Questions on mortgage originating

1.) What advantages and disadvantages, if any, are there to originating mortgages* within the same entity that owns the MHP?2.) If there is a separate entity (entity 2), then does the mortgage originating entity actually pay the MHP-owning entity (entity 1) to make it whole at settlement?3.) Or is it rather that the selling entity (entity 1) is only made whole when the contract payments are made in full over the life of the contract?4.) When is the sale recognized from an accounting standpoint?5.) How is the profit recognized? Capital or ordinary?* by mortgage, it is loosely defined as either a lease/purchase, installment sale, or noteThank You,jkmhp

I’ll jump in with some thoughts – We originate mortgages through a separate company.  As I recently heard Kurt Kelley say, it makes sense to keep your low-risk, high value assets (notes) separate from your high-risk, low value assets (homes).We have our mortgage company pay our homes company to make it whole at the time of sale.  Homes company collects 10% down payment from buyer, and 90% financed by finance co.  Profit is realized and recognized by HomesCo in the year of the sale transaction (up front).  Mortgage company gets interest & principal back over time.I’m not an accountant (but I was once a tax lawyer).  I think the profit will depend a lot on your situation; we are selling previously rented homes that are personal property – depreciable property so we have section 1231 ordinary recapture and then capital gain on top of that.  However, if the homes were held for sale (as inventory) then I think your entire gain would be ordinary and you would not be allowed depreciation at all.  Talk to a (competent!) CPA.AND BE SURE, if you’re selling, that you are complying with the new mortgage origination rules and standards, courtesy of the Dodd Frank act & such.  Mortgages are a touchy business these days.  You will need to be SAFE-act compliant and have a MLO (mortgage originator) license.  To the best of my knowledge, you are generally NOT allowed to take installment-sale treatment (recognize gain over time) if you are dealing in home sales, which I assume would be the case.Did that answer your questions?  (Maybe only a little?)Brandon@Sandell

BrandonI appreciate your quick responsiveness. A few more questions:Lets say HomesCo acquired a home from a resident who was moving out of the park (generally we find if we don’t buy homes, someone will buy it and attempt to relocate it).HomesCo buys for $10K, then put another $15K into it to get it to an acceptable level of qualityHomesCo then sells the home for $35K ($10K profit), but with only $5K down, and $30K financed by MortgageCo (a subsidiary of HomesCo)Under your scenario above, MortgageCo needs to pay HomesCo the $30K to make it whole?If that is the case, then the amount of money needed to orchestrate this transaction is as follows:  $10K buy home+$15K fix home+$30K finance home=$55K total cost to HomesCo + Mortgage CoSo, collectively HomesCo and Mortgage Co will need to come up with $55K to flip a home in our park?It seems cost excessive, doesn’t it?I guess I am having a hard time rationalizing why MortgageCo needs to make HomesCo whole? It seems that $30K payment from MortgageCo to HomesCo is a waste of money, considering both companies are subsidiaries.Typically (in a subsidiary situation such as this), would MortgageCo have a credit line with a local bank that would enable the $30K to be funded without doing a capital call to our investors each and every time a home is flipped?Thanks,Josh

Well, using your numbers, the actual amount out of pocket is $30K, right?HomesCo does this:$10k buy home+$15k fix home (jeez!) Receive $5k from customer, $30k from MortgageCo.  HomesCo gets +$10k in cash after putting up $25k initially.MortgageCo loses $30k to a mortgage.  That’s an investment, but if you like think of it as a cost.  It’s cash out the door of MortgageCo, for sure.  So your “left hand” is up $10k, and your “right hand” is down $30k.  That’s a net loss of $20k, which is your cost outlay for buying and fixing the home, less the customer’s down payment.  I don’t know if you actually need to move the cash around, or just show it on your books.  It’s only accounting, after all.Brandon@Sandell