Consider seller financing for the terms, not the price. Ken Corsini, a real estate investor in Georgia made a good point recently on the Bigger Pockets blog on how you can find better investment deals by working with seller financing. He says, “While these [private] sellers may be less willing to negotiate their selling price, they may be open to negotiating terms.”

Pay attention to the local economy.  A good way to find deals is to be knowledgeable about the local economics. You may even want to network with a few city council people and find out about planned developments in the next 18 to 24 months. These neighborhoods could become desirable. Getting in early on deals can help you foresee a good sale price or increase in rent.

Business networking groups. You’ve heard of these, but you’ve probably never attended them. Bankers, roofers, insurance agents, real estate agents, plumbers, contractors and others who are involved with commercial and residential real estate often join these groups to build referral networks. Why shouldn’t you join them? These people often know everyone in town and in a tough economy; people are fixing what they have, not selling. It’s worth your time to go to a meeting. See what ideas and deals may turn up.

Stay tuned to The Investor Insights this month for more on finding deals.

It’s true; we’re living in a scary time. And as Las Vegas tycoon Steve Wynn says, businesses are scared to invest. Especially with moves like the one that’s been overshadowed by this debt ceiling debate. As I posted earlier this week, the Fed is attempting to eliminate “seller-based financing.”

See the original report from The Paper Journal.

How We Can Squelch the Fear

We have a tiny window to be heard and you need to make sure your voice is heard before the Federal Reserve knocks out a key way we investors can keep on making money – and helping people remain homeowners.

Some of the key points:

• The Fed wants to enact a rule that “prohibits property sellers from taking back a mortgage unless the buyer can qualify for conventional financing.”
• The proposed act empowers buyers to “cancel the sale” within three years if they aren’t “properly qualified” for a mortgage by the seller.
• The proposal means that you’ll be required to collect all sorts of financial information on your prospective buyers. That means you’ll have to keep up with more regulations and will likely drive investors out of the business.

Fight Back by Friday

Let’s take hold of the fear and fight back. Be sure to submit your comments (scroll to the bottom of the page) by Friday, July 22nd. And here’s a link to some prepared responses for you to use in crafting your comments.

How do you feel about this issue? Fearful? Angered? Share your sentiments in the comments below.

The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!

If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.

Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.

The Fed is Soliciting Comments on the Proposal

The deadline to comment is FRIDAY, July 22.

Click here and scroll to the bottom of the page to submit your comments!

With your help, the Fed may at least decide that this does not apply to private transactions. Urge them to exempt seller installment sales from the rule.

Points to Make In Your Comments

• Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
• Homeowners are not bank officers or mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership.
• Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
• Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
• This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
• By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
• The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
• There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
• It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.

The House initially proposed that only licensed mortgage originators should be allowed to do seller financing transactions OR be limited to one transaction every 3 years.

On June 23rd, the sponsors of that bill have agreed to increase it to 3 seller financed transactions per year without a license. Not a huge win but a win nonetheless.

From the Wall Street Journal…

The House-passed version of the bill would have required people to register as mortgage originators if, more than once over a three-year period, they finance a sale of property they own. The provision was written into the bill out of concern that unscrupulous businesses would try to get around new tough lending rules by financing real estate transactions themselves.

But this week, Sen. Christopher Dodd (D., Conn.) and Rep. Barney Frank (D., Mass.), who are the lead House and Senate negotiators working to finish the financial-overhaul legislation, agreed to relax the limitation on seller financing to three properties in one year.

Now let’s just hope the Senate doesn’t screw it up!

The bill would significantly limit private owners and investors from selling property using an installment sale land contract on residential properties including homes, condominiums, mobile homes, and residential land lots, seller financing on second mortgages, wrap-around-mortgages and possibly lease options.    Here is an excerpt of the bill that defines who is not considered a mortgage originator and affects private sellers and investors:

“101(3)(e)

with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 1 property in any 36-month period, provided that such loan meets the following criteria

(i) is fully amortizing;
(ii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;
(iii) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and
(iv) meets any other criteria the Federal banking agencies may prescribe”

So what this basically means is if you are not a mortgage originator, you cannot offer seller financing more than once every three years. Otherwise you must meet the same licensing, testing and other guidelines of a mortgage originator. One way to get around this is to get a mortgage brokers license. Another idea is to switch to commercial property investment. The government should not be interfering in private property owner sales.

This is terrible news for investors, homeowners and buyers. It’s going to hurt investors, buyers and sellers significantly. Buyers who don’t qualify for traditional financing won’t be able to achieve the American dream of home ownership. With traditional mortgage guidelines and tight money, this is a recipe for disaster for the small business investor, sellers and buyers.

Yes everyone agrees that mortgage reform is necessary. That is why it makes absolutely no sense to include individual property owners and small investors under these regulations. With the down real estate market and economy right now, this proposed law will only hurt the people that it is trying to protect.

We all know how important seller financing is to our business. Think about all the buyers and sellers that investors are helping now with installment sales and/or seller financing. There are so many sellers facing foreclosure that won’t be able to get out of their desperate situations and buyers with less than perfect credit that cannot qualify for a conventional or FHA loan who won’t be able to buy a home.   Other mortgage law protections are available to the individual buyer and seller that protect them. It is completely unnecessary to get rid of the owner financing alternative.

If you want to do something about this now, please write to your Senator and ask them not to vote for this bill. Owner financing did not cause the current financial mess or have a role in sub-prime mortgages.  It was big banks and Wall Street. Yes they should be accountable, but not the little guy.  Owner financing should exempted from the HR 4173 Act.