull this off so I hope you’ll do your small part since we’re all in this as a team. For example, I raised $40,000 recently just to put a lobbyist in North Carolina for three months. It’s a good thing we did or the proposed law might be reality. We feel at the least we helped tone it down and make it livable. If we don’t speak up these laws will go unopposed and you can take what you get.
Click [here] to print a registration form for you to join NARHRI, which costs $250 a year, about what a night out at a good restaurant costs. I’m not going to write a long sales letter to get you to join. It’s your responsibility to help and I will assume you won’t take that responsibility lightly. Go to NARHRI.org for more information and please fax this form in right now while it’s fresh on your mind. You won’t miss the $250 but it will go a long way to help you. Starting in October NARHRI will be keeping you updated by email and post new stuff on their coded website…
But You Must Be A Member To Get It!
Here’s a list of what is causing the problems nationwide as far as I can tell with our research. This may also serve as a list of NO-NO’s for you.
1. Foreclosure Consultants – people who charge for advice on how to get out of foreclosure and deliver little or nothing for the money. This whole business is bad news and a bad business faired from the beginning from a common sense point of view. People in foreclosure don’t have excess cash to buy worthless services. If you want to sell a service, sell it to people who can pay. I’d have no problem licensing this profession and wouldn’t lose sleep if it were regulated out.
2. Buy/Lease Back With Option – anytime you buy a house in foreclosure and give the seller an option to buy it back at a higher price you’re setting yourself up for trouble. It’s easily construed as a usury law violation and there’s plenty case law to substantiate it. There’s a huge chance the seller can’t pay and you’ll have to force them out which is what stimulates the AG’s into frenzy. If the truth were revealed most of these cases are simply sellers who can’t or wont’ keep their promise to the investor after their problem has been solved and foreclosure stopped, but that’s not the side that will get publicized. I have always taught against this and wouldn’t advise anyone to buy a house and leave the seller in it, whether it’s in foreclosure or not. Besides, your profit comes when you sell. You can’t sell with the seller in the house.
3. Equity Skimming – This one will get you plenty of space on the evening news and possibly free room and board with Brutus. Anytime you take a loan subject to and install a tenant you better darn sure make the payment. . You can’t skim off the equity and not pay the debt. In fact, anytime you take a loan subject to….. PERIOD…… and promise to make the payment you better do it. If you can’t go back and work it out with the seller don’t simply ignore it and stick your head in the sand. If you make a promise, keep it or find a way to fix it. If you don’t you can expect problems. Of course in the case of short sale deals you won’t be making payments but you should always have a disclosure signed stating that and never rent it out while waiting for the bank to react.
4. Loan Fraud – anytime the lender is presented a different sales contract than is actually taking place its loan fraud. That means you can’t do any of the following tricks taught to you by those who don’t know any better and some who do.
o Artificially increase the purchase price and take back a second that gets satisfied at closing so you can raise the loan amount.
o Deposit down payment money in the seller’s account and pretend it’s there or rig the down payment in any way not disclosed to the lender
o Alter the verification of employment, verification of rental payment or previous mortgage payment, verification of funds, tax returns or any other document that gives the lender false information
o Bribe an appraiser to artificially inflate the value
o Back dating lease agreements to show the lender a track record of the buyer making payments.
Loan fraud doesn’t seem to be as big on the radar for AG’s as the previous items, probably because it hurts lenders more than consumers but never the less a lot of folks have done time on this one. The worst part is its so wide spread many Realtors and mortgage brokers will actually advise and assist you in the process and most don’t know they’re breaking the law.
5. Covering Up Needed Repairs – this may not be illegal but certainly can cause you a lot of grief. Anytime you sell a house to a low income buyer and intentionally mislead them to believe all repairs have been done, make sure they’re done – you can’t paint over rotten wood, patch a roof that needs to be replaced, charge an A/C system knowing it leaks, leave windows that won’t go up, electrical or plumbing problems and numerous other misdeeds you should have fixed, and not expect to pay sooner or later. This is the kind of crap that will get you free publicity, a bad reputation and out of business soon.
When you buy and sell a house pretend you’re dealing with a family member and their dad is a hit man for the mob. Better yet, pretend you’re dealing with your mother.
There’s no reason to do any of the things a handful of people in our industry have done to cause pressure from the regulators.
There’s also no reason for you to lose sleep over any of the proposed regulations. Here’s your job as an entrepreneur….
1. Learn the rules
2. Structure your business to comply
3. Take an active role in preventing laws you don’t like.
4. Make a lot of money, spend a lot of money, and help others do the same.
Here’s a tip that will save you a lot of grief……
Let Your Attorney Close All Your Purchase And Lease Option Sales.
There’s no reason not to and several reason to do it. When buying it’s an official closing with a good witness, your attorney, verifying everything was disclosed. When selling the tenant pays the attorney fee, you don’t have to prepare lease option agreement, it’s an official transaction in the mind of the buyer and you have a good witness if necessary. Let the professional do what he/she does best so you can do what you do best.
Here’s what you shouldn’t do………
- Do not send nasty emails or letters to your public representative. Insults will not make your point. State your case as briefly as possible, put your contact information on the letter and act like a professional.
- Do not call your congressman at 3:00 AM.
Remember, these are people elected to serve the public that includes you. The more of us who contact our state and local legislators the more our voice gets heard, but do it politely.
Who knows, maybe I’ll run for president in the next election.
Never mind. Bad idea! I’d have to tell it like it is. Besides, the pay sucks.
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