Big Brother Is Watching You, New (Bad) Legislation Coming Your Way
by Bill Bronchick
Well, it seems that with everything you do right, there's always someone else
doing it wrong, do it badly, or doing it illegally. Enter Big Brother... the
"well-intentioned" legislator who wants to get re-elected by passing a law that
protects the innocent from bad people or from their own stupidity. What am I
talking about? Several states have passed or are about to pass a rash of laws
that will make being a real estate investor a very difficult vocation. While I
do understand the need for some guidelines and disclosures from the government
to make sure that people are making informed choices and are protected from bad
people, these laws are throwing out the baby with the bath water and will likely
cause financial harm to the real estate markets in those states. The following
is a review of some recent laws and bills that are pending or have passed.
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.
Bio:
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney,
author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real
estate since 1990, having been involved in over 600 transactions. He has
appeared as a guest on numerous radio and television talk shows including CNBC
Power Lunch. He has been featured in Who's Who in American Business, Money
Magazine, the Los Angeles Times and the Denver Business Journal. William
Bronchick has served as President of the Colorado Association of Real Estate
Investors since 1996.