It Is Important That You Read This Even If You Are Not in
These States
When it comes to laws like these, it's "monkey see, money do",
resulting in the domino effect. Your state can be next, so pay
attention. Visit you state's website and review pending bills. Form
a local political action committee. Be involved in the political
process. If you are in one of these states, call, fax and email
your representatives. Email all your friends and business
associates. Picket in from of the state buildings. Contact your
local news people. If you sit silent, you have no right to
complain!
Texas - Senate Bill 629 - Passed
This bill is an amendment to an earlier law passed in 2001 that
regulated installment land contracts. The current law calls these
"executory contracts" and requires certain disclosures, most of
which are not big deal. However, the penalties for non-compliance
are substantial and bear no relationship to the supposed harm the
consumers would bear if the disclosures are not followed. It's
basically a windfall for buyers who find a good lawyer to hammer a
technicality that most investors are not aware of. SB 629 takes it
up a notch classifying lease/options as "executory contracts", the
same as land contracts. This is deadly for investors who want to
keep the tax benefits ownership when selling on lease/option and
taking advantage of capital gains rates. If Texas calls a
lease/option an executory contract, it makes it a sale, thus having
a negative tax impact on the seller who may want to defer his gains
through a 1031 exchange when the tenant exercises his option to
purchase.
And, we're just getting started...
The bill further disallows an investor from selling a property by
lease/option OR land contract if the seller has an underlying loan
on the property without that lender's written permission. Since
few, if any, investors have free and clear properties, this would
effective eliminate the process of buying a property, financing it,
then reselling on a lease/option or land contract. This is bad
because it hurts not just investors but anyone who has a house that
they want to move. Builders often sell properties on a
"rent-to-own" basis, and now will be prohibited from doing so if
there is underlying financing on the property. What if you do a
fix-and-flip, but are unable to resell the property for cash? Maybe
the lease/option would be the solution so you can cover your
mortgage payments while still getting a sale? It won't be possible
in Texas if this bill passes.
And, it gets Worse!
SB 629 states that you cannot sell a property under an executory
contract unless you have title to the property. That means you
cannot do a sandwich lease/option in Texas - Period. The bill also
has a bunch of disclosures and regulations on lease/options, none
of which are objectionable.
Read the bill here:
Senate Bill 629
North Carolina - House Bill 725 (still
pending)
House Bill 725 is a push from the North Carolina Attorney General's
office, which has been on the rampage against investors for some
time. The AG's office claims to have "hundreds of complaints" from
people who were hurt by investors who bought properties "subject
to" existing mortgage loans, then defaulted. I find it very hard to
believe that more than a few complaints were ever filed. From the
way the bill is written it's clear they just don't understand how
these transactions work.
This bill is targeted against the investor who buys a property
subject to an existing loan, the resells the property by
lease/option or land contract to a consumer. The bill requires a
number of disclosures to all parties involved, some of which are
fine and some of which are absurd and irrelevant. The proposed bill
requires the seller to get express written permission from his
lender before transferring a property subject to an existing deed
of trust, which will never likely happen. And, even if it were
possible, the time frame it takes for a seller to get his lender's
permission while he is in foreclosure is wholly impractical. This
will hurt the seller who is in foreclosure and seeking to simply
"dump" his property for whatever he can get. If the investor can
cure the seller's back payments and/or negotiate a short sale with
the lender, everyone walks away happy. If a seller has no options,
he is going to walk away from the property and the bank will have
another REO. Everyone loses.
Now, admittedly, some dumb or unscrupulous investors have taken
deeds from sellers, promised to pay, then defaulted, leaving the
seller with the short end of the stick. The right thing to do is
require disclosures so that the seller enters into the deal knowing
the risk. Adjustable rate mortgages are very dangerous, too, which
is why R.E.S.P.A. requires disclosures. The government didn't go
off the deed end and outlaw ARM loans. Curiously, the bill exempts
real estate agents from the law, which means a licensed agent could
theoretically buy a property subject to an existing deed of trust
without lender permission and without the same disclosures as a
non-licensed investor would be required to give. The suspicious
side of me thinks that the real estate agents are also behind this
bill, trying to corner the market on investing or requiring an
agent's assistance on these deals so they can profit.
And, the most laughable portion of the bill addressed people like
me, requiring all educational seminars to include a copy of the new
law in our materials. I suppose the drafters of this bill failed to
examine the first amendment, which prohibits the government from
restricting the content of free speech.
Read the bill here:
House Bill 725
Maryland - House Bill 1288 (Passed)
House Bill 1288 is aimed at foreclosure investors dealing with
sellers in foreclosure.
The bill targets two types of activities, "Foreclosure Consulting"
and "Foreclosure Purchasing". A "consultant" is someone who
apparently charges a fee to give advice to the homeowner and/or
help him to negotiate with his lender or get a new loan. A
consultant must disclose his services in writing and offer a right
to cancel that agreement at any time. The consultant cannot buy the
property from the homeowner, nor can one of his "associates" (not
clearly defined). The foreclosure purchaser must also give certain
disclosures in writing, including a ten-day right to cancel the
contract. This means you cannot get a deed without giving a
homeowner a 10 day "cooling off" period. This is not necessarily a
bad idea, but it may prevent a homeowner who is fighting a deadline
from doing a last-minute sale. No matter how long the foreclosure
process, most homeowners wait until the last week before taking
action.
The final part of the bill deals with a foreclosure "reconveyance",
that is, a deal wherein the homeowner stays in the property under a
lease, reserving the option to repurchase the property from the
buyer at a later date. I don't particularly like these kinds of
transactions, because they generally fail and they can sometimes be
reclassified by the courts as disguised loans. On the other hand,
many homeowners facing foreclosure have no other means to save
their property, and in a free market should have the opportunity to
engage in a transaction which allows them to try to save their home
based on intelligent, informed decisions. This law would require
the investor to give the homeowner 82% of the proceeds of the sale
if the homeowner cannot repurchase the property, which makes it
unfeasible for any investor to even bother trying to help the
homeowner. In short, such a law would hurt more homeowners than it
purports to protect. The 22 pages of requirements are very
technical, so you should review it in detail with a local attorney.
House Bill 1288 - Full Text in PDF Format
Colorado Senate Bill 06-071 (Still in
Committee)
The Colorado bill is being pushed by the Attorney General and the
Colorado Public Trustee's Association (Colorado's foreclosure
process involves a public official, the county Public Trustee).
This bill is a watered-down version of the Maryland Bill, which
will also regulate "foreclosure consultants" and "equity
purchasers". Through lobbying efforts, we have gotten the ear of
the AG's office to get some good amendments to the bill that should
result in a sensible piece of legislation. Like the Maryland bill,
the Colorado bill prohibits a "consultant" or one of his associates
from buying a property in foreclosure from the homeowner. The bill,
as amended, better defines a "consultant" so as not to confuse such
a person with a "purchaser" who will be buying the property, not
offering the homeowner "advice for money". The bill is still in
discussion and we are hoping to further refine some of the
"reconveyance" provisions to make it fair for investors and protect
homeowners from predators. The bill also adds criminal penalties
for violation of the law, which is certainly scary for the average
investor who does not understand how to comply. If you are in
Colorado expect a seminar this Summer to explain all of the
nuances!
Illinois Senate Bill 2349 (Still in
Committee)
The Illinois law is similar to the Maryland Bill, but takes it up a
notch. The proposed bill would also apply to properties "in
distress", that is, homeowners who are 90 days late, but no
foreclosure has been filed. This is extremely dangerous because
there's no public filing until the foreclosure action has started,
thus no way to know who is in default! Also, the Illinois bill
would require an investor to pay off the seller's liens before
doing a foreclosure reconveyance, that is, you can't take a
property subject-to the existing loan and sell it back on a
lease/option. However, you are not prohibited from taking
subject-to and selling it to a third party.
The Illinois bill also contains the "82% of proceeds to the seller"
provision, which effectively kills any intelligent investor from
getting involved. Why would you want to buy a property and risk the
homeowner defaulting, filing bankruptcy and hauling you into court
over 18% gross profit? On the other hand, I can see the argument
why it is patently unfair for a homeowner to lose a property with
50% equity for non-payment of one month's rent, but these cases are
rare. In any event, a court always has the equitable power to call
a contract "unconscionable" where it sees fit. Using an arbitrary
number like 82% may not be feasible when the local real estate
economy is in the toilet and banks are selling properties at 60% of
value or less. In short, the government should leave the free
market open for people to make deals that they wish to make, punish
those who take unfair advantage, and require mandatory disclosures
so people can make informed choices.
Conclusion
I have mixed feelings about these new bills... on the one hand,
they are rash responses the side effects of a strong real estate
market, discouraging investors from getting involved in deals and
resulting in more properties going to the bank. On the other hand,
some of these bills provide "safe harbors" for investors that
follow the letter of the law. Since there are really few laws that
relate to "creative" real estate investing, providing detailed
rules make litigation by a disgruntled seller or tenant/buyer more
difficult. It's hard to say, "you didn't disclose X, Y & Z"
when in fact the law only requires "A, B & C". If investors in
these states make some noise by contacting their state
representatives right away, a modified version of these bills may
get passed, making everyone happy. And, if something comes up in
your own state, get involved in the process before a bad piece of
legislation puts you out of business.
I highly recommend doing the following:
1. Get involved early in the process. Find out who is pushing the
bill in your state and why. Contact these groups and offer to
assist in the legislative process by discussing practical effects
of these laws and other alternatives.
2. Get other groups involved in the process. Community leaders,
such as real estate investor associations, mortgage brokers
associations, title companies, boards of realtors, etc. Remember,
the banks do not want these foreclosure properties in their
inventory, so they need investors bailing out properties before
they go to sale.
3. Speak to your local representatives. State legislators are
generally accessible, to call, fax, and even visit their offices.
Let them know you are a voter in their district that has
concerns.
4. Speak to the Press. The media is pushing stories about how
people in foreclosure are losing their homes, but there's two sides
to every story. Talk with local newspaper, radio and television
personalities. Write letters to the editor of your paper (click
here for a good example).
5. Hire a lobbyist. The best way to get access to legislators is
the good old fashioned way - money. Lobbyists (also known as
"Public Relations Experts") have connections with different law
makers and can get you an audience to hear your issues. They can
find out who is for and against particular issues, and who can
either amend or "kill" a particular bill being presented. On the
national level, the National Association of Responsible Home
Rebuilders and Investors (www.NARHRI.org) has been active in about
8 states.
The most important thing is to get involved early in the
process.
By: Bill Bronchick.
Luis D Roque
www.hisrealestatenetwork.com
www.greatestrealestategiveaway.com
