OWNER-CARRIED FINANCE: PART III - IIIIT'S BACK!
Post Date: 10/26/2012
BY: J. ROBERT ECKLEY
Real Estate and Construction Attorney
Eckley & Associates
August 1, 2012
©2012 ECKLEY & ASSOCIATES, P.C.
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Now the Questions Are:
Why and For How Long?
How Can I "Quickstart" Learning and Doing These Deals?
ABOUT THE FIRST QUESTION: “WHY AND FOR HOW LONG”?
Today’s National Scene: There IS Life Out There..But Not the Same Kind!
The challenge for the last half of 2012 and beyond is not going to be how best to wash the last of the distressed properties down the drain of short sales and foreclosures. It is not going to be what to do with those whom the Great Crash has hurt so mortally that they can no longer afford to buy anything at all in the foreseeable future. Instead, it’s going to be about how to deliver a marketplace with the viable properties and the financing access to it for the viable sellers and buyers who survived the bloodbath (scarred, perhaps, but still standing) to make deals. It’s going to be how to rebuild out of the ruins.
The mortar for the bricks this resurrection--the link that always connects people to property, makes a market and starts the value-building process–will not merely be access to viable property, as it was in the past decade. There is actually plenty of very, very viable property out there right now. It’s just not on the market because the current market will not let it get its fair “presently-in-recovery” price and it cannot get its proper “today” price because there is no conventional finance mechanism that will let it. Conventional finance has become prohibitive because the loan appraisers—in fear of their souls, pocketbooks and licenses when the lenders holding their over-blown appraisals of yesteryear finally get taken over by the Fed and the Fed audits the failure and then rightly blames and sues the appraisers—have all gone deaf, dumb and blind and “overlooked” or discounted entirely the massive recovery of today’s property values. The appraisers know that they can only be sued for generating appraisal “high-balls” and cannot be very readily sued for appraisal “low-balls” and so that is all they generate today. Those valuation “low-balls” have functionally shut down the finance system to all but the government-aided “edge-of-poverty” cases, stranding the middle class and stalling inventory above that lower level, the middle and above properties where the most robust market and most qualified long-term buyers have traditionally been. Accordingly, the major challenge for current times is the availability of finance to grease the wheels of any well-functioning, healthy real estate commerce. Or, rather, what the real estate industry does about what could well be the decade-long lack of that kind of finance!
So, today, demand is strong, but not nearly what it was or could be with more and more enlightened finance. New and existing low and middle-market listings and inventories are at an all-time numeric low by any measure—good times or bad—because the cheap ones are gone to the investors as rentals and the new ones in the middle market where the Mom-and-Pop-Owners dwell will not be listed because they cannot get enough loan valuation to pay off the existing mortgage. And the jumbos and above must be conventionally financed under terms so absurdly poor-termed and high-cost that even the rich quail and hence, for them, there is no market at all.
So here we are in 2012: Lots of demand, lots of potential market in the middle and the top categories. And not enough institutionally-available finance money to do a damn thing about it. Or maybe not!
Yes, it is a different market than what was enjoyed up until the last five years when the bottom fell out. Indeed, it has a lot of potential life once it gets the right financing diet. The holdup is that there is no longer any money systemically available from the ”usual (conventional) sources.” What now? The obvious answer for those whose livelihoods are the making and feeding of a real estate market and for those who intend to continue doing that is to do something other than what does not work anymore. Clearly, reaching the market today requires the design of an entirely new method of finance, even if only temporarily. The market needs to create its own money.
How to Create Money
We now know why new non-institutional sources for finance are going to be central to resuscitating the marketplace. The very, very smart have already put some new alternative money-creation programs in motion. Witness that new “kick-start” in the explosion of non-conventional finance tools such as massive amounts of new syndicated money for direct commercial and residential debt and equity investments. Witness it as finance for business opps, small to medium commercial and industrial, agricultural lands and, more to the point here—retail residential home sales market, the smart market players goes to Owner-Carries (now 8%-10% of all single-family residential sales by volume and increasing monthly—in some areas making a market larger than VA and FHA combined). On those points, syndications of debt and equity have been made much easier by recent legislation—see earlier syndication articles by this author:
THE "JOBS ACT" - THE SYNDICATION REVOLUTION OF 2012 IN A NUTSHELL
- THE ONGOING REAL ESTATE DISASTER, PART IV:“OPTION A: SELLER-CARRIED FINANCE”
THE MALPRACTICE EXPOSURE FOR AGENTS, INSURERS AND UNDERWRITERS FOR NOT DOING OWNER-CARRIES!
There are a lot more timely and informative articles on these and other subjects in the million-dollar FREE archive found at www.eckleylaw.com. Be sure to browse there using key subject words in the search engine at the site.
Why Not “Wait for It to Get Better?”
Why not “just wait?” Because it is not going to “get better the old way” for a long, long time. If ever. Too much of the economic machinery has been changed so dynamically that the moribund “today” could be close to permanent unless nudged off its dead stop on the dime by adopting other means. The analysis of “why” below thus starts with an examination of how our money system stands, today, where it failed and why the post-Crash banking and money system may not be willing or able to deliver, anymore. It then identifies where the alternate money development system needs to be actively pushed by the real estate community today to build a tomorrow capable of vibrancy of being in pace with the actual market demands. It answers the question: “What do you do when there is a financially-capable seller who does not need a short sale and who would be immediately willing to list in today’s marketplace if he or she could get anywhere near a reasonable price and what do you do if there is also a financially-capable buyer who would and could pay that price in installments—but neither can get a loan appraisal at anything other than a bottom-dollar, almost absurd fire sale valuation?” Sound familiar? Read on for the answer. Hint: “Wait for our brilliant government to solve it,” or “wait for the benevolent Banks to lead us back to blind appraisals and no-doc money” “or even “just keep crying in the dark” is not it, though most of your colleagues are doing precisely those things right now. Read on.
What Has Happened to the Money…and a Passing Comment About Capitalism
The bottom third of the market has to date been the focus for the greater bulk of the federally-assisted programs, is the producer of most of the acrid publicity and has now become the ritual seedbed for the darkest of economic predictions. True: It is where a lot of money has been lost by those defaulting in it but, as is often missed by the pundits and just as true, it has also been where a lot of money has been made by those investors sweeping up the resulting bargains. The soundness of the property did not change. The owners and objectives did and it was, in whole, a painful but capitalistically-appropriate improvement. There is a yin and yang to economics wherein the financial death of the sickly produces a financial rebirth of the healthy. The pain to us mortals is that often times what is dying is the familiar world where what we did “worked” and now what is being reincarnated is a place new and strange where the old is dead and the new isn’t clearly spelled out. But both the philosophical and the practical messages seem clear for those who consider themselves capitalists and chose survival over extinction: Learn the new rules and adapt.
A Closer Take on Why It Happened: It Wasn’t Capitalism That Failed. It was Capitalism that Worked TOO Well.
As data now reveals, the Property Bubble—as all defective economic models must—finally burst about July 1, 2006, and for those who acquired property after the run up started galloping in about 2003 or when it was still capsizing during 2007 to 2008, their preposterous real estate values significantly retreated—first to what were likely “real” levels and then even lower as panic corroded common sense, as the appraisers who abetted the run-up “over-repented” to a new model of abject cowardice, as the flummoxed Feds could think of no better solution than load the Banks up with free money and no duty to lend it and as the government spent more time mired in populist debates on healthcare than in avoiding economic collapse. Litigation has since revealed that the retreat was not due to failed core real estate principles. It was rather because those core principles were ignored. It is now known that the science of honest capital had not been repudiated by the warp and woof of the modern marketplace. It had instead been hoodwinked and hijacked by false markets manipulated higher and higher by cheap money, fantasy over-appraisals, criminal underwriting and the downright insatiable greed of a small, powerful, but formerly trusted banking and securities segment of the financial communities. And no one should ignore the volcanic culpability of the Regulators who stood by and let it all happen. The better news: There is evidence that kind of rampant illegality matched with unmitigated stupidity is for the most part no longer the only hand on the driver’s wheel in the U.S. and that was the first step to recovery. Later Administrations will get around to prosecuting some token bad boys, but the satisfaction of seeing a hundred or so now-defrocked financial gluttons and thugs behind bars will not aid recovery an iota.
What is Left: More Than the Pessimists Predicted
All of that attention to the sinking boats ignored the far greater fleets of seaworthy ones. The fact is that the greater majority of Americans quietly (painfully at times) paid their mortgages and kept their properties. It also true that some of those whose boats sunk actually chose strategically to let them sink in order to save the crew of their families and their cargo of their capital to buy and sail another (sounder) boat again. And they are ready to. Coupling that with the amazing reality that U.S. money markets are now bulging with more cash than ever seen before, it is the clear that Armageddon left far more survivors with far more financial provisions than anyone hypothesized and that there are a lot of people out there with a lot of money in the bank waiting for signs of growth in the market to rationalize taking another plunge into it (leaving the ridiculously puny interest rates money markets are being paid behind) and the moment could actually be promising. This does not even count the trillions of dollars now fleeing to U.S. shores to avoid nationalization by the revolutions broiling in the middle east, the political corruptions of Asia, the continental collapse of the Euro and in general the erratic and even life-risking gyrations engulfing virtually the rest of the world, but which is currently sending trillions more dollars than usual to the U.S..
There is, if one honestly looks at the numbers, ample evidence that the Doomsday Scenario that has been widely predicted by the pundits for U.S. real estate, money and people may have been highly exaggerated or at least may have widely missed the mark. It is emerging that the dynamic economic disruption since 2006 may have been less about a societal Ends of Days and more about the catharsis of sometimes painful, sometimes even “unfair,” but nonetheless eternally inevitable fluid economic changes, wherein a market which can no longer sustain itself in a changing macro environment dies so that a new one that can adapt and sustain itself under the “new math” can be born and flourish.
As an aside: Saying “well the world does, alas, go on, thus we will all need to learn from the past, correct our course, and go with it” after great calamities like we have just had is not being callous to all of those souls who were the casualties of yesterday. Every respect and sorrow is appropriate for those whose lives and families have been wrenched and torn by the economic dysfunctionalities that dropped us unpleasantly here, most of which forces they (and many of us) still do not understand. It is likely that the impact will ripple negatively through the emotions and politics of generations, just as it did with our grandfathers and fathers after the Great Depression of the 30’s and that is lamentable. But the lament must now be forged into inspiration. For the victims of The Crash and for all of us the best “amen” this country can offer for the past suffering is to shake it off and put its still-mighty shoulders into pushing the financial engine back on its track and steaming forward to end it. Starting now.
Who Will Lead the Way?
Much of this recovery challenge is now on the shoulders of the real estate community. The greatest asset this country has—larger in value than banked money and stocks combined—is its real estate. It was real estate (and the financial products attached to it) that was the greatest injured in The Crash. Healing it once again is the economic engine that will pull the train of this country out of the bog and over the mountain. Real estate professionals, by their unique position as the voice of the real estate economy and the makers of markets are the Engineers. All this train needs is the fuel and that in the real estate world is finance. Finance is the now big rub that is presently holding the whole train back. The Challenge? Where the hell is it?
The Dearth of Finance
Viable, affordable, attainable finance for recovery is just not coming from the Banks anymore and it is not because they do not have money. Their vaults—filled to rivet-popping proportions by billions of consumer dollars seeking safety in the storm the Banks themselves created and plied with repetitive trillion-dollar government (read “taxpayer”) doles and freebies to them--are positively oozing with bucks. But Banks, once the traditional “drive-in finance filling station” for real estate vehicles and chartered by the government to liberally do precisely that, have changed proprietorships and business plans. They are no longer those friendly folks who used to run out with a smile when the customer pulled in for a financial fill-up. They don’t wash the windows, check the tires, give away free dishes and support the local scouts anymore. Now they have become the Financial OPECs of the country, giving away nothing and intentionally eking out just enough finance money from their deep hoards to keep demand high, “look” like they are still in the retail bucks business, and keep the desperate consumers willing to pay and do anything to get it. But with their huge backfield money tank-farm full to the brim with the money this country has entrusted to them, the greedy Banking Oligarchs who own or control the spigots are refusing to pump them at capacity to any other than their Oligarch and Titan friends, thus producing a perpetual, brutal artificial scarcity for the rest of those millions of “99-percenters” out there. It is a plot designed to generate long lines of “99- percenters” at the Banks’ buck-pumping stations in order to bilk them on prices in their desperation.
Witness the record profits the Banking proprietary desks are making for themselves today investing depositors’ cheap money into the stock market for their own proprietary gains. With the incipient greed of the emerging Banking OPEC system, combined with the coming higher capital reserves of Basil 3 and the deeper secondary market risk retentions of Dodd-Frank starting January 2013, no one should expect the institutionalized real estate investment money wasteland to change anytime soon. In fact, it could get tighter yet for those “99 percenters” who make up most of the borrowing real estate markets as the Bank cranks the whole wheel of retail finance beyond government-backed money to a stop. Regrettably, it is those hardest hit whom the equivalent 99% of the professional real estate community serves.
Its high time then for the real estate community to adopt a new business plan, too.
The New Real Estate Investment Business Plan for 2013 and Beyond
With the new Banking OPEC slowly strangling the money pipelines, those end-users who need the capital—the real estate community, the marketplace and the consumers it serves-- have two choices: They can sit at the curb on their real estate, staring at a capital gauge on “empty”, be financially beached, go broke…do nothing. Oh, yes. And also bitch about it. Or, alternatively, they can ignore the crooked Banking OPEC entirely, get out their own drilling rigs and reopen the otherwise abundant domestic supplies of capital—the ones underfoot everyone forgot about when “almost free” cash was gushing from the leaking mortgage pumps.
Stepping out of the similes and metaphors for a moment, the fact is that there is a hoard of cash out there owned collectively by those” 99-percenters” who each “saved a little” for a grand total (when multiplied by over 300 million people) of “a lot”. The only investment alternative for these savers until now (with a gyrating stock market most everyone now rightly suspects is rigged by and for the “1-percenters”,anyway) was to loan it to the Bank for the abysmal quarter-point annual returns the Banksters pay. Realizing that even depositing with the Banking Baronies has become a rigged game, as well, the smarter real estate players have devised a new plan: Give markets and their consumers the opportunity to seize real control their money by passing over the middlemen Banksters with it and instead depositing it directly into their own real estate debt and equity investments.
That gets back to the point made in the introduction, above. Witness in proof the myriad of new privately-developed real estate REMICs and REITS that have recently exploded into the selling, buying and managing marketplace, some of them massive and almost all of them developing their capital by syndicating it from the consumer savings and investment dollars that would previously have wasted away in the Banksters’ coffers. And these vibrant new investments are turning reliable monthly dividends of 5 to 20-fold what the Banks are. In addition, they are secured by top-grade, well-managed real estate bought when the prices were truly “right”. To the well-informed, that kind of entity with that kind of real collateral should induce far more warm and fuzzy investor sensations than leaving family nest eggs to a banking community that pays chump change for it and which is for the most part an unstable, red-ink enterprise kept open by nothing more than opaque bookkeeping, political cronyism coupled with massive taxpayer bail-outs.
There is another “Bankster Bypass Route” for the consumer himself or herself that is starting once again to get some real traction. And it’s not new. It’s old. It is the answer to that “Have and Want Disconnect” question posed above. It’s the new answer to the new residential marketplace where there is Have, Want and no institutional (read “Bank”) finance to link it except at giveaway valuations which no intelligent seller is willing to accept or without huge down payments (to pay the price down to appraised value) which no intelligent borrower is willing , able or even wise to pay. Yep. Owner-Carries!
Where Owner-Carries Fit
Let’s look at a hypothetical market example that is all-too-common out there these days and then examine a cure for what ails it:
A STORY PROBLEM
About The Potential Buyer:
Last year, Paul and Mary, both successfully employed, elected to short sale what had been their dream home, purchased by them at the inflated prices of 2006. It was purely a sound financial decision, i.e. they could not see paying a $1.3 million mortgage for a home worth at most $600 thousand on a good day. They walked away from it free of any more debt for it, but their credit was damaged. They have no other debt, they make good money and they have money in the bank. They want to rebuild their family portfolio by buying now in a “down” market, but cannot because of the bad credit issue, as no Bank will lend to them. They want a home, they want a nice one precisely like the one below, they have a job to pay for it, they are also motivated to pay better-than-Bank terms to get into a new home and start rebuilding their credit. They can handle it economically, they just cannot do it, conventionally, without waiting years to rehabilitate their FICOs (meanwhile watching the buyer’s market disappear). The Realtors they have consulted have suggested they should ”just swallow it and rent until things blow over someday” and have had no better ideas for them. They are hungry to sign a contract and get into a home. They would love Bill and Judy’s home, below.
About The Potential Seller
Bill and Judy, both successful employed and with good credit, are living in a home they originally purchased in 2005 for $1.4 million, and now owe $700 thousand. They had it Bank appraised to see if they could refinance and the appraisal low-balled it at $550 thousand. They know they are seriously upside down on this house, but they refuse to modify or short sale as they want to protect their credit and their own sense of pride in paying their bills. Empty-nesters, they also want to downsize, retire and move closer to their grandchildren in another state. They have also been told by a Realtor they visited that their home—a truly magnificent residence they actually “stole” at the time they originally bought it even at its then price—is today unmarketable with conventional finance, because even at the 90% loan-to-value mortgages that are available out there for this type of home, the down stroke for a buyer would be at least a whopping $205 thousand--$150 thousand to get the existing mortgage down to appraised value, plus $55,000 to get a 90% of-value mortgage. Tack in commissions and closing costs and the down stroke would have to be bigger and even after all of this money being paid in, the seller is left a “net” of nothing except the “satisfaction” of getting his mortgage paid without and credit disruptions. They would like to list and sell and would even be happy just to net enough to pay their mortgage, commissions and closing costs, but they do not because they are against defaulting on their debt and have been (correctly) told that they cannot likely get enough down from an intelligent buyer under the above conventional financing scenario to get anywhere near a walk-away “net-net.”. They are immensely frustrated. They have a great home that in better times would be worth every dime paid and more. But they cannot sell now because they do not fit a conventional mould that would generate a huge mortgage loss and none of the Realtors consulted has come up with any alternative ideas. So they don’t list. They just sit, lose money and get sick over it, putting off retirement until someone can figure out a better plan than a short sale. Or until they die of old age!
The Dilemma Analyses
In this story, we have a great property in a sought-out part of town coupled with a highly motivated seller and a highly motivated buyer who may never meet each other, as, incredibly, there is no listing and so, obviously, there no Have-and-Want medium to practically hook up a willing seller and willing buyer and accordingly there will be no deal. And even if they met, it is doubtful by the “one-conventional-option” they have had explained to them by their Realtors that they could even do a deal. Paul and Mary are well-fixed, but they are also not stupid about the use of money. They are not going to pay $205 to $215 thousand down and without that the sellers cannot sell. So everyone loses and all of this loss is needless for two reasons. One reason is a bad one, the other reason far, far worse one. First, the bad reason: The parties think “..there cannot be a deal since the credit dynamic for this to be done conventionally does not fit the parties’ needs with the Bank dictates (buyer has money but poor credit, seller cannot appraise.., therefore it must die”. Yep, just chalk up two more economic road kill victims for the Banking OPEC--with the Realtors pushing them under the wheels. And there is the really far, far worse reason and that is that something CAN indeed be done: The Realtors are being either stupid or incompetent and have given worse than terrible advice (they should check the status of the E & O policies). They have missed a glaring alternative way to turn this into not just a deal, but a “win-win” deal for seller and buyer…and a significant reward for them in thinking of it! It just never even occurred to the Realtors in this scenario that it is perfect for the generation of a better solution. The solution is not to tailor the deal so that it rams into the formidable Bankster Roadblock and then to give up and go back to sleep. It is to simply bypass it and get to the financial destination by creating a detour—in this case using the deal’s own money! Owner-Carries!
A Bypass to Solve the Dilemma
Bill and Judy just want to leave “even” with their Bank, take nothing more and to leave. Paul and Mary cannot buy the house conventionally both because of credit and also because they are smart enough to not want to trim their savings by paying over $200 thousand-plus down. But terms do dictate price. If they were extended an Owner--Carry Purchase Agreement plan by Bill and Judy they are perfectly willing to pay $800 thousand at $100 thousand down, with the balance financed at the minimum monthly payment as the underlying Bank mortgage for a period of 5-7 years at which time they will then refinance on their own then-rejuvenated credit and pay it all off. Paul and Mary will pay taxes and insurance and they will even offer Bill and Judy 6% interest on the Owner- Carry (that is 2% above the underlying mortgage, so Bill and Judy make a profit on the interest spread of about $14,000 a year when they expected to make nothing!). A local Escrow will collect all payments and make sure they are applied to the underlying mortgage, taxes and insurance with any balance a payoff left to Bill and Judy. There is in the down payment enough to pay commissions and closing costs and in the interest spread enough to keep the underlying debt paid to an amount lower than what is due on the Owner-Carry and the interest spread leaves more money for Bill and Judy at the time of payoff, as much as $50 thousand more for their pocket. Bill and Judy may take installment capital losses on the sale and lower their taxes; Paul and Mary get all of the deductions of a home purchase loan and they will have 5-7 years of timely payments recorded at Escrow to rebuild their credit. When the payoff time comes, Paul and Mary will have re-established good credit by these payments and by the passage of time and will likely have a home that is worth a good deal more than they paid for it during the Crash. Refinance will be a snap. The Realtors go home counting a full commission. Neighborhoods become vibrant again as they are populated once more with pride-of-Owner-ship occupants who glad to be there and can afford what they bought, HOAs are paid so that lawns get mowed, trees trimmed and common facilities get serviced once again. Foreclosures and short sales disappear and, alas, value comes back.
Now THAT is how it is done. Win-Win and ....Win!
Now to the process--“The Quickstarts”.
B. ABOUT THE SECOND QUESTION: “HOW CAN YOU ”QUICKSTART”
LEARNING AND DOING THESE DEALS”?
A Marketing Quickstart:
This really is the easy part. How does one get into the market to start doing these? Well, heck, folks, they JUST START DOING THEM! For example:
What lister worth his or her salt would not check the “Owner-Carry” box in logging on every single listing? Is there any harm in finding out what someone motivated might offer on that basis? A recent study in a major city suggested that Owner-Carries sell faster and for more (as much as 35% more per square foot in one study).
And what buyer’s broker would not type in the “Owner- carry” field in every single MLS search? Highly flexible, better deals might be had there and is not finding those the primary assignment of buyer-brokering? Buyers love needs-friendly, negotiable terms and investors love leverage and they do not get that with “all cash on the barrelhead” deals.
P.S. Owner-Carries or contracts of sale and finance directly between sellers and buyers also work for 1031 Exchanges and for deals where payments are all trades or paid in part trades. Only Owner-Carries can have terms like “one 4-carat diamond cocktail ring and one 2010 Bentley representing and deemed $375,000 down with the balance thereafter payable…” No conventional finance has ever done that or been that flexible and imaginative and it never will be.
Obviously a good marketing campaign telling the world you are open for this kind of business would also be wise. The simple fact is that you cannot get into by being anonymous or by making your Haves and Wants and Ingenious Methods invisible to the world.
See an earlier article by this author at http://eckleylaw.com/article_fullstory.asp?ID=85 for some marketing grab-lines
A Deal-Making Quickstart:
Don’t do the first half dozen Owner-Carry deals by yourself! Recruit an experienced Owner-Carry broker and/or Owner-Carry attorney to help you from the earliest stage (and that means before you put pen to paper by making an Owner-Carry offer or accept one—what you start with casts the bronze and so it has to be right at the beginning.).
This author, an almost 4-decade real estate attorney and former two-decade real estate brokerage owner and licensee, has done somewhere in the neighborhood of 3000 Owner-Carry deals across several states in that time in one or the other capacities. Look for the equivalent. Very few attorneys or brokers have actually done any or many of these in those 10 of the last 15 years when baskets of conventional money were falling form the trees! Look for a mentor with some gray hair for the first few maiden voyages.
Let the experienced broker and/or attorney help you out. It will be the best investment of your life and in most cases all of the money to pay them is coming from the sellers and buyers as commissions or closing costs.
A Closing and Collection Quickstart:
Ditto on the selection of a title and escrow company to close and collect the Owner-Carry. Get the smart, experienced ones. Also get ones who will even do them. Many won’t do Owner-Carries (for political reasons) and some who will do them ought not be doing them, anyway, for two reasons: First, they are not competent to do them, second, they do a terrible job drafting the Owner-Carry Agreements and are often breaking the law in drafting such agreements at all without a license to do so! There are some good ones out there. Just few of them.
A residential Owner--Carry agreement (no matter what it is called) must be aligned to determine applicability of and where required comply with RESPA, the Truth-in-Lending Act, Regulation Z, the Dodd Frank Act, the SAFE Act as a matter of finance law and must also contain mandatory written disclosures about the legal, tax and agency ramifications of Owner-Carries as a matter of real estate licensure disclosure law—otherwise the real estate licensee gets fried by the DRE.
Bookstore forms and stock Realtor and Escrow forms will not do it. These are highly customized, highly complex legal documents calling for high-end legal and real estate brokering knowledge to draft them. Under recent laws, all of it has been cranked up to even higher standards, including underwriting mandates even for a single private transaction. But a lot of title and escrow companies desperate to supplement eroding short-sale incomes simply don’t get it and are glibly blowing out bare non-complying shards of the much larger transactional documentations required by law at a few hundred bucks a pop. That’s expressing more than brazen chutzpah about the law here. It’s just damned reckless. Violations of the noted foregoing and other laws are felonies for those who committed them and for those who aided and abetted the commission of them.
In a recent review by this author of what is being pumped out of the title and escrow agencies for the real estate community, less than 10% of the documentation is compliant, meaning devastating liability for the agency, but more to the point, devastating liability for the parties…….and for their agents who got them there.
As is this was not enough, there is more hell to pay for these bandit title and escrow operations and those who own them: A lot of them are using people to draft these who are not attorneys or real estate brokers. That is in most all states the unauthorized practice of law and the engagement in professional real estate activity without a license. The escrow practice of having “…Mary who has been with us for years and is really smart and has done a lot of these really cheap..” doesn’t cut it. The fact is she just plain does not have a license for what she is doing and it is a felony for her to do it and for you to put your clients in her hands.
No, an “escrow officer” license is not enough to waive a law or broker’s license in those states having such a license. Forms with little one-inch-long non-narrative blanks that can be filled in on one or two words or numbers can be handled by Mary. Complex Disclosure-Complaint, Regulation Z and DFA Complaint documents generated from scratch cannot be prepared by her in ANY state. In Arizona, see Rules of the Supreme Court of Arizona, Sec. V., Regulation of the Practice of Law, Rule 31 A.(1) which provides in pertinent part that the act of “…preparing any document in any medium intended to affect or secure any rights of a specific person or entity..” is the practice of law needing a valid state license for law practice by the drafter; in California see the long-followed, definitive People v. Sipper, 61 Cal. App 2d Supp 844 (1943) [and a long list of consistent cases thereafter] in which the Court held that “law practice” needing licensure included “…legal advice and counsel..and the preparation of legal instruments and contracts by which legal rights are secured…”.
The rule here?: Stay away from the fast-talking “we do the whole deal for you without those expensive, damned deal-killing lawyers” escrows. They cannot by law and it is YOUR CLIENT’ and YOUR NECK they are playing with by trying to be a “jack of all trades” (and “a master of….”, well, you know the rest). In the lawful world of lawful practice, the only one you want to be in, the attorneys prepare the actual Owner-Carry paperwork and the escrow gets the title insured, closes it, gets it recorded and gets it to the appointed collection. One road.
Using the Professionals: The Proper Roadmap
The right way to coordinate an Owner-Carry is, as in all things, to hire only the skilled in each area and have them do what they do best (and are licensed to do). As the old adage goes, keep the butcher, the baker and the candlestick maker only in their respective businesses and disciplines doing what they do best. It is dangerous (and inefficient) to have the butcher cobbling shoes or the baker molding candles. Likewise, it is dangerous for you as a real estate licensee to try to be one of those when you are not or to be “the whole enchilada” when the law prohibits that..
The real estate licensee should find the property, the seller and buyer and be the procuring cause for the Owner-Carry deal; the licensee should do the normal property due-diligence, get the usual pre-printed disclosures out and, yes, get paid for it when it is all done. When there is a willing seller and buyer and a general idea of the Owner-Carry terms, the real estate licensee should get the deal to a licensed, experienced Owner-Carry attorney (or experienced broker) to write up at the very beginning –then the attorney will follow through on the legal matters to the very end. The attorney should draft the Owner-Carry documents, the DFA pre-qualification documents, the affirmative disclosures required between parties on Owner-Carried financing, will assist in the affirmative disclosures required of the agents to be given to the parties that discuss the legal implications of a “wrap”, the tax implications of an Owner-Carry, etc.. The conclusion of the deal should be in the offices of an experienced escrow company (one which knows its lawful place in the deal) to insure, close, record and collect as directed by the parties in their documents and by their attorneys. The parties usually split the attorneys’ preparation costs evenly as a cost of closing in escrow.
A good title and escrow company will ALWAYS insist that the parties send any Owner-Carry paperwork an agent or the parties may bring directly to them out to an attorney to do the above paperwork. If the parties did not chose an attorney after being advised that they ought to, the escrow company may chose one to act merely as a licensed scrivener for preparation of the closing paperwork. There are no other options than for the escrow to refuse to do the deal if the parties do not permit one or the other method. No party or agent can “waive the application of licensure law” and escrow paperwork that tries to do that is itself another legal violation.
This above process is the way it was done all during the many decades that Owner-Carries have been out there. It was only lately that some fee-starved title and escrow companies decided to cross legal and licensure lines by drafting them sans licenses and inappropriately in their back rooms with the shades pulled down. Juuuuuussst ….don’t go there or do that either alone or with your client! You would look just terrible in white and black stripes or an orange jumpsuit—it would clash horribly with your very red face!
The Bottom Line
What this explanation shows is that the system out there is already in place and prepared to do the rest of the heavy lifting once the real estate licensee or the parties decide they want to do an Owner-Carry and once they get the bare minimums like basic price and general terms out of the way.
Now that it is clear how easy this is to do and that the system is full of experts to help one do it right a few times until one gets it down, when are YOU going to go back and change all your listings and all of your buyer-search fields to also include Owner-Carries? When are YOU going to get on the horn and call that monstrous pile of “expireds” out there? When does YOUR new “I am the Master of Owner-Carries” ad campaign start? When are YOU amending your website, business cards and brochures? When are YOU taking some of the great Owner Carry classes and reading some of the better texts out there? Today is always a good time!
Yes. There has been a lot of fuss and focus at the bottom of the market these last five years. But everyone ignored those suffering at the middle and the top. The appraisal-miserly Banking OPEC has pretty much killed those markets with bgarded money and cowardly fire-sale appraisals and there is no change of course in sight. For those of us needing to make a living TODAY, we have to conclude there is not going to be a change and that we therefore have to change what WE are doing when it appears we are unable to change what THEY are doing.
If the Banks are not going to give the same “$700 trillion artificial prime of the pump” to the rest of the market as they did to the bottom third of the market when it needed it to rise—give us the same kind of bonused “recovery loan value” that will restore the middle and upper inventory to the marketplace with the same gusto it was handed out to the bottom of the marketplace for the last 5 years--then we have to invent the method and the money, ourselves. This seems especially timely when there is so much dark talk of the “fiscal cliff” Congress has led us to the edge of starting in 2013—where values and money will likely be tighter, yet.
No doubt we need a new financing paradigm. And quick. And that paradigm turns out not to be one requiring a PhD in economics. It is one that has been around for several hundred years and was always a great solution for any time, let alone troubled times. It just wasn’t used for a while when the Banks were tossing out greenbacks from the rooftops. Now it’s time has come once again.
Yep. For 2013 and beyond. It’s going to be Owner Carries.