On this episode of The Mobile Home Park Lawyer, Ferd continues his discussion from Episode 24 on selling and divesting homes while dodging the Dodd-Frank Act and the SAFE Act. Enjoy!
“Rent to own, lease to own. What does this look like? You’re a renter over time you’re going to own this house. It could look like you’re just paying monthly rent.”
HIGHLIGHTS:
0:00 – Intro and recap from the previous episode
1:32 – Renting a home has more cons than pros
2:32 – Ferd discusses what rent to own and lease to own look like
4:43 – A rent to own really depends on the situation as to whether it violates the Dodd-Frank Act or the SAFE Act
5:55 – A contract for deed is similar to a rent to own but there are down payments and amortizations as well as some other small differences
7:32 – Ferd has a contract for deed template with some tips and warnings
9:47 – If you have something upfront, it’s probably a down payment, meaning it’s probably a disguised mortgage
11:25 – The safest way to divest homes is probably the rent credit
17:25 – You should make a separate document for the contract for deed for mobile homes
21:00 – Try to sell cash with bank terms or rent, all of which are safe
FULL TRANSCRIPTION:
Welcome back mobile home park nation. Here again today, teaching you how to divest of park owned homes, but giving you the pros and cons of all the strategies. As a recap, the last episode we covered Dodd-Frank Act and the SAFE Act. I’m not going to get into the weeds too much here, but the options for park owned homes to divest of them, obviously sell cash, sell through the bank, you could rent them, but then you’re not getting rid of them, Obviously. You can do a rent to own, or at lease to own, which gets rid of them on terms. You could do a contract for deed. You can do a lease with an option to purchase. You could do a rent credit, and all of these strategies help you decrease the percentage of park-owned homes, which makes you better able to get an agency, which would be a Freddie Mac or Fannie Mae loan, also a CMBS loan. So, for a lot of folks, that’s the holy grail is to have non recourse agency debt and have no park-owned homes. So how do we get there? How do we get there legally?
So, renting the home. That’s pretty much the blocking and tackling. Everybody knows what that means, right? You rent the home; you own the home. It’s clear you own the home. Pros, you get more rent. Cons, you have more maintenance responsibility. Cons, it’s harder to get a bank loan on, you know, personal property. It’s harder to get agency loans. Another con would be, it takes more of your energy, more brain damage. So, it makes it less likely you’re going to be able to expand and buy more parks. Also, less likely you’re going to have the cash to buy anything because park-owned homes require cash infusion at a minimum, a down payment with a lender.
A lot of times park-owned home requires just straight cash. Cause you can’t get a loan on it. Now there are some exceptions to that. Like 21st Mortgage will finance a hundred percent of the home, but if they put it in the rental program, they often, there’s some fees they don’t charge. And they charge a decent amount of fees and points and stuff. So, there’s some more cons to doing a rental, but I own park-owned homes. So, I’m not saying no park-owned homes.
Okay. So today we’re going to cover more to the rent to own, lease to own. What does this look like? This is basically, hey, you’re a renter over time you’re going to own this house. That could look like hey, you’re putting a thousand dollars down and you’re going to pay monthly rent. It could look like you’re just paying monthly rent. I bought a park where the previous guy had a 30-year amortization rent to own. So, I inherited all these contracts, which by the way, I should have covered that in the last episode. But basically, the general rule, I think right now in the law is if you inherit these contracts, you didn’t originate them. So, you’re not going to be penalized from them though. Some operators and some lenders require you to divested them like immediately. So that can be pretty scary. Getting a violation of the Dodd-Frank and SAFE Act would be scary.
I’m unaware of the enforcement mechanism that is actually out there convicting people. So, when I get into these other strategies, lease to own, contract for deed, rent, credit, lease with the option to purchase, all of these, I think would be technically illegal. Now, do I know some folks that are operating and doing these strategies? Yes. I have several clients that are operating with these quote illegal strategies, despite my advice and that can help them draft legal documents to mitigate the risk. I have some practical strategies to help them mitigate the risk, but is there a risk of Dodd-Frank Act or SAFE coming back and bite them in the butt? Yeah, possibly. Now some good news is the current administration, President Trump and Secretary Carson don’t seem to have a problem with the law, with enforcing the law. They don’t think it’s even valid is what I’ve heard, they haven’t repealed the law. So maybe I’ll manage to call out Ben Carson here, who generally I think is doing a pretty good job. But he hasn’t repealed this law. So, for our industry, he hasn’t done as good a job as I would have liked. So, I’m going to tag him when I post this podcast. So maybe I can get him on the spot. I guess it’d be pretty cool. I think he’s a pretty good guy. So it would be fun to talk to him. Okay, Ben Carson sidebar, you just got a shout out and a call-out.
Okay, back to our regularly scheduled programming. What the heck is the rent to own? Is that a violation of Dodd-Frank? I think it’s going to depend, is it a financing? If it’s typical financing, the borrower generally puts down some down payment and, or at a minimum is required to make long-term, typically long-term payments towards the purchase. So, if your lease to own says that if they miss a payment, they’re going to lose some of their prior money, that would probably qualify as a disguised mortgage and probably be in violation of Dodd-Frank and SAFE Act. If your lease to own says that the occupant is required to pay for maintenance, which is probably why you’re doing that, to be honest then that may not be a Dodd-Frank violation, but that’s probably a violation of some other warranty of habitability or some other general landlord-tenant requirement, like landlords can’t just contract away from paper, so they don’t have to do any maintenance. Now does that happens? Yeah. And I have several clients to do that too. If you want to know who those clients are, any of them that don’t pay their legal bill, I’m actually going to post those. I’m kidding. I’m not going to expose them. Okay. So rent to own, it’s illegal, but people do it, right? So, there’s pros and cons.
Okay, contract for deed. What is a contract for deed? A contract for deed for basically it’s similar, but it’s, you typically will get a down payment, say 15% or 20%. And then you have an amortization such as three, four, five, six years. And the buyer is required to A, pay lot rent and B, pay contract and deed payment and upon successful payment of the contract for deed payment. They then get title to the home. If they default at some point along the way, they have forfeit their down payment and they forfeit any principal payments so that the contract for deed renter would pay the landlord a lot rent, which would probably be a different entity. They’re probably your land entity. It’s lot rent. The home rent or home payment would come to the homes LLC. And home payment would include principal, interest, and then typically a reimbursement for property taxes on the personal property and insurance. Because if I’m the owner selling this home on terms, I’m going to want to make sure it’s insured. So I’m going to have it in my name, have title in my name, I’m also going to require that upon payment of the last payment, the home cannot be moved out of my park for x number of years, maybe three, four or five years.
In my lot lease, by the way, I have a right of first refusal, that if people start to move out or try to sell it, I have a right to at least start to buy it. And there’s some restrictions on that as well. So, from a contract for deed, is that also illegal? Yeah, technically, probably. I don’t know anybody’s been stung, but it could definitely happen. So, I’m not going to be your lawyer and say it’s risk-free. But if you want me to draft a contract for deed, I have any templates that I have revised and haven’t included in an exhibit, some guidelines from Dodd-Frank. So, these in SAFE Act, these guidelines were never really promulgated in the law. They were just kind of like here’s some suggestions, things like, and things like don’t be a jerk. That’s kind of the general rule. Like don’t charge an exorbitant amount of interest that was grey what that number was. So, if it’s 5%,6%, 7%, 8%, 9%, that’s probably not too high. Considering the quality of clientele that we often deal with. If you’re charged 50% or 500%, like some of these car loan guys are doing in Missouri that’s insane. That’s immoral in my opinion, but also probably playing with some fire. So, don’t do that. So, I would cap it at single digits.
Also don’t have an adjustable rate. Also don’t have a balloon, meaning you have to have a balloon is like hey, I got a 20-year amortization, which makes the payments low, but you got to pay it off in three years, which means you got to go get financed out elsewhere or come up the cash. So, you’re setting people up to fail. So, don’t be a jerk. So maybe you have something like a five-year fully amortizing loan at 9% with a fixed rate for the entire time. That seems more reasonable to me. I would include some verbiage that both the seller and buyer desire for the sale of the home to include financing from the seller over-determined several years, I would implement and include in your paperwork procedures, the guidelines that get guided us on things like reviewing the buyer’s financial wherewithal, making sure they don’t have a debt to income ratio of over 43%. Having, you know, a reasonable expectation based on income or assets to make the payments in reviewing their employment status, looking at their pay stubs, maybe looking at their tax returns, making sure that the monthly payment is fixed. It’s clear, it’s reasonable. And then look at their overall debt obligations, like, you know, car payments, alimony, child support, and their overall credit history. A lot of that stuff you’re going to do anyway, as part of evaluating and underwriting, if you want them to be a resident in your mobile home park. So that’s kind of a mitigation strategy if you will, is to put, you know, some key terms in your contract repayment or in your least option to purchase or in your least own. And then the lease with the option to purchase. What is that? That’s basically, Hey, you’re just a renter. You are just leasing it. Oh, but if you buy it, if you lease for so many terms, you pay so many that much a month, one day, we’re going to give you the home.
The way I typically see these. And I’ve seen some templates from other folks. I think it’s a disguised mortgage, to be honest. If you have something up front that’s, you can call it whatever you want. You can call it a down payment. You can call it an option fee. You call it a pink flamingo. Doesn’t matter what you call it, what does it look like? And how does, what it act like? It looks like a duck, quacks like a duck. It’s probably a duck. If it’s non-refundable, it feels like a down payment. If it’s applicable towards the purchase price, feels like a down payment. If the monthly amount that they pay to you, no matter how you slice it up, if it feels like it was calculated, based on some form of amortization, feels like a monthly principal and interest payment, all of that means it feels like a mortgage, which means you’re supposed to be a mortgage loan originator.
So, I’ve seen people get cute all the time with this. If you ever get called to the carpet, which I don’t, again, if you ever do, I wouldn’t bank on that protecting you. So the safest option, but also the pros by the way, the lease with the option to purchase and, or the rent to own whichever you do, the pros of using those strategies, you’re going to have the non-refundable money upfront, which means you’re finding somebody who is more committed. I like to say they’re a little bit pregnant. You know, you’re a little bit pregnant, you’re pregnant. And they’re committed. They’re more likely to buy versus just a renter, there’s not a lot of commitment. A renter where one day you may, you may buy it, you may convert it, they’re not as committed. So these are the strategies, especially if you had, obviously people also on the strategies they have, like the last, like after so many months, the payments like a dollar or zero, that’s a disguised mortgage. You just back into amortization, don’t do it for yourself.
So, what’s the safest way to divest of these homes other than, of course the cash sale or the bank finance sale. The safest way is probably the rent credit. That’s the pro obviously. It’s most likely, it’s been held up in a few states. It’s I think it’s been dinged up on a couple of states as well, but not, I think it was Maryland. Can’t remember the case, but not to the level that some of these areas could be. And that was dinged up, I guess, by a state, a state act. Not by the federal government. But again, state is pretty scary too. So, the rent credit basically says I’m giving the tenants back some of their money, I am rebating it. So, I utilize the rank credit program and 21st Mortgage lets you do it.
So, I just closed on one this morning, actually, where the occupant needed something like, I think it was $4,500 bucks to get the loan purchased with the down payment. Well, the guy wanted to buy the house, but he only had $2000 bucks. So back in the day before the financial crisis, what shady people would do is they’d say hey, you’re short on the down payment. Here is what we’re going to do, we’re going to up the price by three grand, whatever it takes. And I’m going to hand you $3,000 cash. And now you have the down payment. Congratulations. I win, I got the price I wanted and after cause, because we upped at $3000 and then I gave you $3000, I got the net price. I won, you got what you wanted the house, you got a $3000 bigger mortgage, your purchase price, you got a little bit more mortgage payment, but you got in the house and you’ve been by buying, you’re going to get equity. You’re going to save all that kind of stuff. So, you want to buy, everybody wins. Well, who doesn’t win? The lender. We defrauded the lender That is called bank fraud, guys. Don’t do that. We defraud the lender because they thought they were lending to a, the kind of guy that had five grand lying around when the guy had two grand laying around and I fraudulently gave him some money.
So 21st Mortgage is super anal about that, which I think is good. And they require you to show proof of down payment. They look at the bank statements of the borrower for several months proceeding the down payment. But in this example, one of my parks here in Kansas City, the guy didn’t have 5,000 bucks. So, I could, I had to say, okay, go away or actually, look, I can rent it. I don’t want to rent it. He didn’t want to rent it. So, we said, here’s what we’re going to do, we’re going to get you in here today as a renter. But we both know we’re going to work like heck to get you out of here as a renter and into the home buyer, as soon as we can. So, the payments all in for a lot rent, principal interest tax, insurance, if he was a buyer was about $800 bucks. So, I said, I want you to be motivated to get over the finish line. So, here’s what I’m going to do. Your rent’s going to be $950. So, you’re motivated to get to the $800 level, I said $950. So, what I’m going to do, I’m going to give you back that $150 and I’m actually going to give you the lot rent $375. So, anything above the lot rent is considered home portion rent. So, $950 minus $3 75, I’ve got $575 of extra home rent. I can rebate that back as a rent credit. So, what I did was I waited. It took about five months, but that’s five months is $2,875 bucks. So, I gave him rebated back, whatever portion of that he needed. I gave it back to him and I printed my tenant ledger off of the rent manager. And I signed it and said rent credits of whatever the Delta was $2,500 bucks for this guy, Eric. And as a result, 21st Mortgage knows where he got that down payment. He had $2000, his checking account and he got $2,500 from me. And as a result, Hey, he got financed and I got the sale. He got to buy. He’s now saving 150 bucks a month, starting November one. Really good for him. For me, I got to sell the house really good for me, which helps me get my agency to refinance the loan, which is coming here. This upcoming 2021, I’m going to refinance it out. This was one of the last two or three homes I needed to do this conversion process to.
So, I regularly pound on my residence. Like every time I see this guy, literally every time I see this guy, I go, hey Eric, why are you paying so much, man? How about you start saying $150 bucks. And really only to Eric, because him and I were on this plan for five weeks. But I do it to the other guys, I guess I’ll do it to him a little bit. Like hey, stay on track, stay on track. But I do the people who are just pure renters. I go, why are you renting man? That’s a sucker’s game. Build some equity, get some principal pay down, lower your payment. Okay, so this rent credit conversion strategy works really well. Because a lot of people don’t, they’ve never lived in a trailer. They don’t know if they like the neighborhood. So, they just can’t commit. And I get that. So, I say, tell you what, live here for six months, in six months, you’ll know if you like it. You know, if you like the house, you know, if you like the neighborhood. At that time, we will talk again. And I pound on him every time I see him, all these guys, and I pretty much memorize all the status of all my residents, and I see them and all that kind of stuff. I visit the parks fairly regularly and they think I’m the manager, right? So, don’t share this podcast, or don’t share his podcast with them, share it with people who are looking for legal business. I’m a pretty good lawyer.
So anyway, the rent credit program is safer. The downside is there’s not the upfront, down payment or commitment. And then depending on the borrower like this guy, Eric, he was bankable. He was able to be taken. I got to taken out of that loan in less than five months. But right at five months, some people, they can never be bankable. They don’t have a regular job or their income ratios, you know, not enough for the bank or they got some other credit, or they had a foreclosure three years ago. So, you can use the rent credit program. You can do as long as you want. As far as, I mean, you can say hey, rent credit, I’m going to do this. I’m going to give you $200 bucks a month back for 10 years. At the end of 10 years, you can own a house. Because they can bail, that’s going to be different than the other disguise mortgage strategies in my opinion. It may not be Bulletproof, but I think it’s pretty close. But it’s more Bulletproof than the other strategies, but there’s downsides.
Practically, a lot of my clients make the decision to go to the contract for deed. Contract for deed, I feel like it’s better than the lease to own. Part of the reason for that, well I’m not going to get into that debate. There’s a whole another, okay, I’ll do it. Contract to deed on the land stuff is more confusing. And as a buyer, you should never do it. I should probably write that down and do a separate podcast on that.
But the contract for deed for a mobile home for you on the sales side, what I like to do with it, if I draft the papers, I make it a separate document and make it a separate document than the lot lease. And we’re allowed to do lease to own. It’s kind of in the same document. The reason I do that is if I was the evictor tenant, I’ll just evict on the lot rent. Cause we’re not paying; we’re not paying the contract for deed provision. They’re not paying the lot rent and, in my contract, there’s a cross-default. If you default on the contact for deed, you are also defaulted on the lease. So that way they can’t just say I’m paying one and not the other. But if I evict on the lot lease, here’s how it typically goes in front of the judge.
Dear tenant, did you pay the lot rent in this amount, as Ferd said you didn’t? Well, no, but hammer, I win and then all I talked about that day was lot lease as opposed to, dear tenant under this lease with option to purchase whereby you put down $2,500 and you have an amortization schedule of this and your debt to income ratio was X. And it was arguable, if you were a good quality tenant, buyer and was this a bank? What about this bank? What are the Dodd-Frank stuff? Well, now I’m having a conversation I don’t want to have. So just get the lot rent eviction. Are you going to potentially lose out on some dollars on your judgment? Yeah, but I would like to find the person that actually got a judgment and a garnishment on an evicted tenant and it worked out well for them. Because I’ve tried it. And the only person that wins is the attorney. And I’ve even found people where they work. I go to garnish their pay, they get paid, they leave jobs. They flip, they go to the next McDonald’s. They go to the next concrete company. And I got garnishments out there. I got judges out there. I tried to attach to their tax returns. I’ve given to collection agents and collection attorneys. A lot of the collection agencies now don’t even do collections for purely rental debts. They do like, you know, medical payments and credit card bills and stuff.
So, it, to me is not the juice ain’t worth the squeeze to go after the garnishment. I get the possession. That’s all I care about in an eviction and evictions are pretty rare on lot deals. On home rents, you’re pretty much in the apartment business. There’s more evictions in the home business than in the land business, but that’s the strategy that I like better over lease to own. The rent credit is safer, but it’s harder to get higher quality tenants because the customer deed, if you charged a big down payment, like $2,000, $3000, you’re screening out 90 plus percent of the potential buyers, but that’s okay. You screen out the tire kickers or the problem children, I charge, depending on the state, on the rent stuff. I do park-owned homes. I charge a double deposit. It’s like that $950, typically I would require this guy, Eric, I had to make an exception because of we were doing the rent credit stuff and there’s a separate set of documents, rent credit documents that you can do as an attachment or as a supplement to your it’ll be a supplement to your lease, non-attachment. But on the park-owned homes, I haven’t tried to get a high down payment, some states you to do one X, but I try to do 2X of the down payment if I can, or excuse me. I said down payment, I meant security deposit, it is refundable, you know, less damages and things like that when late fees and all that crap.
So anyway, lots of moving parts on this stuff, I’m kind of flying blind here, I’m just kind of going from memory. So, I don’t have all the statutory citations and stuff memorized, and frankly, I just didn’t think it was necessary. So here we go again, Dodd-Frank, SAFE Act can be scary. So, try to sell cash, try to sell with bank terms or rent. Those are all very safe, not as safe rent to own, lease to own, also gray, contract for deed also gray lease with an option to purchase. Rent credit, it’s, it’s only a little gray. So that’s definitely a safer option. I just admit it here, I’m doing rent credit myself. So hopefully I’m right. Put my money where my mouth is.
No legal advice was given here today. This was merely for discussion. Until next time God bless.
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