Earlier this month the magistrate in my county threw out an eviction filing of mine, after having his “advisor” in Raleigh review my rent credit contract. He did not expressly say who the advisor was other than to say that the person was over all the magistrates in NC. The conclusion was simply that in NC the rent credit agreement is viewed as just another version of “rent to own,” at least as far as small claims court was concerned, and he could not hear any case that involved a rent credit agreement. I actually sat down with the magistrate last week outside of court and he pointed to the specific language in the contract that referenced the possibility that rent credits could be used to purchase the tenant’s home at some future date. The fact that credits had no tangible monetary value, or that the credits were not explicitly tied to a particular home seemed to make no difference. He told me if I divided my “Mobile Home and Lot Rental Agreement” into two contracts, I could come back and evict for unpaid lot rent only. But he couldn’t hear a case that in any way, shape, or form was tied to a contract that involved any sort of implicit or explicit financing of a home.
Right or wrong, I am now in a bind. I can (and will) create a separate lot lease agreement for eviction purposes, but what do I do with the rent credit model now? Many of us have been using rent credit contracts for the past few years, but is there any case law, or legal opinions that we can lean on for some assurance that we won’t get in trouble in the future? If the implications for NC MHP owners is simply that we can’t evict without a separate lot lease agreement, that’s an acceptable outcome. But how sure are we that the existing rent credit contracts are SAFE Act compliant and Dodd-Frank Compliant? The fact that Frank and Dave are successfully using these contracts will be of little comfort to me if I end up in some sort of class-action lawsuit spearheaded by an angry tenant and a zealous attorney.
The experience of the past week has me seriously questioning all my current contracts, trying to figure out what to do next. Is anyone having success with a method of transferring ownership to tenants that does not involve rent credits, and does not run afoul of the SAFE Act?
NC is more aggressive than some states, but the truth is the rent credit system is a form of rent to own, and is illegal in many states. People using this system that think it works just haven’t been caught yet.
There are solutions that work, some requiring a pretty high volume of loans to justify, some a bit less, and only one that I know of that can work for people doing a low volume of loans.
In full disclosure, in addition to being a community owner, I also run a national consultancy that works with other community owners specifically in the area of chattel finance solutions and also, more recently, in helping communities get compliant regarding Fair Housing, ADA, and SACRA.
If you are interested, please feel free to email or call me for a brief discussion of the options Rishel Consulting Group can help you with.
I think rent credits are largely tap dancing in the grey area of the law. It could probably go either way. We do a lot of them but like the above statement, we either haven’t been caught or it’s just too grey for anyone to know what to do with (us included). At the end of the day, we are all trying to take a renter and allow him or her to be a homeowner. A large majority of people (including us) don’t even build in interest into the rent credit agreements and even use them to help form down payments for programs such as CASH.
We do not think rent credits are the only thing around and I would personally suggest you attend the SECO event. There are plenty of other, lesser talked about programs out there that may be a better fit for you and your customers. Just because a program has a following doesn’t mean you need to fall right in line with it and take it as gospel.
We have had similar drama in NC and you need separate lot leases. We don’t even do rent credits in that state as a matter of fact. We only sell for cash or do a rental.
@CharlesD thank you for the reply. Your reply does a good job of summing up (and reinforcing) my current thinking on some things. I love the Rent Credit model and have “drunk the Kool Aid” but my experience in small claims court was a wake-up call. And as my attorney said discussing the issue afterward, “if it looks like a duck and quacks like a duck, well…” If there were some established case law to lean on, or at the very least a well-formed legal opinion that we all could rely on, I would feel safer about continuing the Rent Credit program. Do you mind if I ask you why you do Rent Credit in other states but not in NC?
As @RCGroup states, Rent Credits appear to be just another form of Rent to Own. If that’s true, then I want to explore other ways to achieve transfer of home ownership to tenants that do not run afoul of the various laws. @RCGroup your company has been on my radar for the past week and I definitely will contact you to discuss options.
@CharlesD thanks for the recommendation for SECO. It’s close enough to my neck of the woods that I will plan to go.
We still do them because no other state has given us any grief about them. In fact, 21st Mortgage recently encouraged us to do a version of rent credits to help residents form down payments in order to buy our late model used homes and new homes. They were even kind enough to provide us the rent credit paperwork to attach to our lease.
We’re in the same boat as everyone else though. The lack of clarity provided by the law ultimately makes it difficult to run a proper home sales program. Lawyers are confused by this stuff so it’d be really hard to expect any of us to know what to do with any of this!
I’d say this is a well-formed legal opinion. In the end, this is what the judge or jury will decide if you ever “take it that far.”
With respect to rent-credit there are a few issues.
(1) Are you lending? Do you need a license in your state?
(2) Is it secured by a dwelling? Is this a mortgage? Did you follow “the rules?”
(3) Who is asking? A private citizen or the state regulator or a federal regulator? What complaint do they have, and what are the penalties if you “lose?” Can you limit your loss to a reasonable number?
Right now it sounds like @Suburban has the case of the private citizen (potentially) claiming, “hey you cheated me” – and the judge agrees. Worst case – judge penalizes you
(a) with respect to this resident meaning you owe them [$price of home x 3] or something ridiculous
or even worse,
(b) by granting “class action” status to everyone you’ve dealt with similarly.
But in all likelihood, if you go through the correct court of general jurisdiction with a “judicial foreclosure” action you will win a default judgment awarding you possession of the home (and therefore the lot) and it won’t go any farther.
If the tenant even shows up, the judge will likely not be sympathetic to “I didn’t pay but I should get to keep living there or something anyway” – unless you did something “bad.”
Thanks @Brandon.Yes, those are the right questions to ask and I don’t want a judge, or a state or federal regulator asking them to me! My business is growing which means my exposure to potential liability of one sort or another is growing as well. I want to make sure my operations are as compliant as possible, but at the same time not overly burdensome to my staff and me. If Rent Credit Agreements don’t work (at least in NC where I am based), then I’d prefer to be doing what you do with seller financing, but I don’t have a partner as you do that is willing to become a MLO.
Earlier in this thread Rishel Consulting Group replied and my intention is to have a conversation with them to see what they can do for me. If anyone has worked with them previously, I’d love some quick feedback either by posting to this thread or messaging me.
This is a topic for a different thread but I’ll ask it anyway: why should I not just sell my homes for $500 (with a buy-back option clause perhaps in the bill of sale) and raise the lot rent for the first 3-5 years to recoup my loss on the sale of the home? What are the hidden risks in that approach?
My contract already breaks that into two fees. One for the home, one for the lot rent. There are a few good reasons for doing it that way, your problem is just one example.
It also specifies that a portion of the house portion of the total rent goes towards rent credits. It also stipulates that we can raise lot rent without changing the home rental portion of the rent.
That way, when the home is paid off, the lot rent portion is already set.
Also, if you set up your corporations properly, the park itself should be in one entity, and the homes in another. When you do this, you HAVE to split it up in your contract, and you have to have more than one bank account to split up the income.
This also curtails lawsuits against the park. If someone is hurt in a home, they can sue the entity that owns the homes, I don’t care that much. It makes it harder to sue the park itself.
Maybe I’ll look into splitting it up even further, but I think I’m pretty safe as is.