Strategies to Avoid Frank-Dodd Owner Finance Issues in 2014

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There’s a new law coming and creative real estate investors need to pay attention! Yesterday’s blog talked about the new issue hitting January 2014 from the Frank-Dodd Act.

You may want to go back and refresh your memory. Today we’re going to talk about strategies to avoid the seller financing issues.

You are limited to just 3 seller financing homes under the Frank-Dodd Act. This starts January 2014.

So let’s see where we are with strategies:

Land Trust: If you’re going to try to use multiple trusts to avoid the 3 per limit, it’s probably not going to work. Although it’s not directly stated that you can’t use a Land Trust, it’s pretty clear that it will be shut down.

LLC: Right now, there is a big hole when it comes to a corporate structure. You can have 3 per entities, provided:

  1. There’s no balloon in the note (meaning it must be fully-amortizing)
  2. The interest rate is fixed for at least five years, and
  3. You “qualify” your buyer.

The challenge is that there are no written instructions as to what it means to qualify your buyer. The only qualification that is written is that they must have no more than a debt-to-income ratio of 43%.

One way around the balloon requirement is to make it in the buyer’s best interest to refinance by increasing the interest rate.

The three per entity could mean that you have three deals, your spouse has three deals, entities you own have three deals each and even your pension plans (and their respective LLCs) have three deals each. So it is possible to do more than three deals in a year, you just need to have a strategy around it!

Tomorrow I’m going to talk about what happens if you get above the 3 deal limit without a strategy. And, shudder, what if you just say ‘forget it!” and do what you want anyway? That’s tomorrow!

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