A new Bill, HR 1728, passed through the House with an overwhelming majority in a record 3 days. It’s now at the Senate. If the Senate passes as expected, you may soon see the end of creative real estate investing. There was also a little rider attached to the bill at the last minute that would also allow the government to take away any multi-unit property they deem to be at risk of default.
You can read the entire bill here.
There are a number of things wrong from this bill, from the standpoint of the real estate investor.
First of all, the definition of who the law is applicable is incredibly broad. If you sell more than one residential property every 3 years, then you have to comply. That pretty much means anyone who is involved in real estate investing needs to look out! It also means if you are currently buying real estate and using creative strategies to do so, you’re about to lose your ability to buy because the people selling are likely to get caught in the net as well.
If you have to comply with the rules (and that’s just about anyone selling residential real estate), you can not do seller carry-backs. No second mortgages. You can’t have any balloon payments due. Every loan, every installment sale, must comply with very rigid rules including full 30 year amortization, escrow accounts, stringent truth in lending requirements and more. Basically, it just put pretty much every seller who used to carry paper out of business.
That’s enough to get the creative real estate community up in arms. There have been some grass root letter writing campaigns started. It’s hard to say how much of an impact it’ll have on the Senate though. The fact that this Bill passed so fast, with little debate, shows how powerful the lobbying groups behind it are.
But there is one more last minute add-on the Bill that has me even more concerned. It’s Title IX. If you look at the entire Bill online, make sure you skip over to this section and especially if you have any multi-unit residential property. That section of the Bill gives the government the right to take your property if you’re in default (a late payment) or RISK of default (and they get to define what risk of default means). The property will then get converted to low income housing. There is a strong movement to create low income housing and I”m concerned that government could get a little out of hand here. What constitutes risk? They decide. It could be because of the neighborhood, it could be because you’re upside down on the property (even though you are current with payments) or it could be that someone else defaulted on their property and yours was similar. Or it could be someone in the local government decided your property would make a nice low income housing project.
And just like that, you lost an income producing asset and, if you had personal guarantees on the property, your credit got trashed too. And there is NOTHING you can do about it!
You can imagine what that section of the Bill will do to multi-unit housing sales. Who would buy one knowing the government could take it at anytime?
Bills like this are going to further deepen the recession and plummet real estate values.
If there’s time, and I hope there still is, write your Senator. Meanwhile, please stay tuned here. We’ll keep posting what is happening and how that will impact you and your real estate investments.