What are some standard plans that parks offer tenants?
Unless you want to get SAFE Act licensed, you can only do two things: 1) sell for cash or 2) rent. If you want to add a rent credit option for customer retention, that’s up to you. But the whole concept of “lease to own” or “rent to own” is now considered a “disguised mortgage”, so you need to abandon that thought.
You can also use a lease / option and pattern the terms much like a car dealer would. The home, because it depreciates in value over time can be purchased for a set value at the end of the lease term.Say you have a home worth $10,000 today- maybe you just did a rehab on it.You might lease it with a option to purchase it. Say the lease term is 5 years at $200 per month.Then at the end of the term they can purchase the home for $3,000 or- they can continue to rent the home at $200 per month… Our lease options are modified from our straight lease’s to include most maintenance items… the key is the payment at the end must reflect a fair market value of some sort and not be ‘nominal’. Like $100 will not fly…
Hypothetical scenario. A tenant is currently paying $400 for a park owned home. Standard lot rent is $150. Say the home is valued at $5k. Can I offer them the option to pay say $500 for ownership of the home, but they agree to pay $250 per month in rent for say 2 years. At that time they can move the house if they choose to or stay in the park and their rent will be reduced to the current lot rent at that time. If they want to replace the home during the 2 year window, that’s fine and their rent will be the current lot rent. Lastly, after the initial $500 is paid, they assume all repair and maintenance(r&m) responsibilities for the home. Is this possible without any expensive headaches? My goal is to reduce the R&M expenses as much as possible and try to primarily be a lot renter. Without shooting myself in the foot.
As long as that does not violate a state statute. Fro instance, in Texas you must offer a 6 month or a 1 month lease- there are not other options.
Can you sell homes on land contract as long as you qualify the buyer and you do not sell more than 3 in any 12 month period?
Not as I read the law. You can sell your personal residence, and that is it. I would not test resolve of this rule as it has lots of teeth, and if you are seen to be trying to skirt the law you will probably open yourself to being a test case for all of your business practices. I have seen others talk about moving homes into trusts, or LLC’s etc… and I think that is trying to shield your business practice using a scheme that was not intended with the formation of the entity. Remember- the law looks at the rules, but also the intention. I think that will lead to criminal charges, civil charges and a nice meeting with the IRS. It sill also- my opinion, pierce your corporate veil and everything personal will be tossed on the table for damages. Others might disagree… but that is how I read it…
Yes, I personally agree with you Jim. Piercing the corporate veil when it is determined you acted with bad intentions to curtail the law is a real possibility. You don’t want to be the first name that pops up in the case law.
Jim,Do you have some more details on the lease option and its terms and conditions to provide some more detail? Thanks.
Our lease is very straight, forward, looks like a rental agreement. It states the renter needs to make repairs though we must be notified of all issues. When they sign the lease they also get an option to buy. They purchase that option on the front end of the deal for maybe $500 - $2,000 depending on the home. Then after x number of years, they can continue to lease (rent) or they can choose to purchase for the price that was set out in the original agreement. So if they were current we might choose to finance that purchase. Now do not get all up in arms- let me explain.The option just says- you must pay say- $4,000 at the end of the term to get the home. Maybe they do not have the $4,000- so, we might sign a promissory note- a personal one. So no lien, the home is not even in the body of the paperwork. In the day- we called it a signature loan. Sort of the way a credit card works. So maybe the give us $500 and we take payments of $250 / month for 12 months- plus interest. Because we are not loaning on the home directly, so we can not hold the home hostage if they do not pay, we do not need to worry about the safe act. So we are at risk if they do not pay. But- they have lived there for say 3-5 years and made payments on time, so we offset the risk with the history. So that is how I do it… differing from the way a car company does it only by not having a lien on the title once the lease is over- and the purchase starts. In the long run- you all need to consult your CPA and attorneys to make sure your not just following someone down this path of selling homes. Everyone reads the law a bit different and until there is case law- well we are all in the dark a bit. So follow a path were you can stand in front of a judge and jury and they will see your path as just and legal. The law looks at the intention of your actions for guidance on the application of the law and its penalties if necessary. For example- speeding might be just a warning, or a ticket, but if you speed with the intent of hitting someone with your car- well that could be attempted vehicular homicide. If you do it in anger- it might be road rage…
Thanks Jim.Texas SAFE act reads as follows:Frequently Asked Questions (FAQ):Texas SAFE Act and Seller Financing QuestionsDoes a seller who, with his or her own funds, finances the sale of a property and takes a security interest in the property need to be licensed?Texas Finance Code, Chapter 156 has a de minimis exemption from licensure for an owner of real property who in any 12 consecutive-month period makes no more than five mortgage loans to purchasers of the property for all or part of the purchase price of the real estate against which the mortgage is secured. Please see the August 12, 2010 notice from the Commissioner for additional details.How to interpret it? SAFE Act does not apply if only 5 mortgage loans are done in 12 consecutive months?
'takes a security interest in the property’that is your key line. I do not take a security interest in the property.But- I also own parks in Texas and I am licensed as a home retailer / broker / installer (RBI) in Texas.I am not a lawyer so I can not interpret that 2010 notice, but there are new laws in 2014.
Jim,When someone exercises the option to purchase and you finance the transaction with a promissory note I assume, at that point, you record the sale of the transaction with the state. You are then liable for the sales tax on the home right?
Depending on the state we owe taxes. We transfer the title as soon as they trip the option though, we do not hold the title as they pay off the promissory note.
Does a seller who, with his or her own funds, finances the sale of a property and takes a security interest in the property need to be licensed?Texas Finance Code, Chapter 156 has a de minimis exemption from licensure for an owner of real property who in any 12 consecutive-month period makes no more than five mortgage loans to purchasers of the property for all or part of the purchase price of the real estate against which the mortgage is secured. Please see the August 12, 2010 notice from the Commissioner for additional details.What is your interpretation of this? Does it mean that SAFE Act applies only to any rent to own sale if it is more than 5 per 12 consecutive month period?
Hi Jim. Thanks for this post. I know this thread is old, but I wanted to follow up to see if you knew where we might find an example of a lease/promissory note for the sale of a MH, similar to what you explained in your post. My partner and I were thinking of doing something similar for a park we have in contract in Indiana, but not sure what the language should look like in the lease and promissory note.