I have a park with a number of older POH that I’d like to sell to my residents. I’ve found a local credit union that will finance the purchase for those with at least ok credit. The credit union wants 20% down and requires an appraisal to determine the size of the 80% LTV loan. They’ll finance the down payment if the buyer has equity in another asset like a car, or they’ll allow me to do a seller second for the down payment or any other amount if the sale price of the home is higher than the appraisal value.
The SAFE act limits the number of seller seconds I can do in a given year to well below the number of homes I’d like to sell, so I’d have to do the seconds not as mortgages but unsecured personal loans. Is there any reason not to just increase the tenant’s lot rent (the increase in lot rent would be on the order of $100/month or so during the period where they’re paying back the second) during the period by the amount of the repayment of the unsecured second, so 1) it makes it easier for them to understand, 2) that they’re not paying two things and view the loan repayment as optional, and 3) it gives me more leverage over them if they’re not repaying the loan? The reasons I can think of not to do this are:
The resident could buy a home and move it to another park or piece of land and thus getting out from the lot rent, in which case I’d only get the money funded by the loan from the credit union. I’m ok with this risk.
The accounting could get messy as I wouldn’t want to report this increased lot rent as lot rent but as repayment of a loan, but I don’t think that’s insurmountable.
In practice this would mean (for example) lot rent would be $300 now, then go up to $400 for 2 years while the second is paid off, then down to $300 or whatever the current lot rent is at that time. The resident would still have their loan payment to the credit union at that point, but just regular lot rent to me.
Am I missing any reasons why this would be a bad idea? I would, of course, run it past my attorney and my accountant to see if they have any reasons not to do it.
You are proposing to disguise a “seller second” mortgage as rent. This is defrauding the credit union, which wants 20% down payment.
You say they’ll let you do a seller second “or any other amount if the sale price is higher than the appraisal value.” If the homeowner is borrowing money to purchase the home at a price higher than the appraised value, and the credit union will only finance 80% of the appraised value, that’s fine for the credit union (they are not putting undue leverage risk on the customer) but it appears that you are. So you are right in the crosshairs of all sorts of state-based consumer protections. I can’t name them because I don’t know your state law.
If you keep the right to repossess the home (evict the tenant if they don’t pay rent) it also likely violates SAFE, Reg Z (TILA), Reg X (RESPA), and probably other federal laws as well.
You said you would do “unsecured personal loan” rather than mortgage but if the customer loses their home when they don’t pay, that doesn’t pass the “smell test” of being exempt from various housing laws, i.e. all the stuff you’re trying to avoid by calling it not-a-mortgage.
The credit union is probably not going to assist you, but if they did, they would have to include the monthly payment to you as part of the customer’s debt load when calculating the customer’s acceptable debt-to-asset and debt-to-income ratio, and this is where you are going to get into trouble because you are not being straightforward about what “debt” is owed.
You will probably find that the costs of going through the credit union’s process make it a non-starter when compared to the loan amounts. I don’t know about the value of your “older POH” but probably it is better to give the homes away or sell them for $100 cash and increase the lot rent to where you and the customer feel comfortable doing the deal – but do not reduce the lot rent down again after a period of time.
Thanks for taking the time to write all that out, Brandon. Much appreciated.
My intent is not as nefarious as it may have come across in what I wrote. Nevertheless, it looks like there are some problems with this idea, and I’ll have to look at other ways to get the tenants to become owners. Thanks again for your help here.
I do not think you have bad intentions. Merely you should be prepared to explain how you’re not the bad guy when push comes to shove. If the homes are worth more than giveaway value, and you absolutely need to find qualified financing for the customer base perhaps an alternative is to just give the down payment right outright to the buyer. I don’t know how that would fly in court (probably illegal) but it’s hard to see how you’re the bad guy.