Your CORE Advisor Blog

 This was a “contact letter” I tried to send to Brad Miller of NC.  But then I saw he doesn’t take email from anyone other than his constituents, and I didn’t want to lie about who I was or where I was from, plus I saw they limited it to 10,000 characters or less (maybe we should do that for laws?)… So I shortened it up and sent a link to this post.  Probably won’t go anywhere or be read by the intended recipient but if you know anyone in NC…. maybe they can cut and paste it… and forward it on…  If you are reading Mr Miller… Thank You!

Dear Representative Brad Miller,

While you are not my representative, I believe you are the best person to address on this issue.  I trust you are a fair and caring individual or your constituents would not of voted you into office. I also assume you would care about the individuals and Americans throughout the US. Please share this with your fellow representatives if you like.

My name is Chris Ormsbee and I am a Realtor in Colorado.

I am writing regarding HB1728. I believe you should not restrict individuals or small companies from creatively financing deals without further regulations. Or at least increase the limit to 10-20 homes in a three year period rather than 1.

From what I understand, this bill (HB1728) would prohibit or strictly limit owner/seller financing (without licensing or big bank lender compliance requirements).

It appears HB 1728 will allow an individual or entity to do one (1) owner finance deal in 3 years without being covered by this bill. Beyond that, they would need to comply with a slew of disclosures and regulations, that will likely deter the small investor or rehab company from providing financing at all.

Currently they sell most of their “great buys” (REOs and Foreclosure/Short Sales) as “good buys” (with some profit for them and covering their expenses of rehab and cleanup), with terms that the buyer can qualify for and afford. They are much more flexible than any bank lender and can fluctuate with the needs of the market… restructuring their deals on the fly if necessary to bring the deal to a close or even prevent its failure. This equals an American family or individual that can now own a home instead of renting. These same “flippers” often borrow private money which is already regulated by state and federal SEC to purchase the homes and finance the deals for home buyers.

Owning a home is the American Dream! Americans want to own a home, many want to own more than one and some want to own hundreds and help others accomplish their goals of home ownership. Is this bad? Does this need more regulation? Did this get us to where we are or cause this problem of bank liquidity and failures?

Limiting Creative Financing especially right now, seems crazy to me as a Realtor. Right now we need more creative financing not less. The tightened money markets are what is stopping otherwise willing buyers from purchasing.

In my hometown, there are hundreds of construction workers who have been put out of work from the “Housing Sow Down”. Similarly Realtors, Inspectors, Appraisers, etc. are all feeling the crunch. There are spec builders sitting on brand new homes, competing with REO properties and Foreclosure Short Sales. They will likely become the next foreclosure. This then kills the resell market, when someone can buy a brand new home for “fifty cents on the dollar” (quoted because buyers prompted by media believe this, but it isn’t true here. We are probably closer to .65 to .85 on the dollar from otherwise “retail value” depending on condition. However, this common buyer belief and growing inventory are creating tremendous downward pricing pressure. Buyers aren’t stupid, they just want a good deal and don’t want to overpay, for their home or their loan. “Buy and Hold Investors” sitting on cash are generally more greedy and are waiting for it to fall further before they jump in to ride it up.).

This cycle all trickles down to your retail and restaurants, people are cutting back, struggling to stay current on their bills, they are depleting their savings to make up for lost or short income. This affect on retail starts to affect the commercial real estate market and now this lending market is tightening up in fear of the unknown future.

Theoretically the rental market would tighten and create upward price pressure on rentals and then a home starts to look relatively attractive again. But now because no one can get a loan, the vacant homes are in some cases renting for less than ¼ of their mortgage payment (particularly in the high end). So the vacancy rate is actually climbing here and home ownership discouraged. Eventually the negative cash flow exhausts all but the sellers/owners with the deepest pockets and they either let it go back to the bank or sell it at a loss or lessened profit.

If we could get people buying homes again we could get people back to work so they could keep their homes. We don’t have a shortage of homes, we have a shortage of capable buyers. We have willing buyers, but they are unqualified to get a loan.

Creative financing has paved the landscape of the Commercial Market since its inception and to a large extent the Government doesn’t regulate the business or structure of deals there. They figure everyone is a “big boy” and they know what they are doing.

The residential lending market has seemingly swung the pendulum to where they expect that everyone is an illiterate child on the playground.

Don’t get me wrong, I am not trying to take away from your cause of reasonable regulations on banks and I think some of the Bank’s “Loan Packages” were close to fraudulent in how they were marketed and seemingly pushed on people that walked in wanting a clean 30 year fixed rate loan and sold an ARM with a prepayment penalty for a cheap teaser rate.

Seller financed deals are not structured like this. If the payments escalate, it is usually on a set schedule to allow the buyers income to grow as they anticipate. But it is typically very easily understood and clear. Individual or small company sellers do not have the computer equipment, staff or software to handle the loan management for some of the Bank’s “loan deals” that were “creatively” structured to take advantage of unknowing people and make the bank more money. Sounds predatory-esque to me!

So if they were making all this money… why are they failing? Some say because of people defaulting, but around my home town… people didn’t start defaulting in quantity till the banks did. Then the money supply dried up and home sales and construction stopped, which caused the viscous cycle we are experiencing now. I think banks failed primarily due to misrepresented and repackaged debt that was sold as safe when it was actually already bad or at best high risk. The industry typically prices for risk.

I have not seen many seller financed deals go bad. They might have issues or hiccups as people do and usually the two parties come to a reasonable agreement or the standard laws apply in either eviction or foreclosure depending on the structure of the deal. Usually you have a buyer and seller directly negotiating on terms. These terms are typically very straightforward and easy to understand, not laden with hidden fees, clauses or crazy default rates or prepayment penalties that the banks try to push down our throats from time to time when they get creative. Are their unscrupulous loan shark individuals out there? Sure there are. There will always be crooks! But we shouldn’t punish the honest folks because of them. If you want to regulate it at least enable it, create or endorse the states to create the EZ Owner Finance Form(s) package and allow unlimited deals if done on this form, or something… But don’t kill this avenue of financing for would be buyers.

Creative financing has enabled thousands of home owners, just starting out or starting over to “own” their own home, as much as if they saved and sunk a bunch of money into the home only to loose their job and then their home and all their savings. I personally prefer to see the buyer use less savings, creatively finance what they can and have the reserve for tough times or months or a fluctuating income. Is it a gamble, yes, but no more so than a fully regulated loan at the bank. Actually less of a gamble when you consider the loan doesn’t get sold off and it is typically an individual or small company and the communication channels for negotiation are much more direct (like you call and get the guy that makes the decision as opposed to the bank, where you call their computer, get transferred around to various departments [seemingly none of which know about the other], waiting on hold for 30 minutes or more to find out that they aren’t the right department, but they will transfer you only to be disconnected and start over trying a different menu option…). So it (the problem – like lack of funds that month) can often be worked out with private financing.

We the American Public postulate this “work out” or “Loan Modification” should be possible with Bank Lenders, but it is actually kind of an oxymoron when you consider that the Lender is required to ensure its investors monies are used safely and wisely and the government regulates them regarding this. Then the government is now telling them they should negotiate with borrowers who cannot pay, thus changing the terms of the deal and making the original investors money now “unsafe” or at best not live up to its original promise. Strange!

Anyway, I understand the US Government’s premise that “we” (the American People) must save the banks from this bad debt but actuality it is “we” the American People that need saved from this self-fulfilling disaster we are creating. We are pumping money into the banks but dictating how they can lend it to only those that don’t really need it, rather than seeing what the lending market needs to help people buy homes and attempting to encourage and even possibly reasonably regulate these channels.

I am no finance wizard or banking expert, but it seems if you want to solve the falling housing market, that could otherwise propel us into the next “greater” depression if not stopped, that we should loosen the money supply and since banks have proven their inability to do so, we should enable other methods possibly even create incentives like tax breaks on cap gains or interest collected for privately financed deals. To where the existing owner can keep more of their cash parked in a prior property if they don’t need it and become the bank for the borrower, even if it is just for a second mortgage for the down or to get the borrower to a point where they can make the payment. Even if this is a balloon, so what.

Say you have a single mother of four that cannot income qualify to buy a house or own her own home where she could get the tax breaks and the security and stability that a mother wants for her children. With a Seller Financed deal she can structure a 5 year or even 10 year balloon and then when her kids have left high school, she can sell the home and pay the balloon and or (assuming the kids don’t go to college) she has reduced expenses and can afford a higher payment and then can or anticipates being able to qualify to refinance and payoff the balloon. The fact that interest is accruing is irrelevant, even if the home didn’t go up in value, as long as it creates a situation she can budget and afford and a way for her to own her home I think it is good. 

People will take better care of things they own compared to things they rent. 

The Banks had some packages that kind of addressed this type of situation, but then they got abused by investors and sold to people who weren’t told or explained how they worked. An now that we have tightened the credit markets they cannot sell.  They can maybe refinance with “government intervention”. Still the “Creative Seller Financing Deal” has solved this type of problem for years.

It appears your bill would prohibit a parent from purchasing and financing out to his 3 kids their homes. Why? It appears to prohibit the investor/rehabber from selling his/her homes creatively. Why?

I recently helped a buyer structure a deal with a FSBO seller where they weren’t seeing eye to eye on a deal. We came up with the idea to finance it with up to four skip a monthly payment coupons with some stipulations (like no more than two in a year and non-consecutive months) that protected the seller as well. It met the needs of both the seller and the buyer. But this bill would of prevented this young man and his wife from buying a home. He just finished serving in the US Army for four years, married a lady with four children and while she had income, her credit was marred from both medical and divorce debt situations and otherwise rejected from all the banks…. But they wanted to buy and if I didn’t help them they were looking elsewhere. They had scheduled monthly income and good job prospects, still they clearly didn’t fit the bank profile and were specifically searching for seller financed deals. They seemed cautions and alert as to their budget, monthly available funds, savings, etc. and willing to take the risk and they did end up having to put almost half $4,000 of their $10,000 savings down, but the “skip a payment coupons”, allowed them to assess and offset the risk of coming up short in a bad month.

Banks don’t do these kinds of deals! Investors and eager or possibly desperate buyers do these deals. Are the buyers possibly too optimistic? Maybe, but who am I to judge? For that matter, who are you or any other member of our “Serve the People” government to judge what risk a lender or a buyer should be allowed to take, particularly if they are individuals dealing directly, often face to face.

I as a self employed Realtor could not get a loan right now even with A+ (800+) Credit because of lack of provable income. I have net worth in assets (mostly non liquid real estate) but my cash flow is severely lacking at the moment and I don’t want to liquidate assets unnecessarily. My last two home loans were “liars loans” as they call them… Stated Income. I didn’t lie but I estimated and projected income as any Realtor would do based on the best assumptions I could make at the time. The bank charged slightly higher fees and a higher rate because of the higher risk. These loans DO NOT EXIST NOW!

I have not defaulted on this loan, and luckily I refinanced out of my ARM while there were still “stated income” refinance options for America’s Self Employed. Now I am watching fellow Realtors trying to get loan modifications and being turned down because of lack of provable income. This is crazy. We at least need some “loose” money in the refinance arena. I am at the point where I need a bail out loan. A“bail out loan” for the Bank of Chris. I intend to repay every penny I owe to everyone and I have the assets to do it, but do you think anyone out there wants to lend a Realtor money right now. No bank does! The saddest thing is if I had the money or could borrow the money, I would be buying up all these screaming deals on homes and flipping them out on owner financed deals to in effect become the bank for them and enable them to live the American Dream.

Right now the message I seem to be hearing from the Government and the Public from my non-TV perspective (I don’t watch it) is that if you are a business (at least a large one) and you mismanage your money and otherwise fail… we will bail you out with the American People’s money till you can start making a profit off of the American People again… If you are an individual and struggling, like most are, we will make the bank take less, so you can stay in your home… Please don’t misunderstand, I get why people think this… but it flies in the face of the American Capitalism that built this country. I think Warren Buffet said it best when he said they should take the money and lend 80% of the purchase price to investors, who then have to come up with 20% of their cash to buy the assets the banks are liquidating. And they should lend it to the investors at the banks cheap rates… 3-4%. These investors don’t want their 20% cash not returning so they will pump more cash in, fix the properties up and presumably seller finance them to otherwise non qualifying buyers who can’t get money from the bank they just got foreclosed out of. Push the banking to the individual investors more…. He didn’t quite say it like that but that is what I heard and it made much more sense that what is going on. Force the banks to liquidate their bad assets within x number of days and enable the market to absorb it, then eliminating the glut of foreclosed homes in the various markets that are dragging down the markets.

Please let me know what your intentions are and that you are revising this bill. Again I trust you mean well and I anticipate this is a mere oversight and hopefully already addressed.

Yours truly,

Chris Ormsbee

Realtor in Colorado

First I must admit I just saw this and am ALARMED based on my skimming of the facts… or at least the rumors… 

It appears on the surface that this new bill would largely prohibit creative financing often used by Sellers to entice or enable buyers to purchase their real estate. 

As I understand it, if a property owner wanted to “wrap” their mortgage or do a “Lease Option” or a “Lease Purchase” or probably even a “Land Installment Contract”… that they could only do one in three years or they would be classified as a Mortgage Broker and would need to be licensed and comply with all these laws.

I am sure whomever wrote this bill HR 1728 had good intentions, BUT, if the above is true… I feel it will be devastating to our already “fragile” or “weak” Real Estate Market.

I also think it is just more segmenting of the “classes”, forcing the poor to be poor forever…  I am not endorsing “crazy lending”, some of which got us into this mess, but I am endorsing and do endorse creative solutions to problems… These often include some creative financing.

On top of that there are many industrious folks out there trying to make a living by buying and selling homes and many of them use these strategies to sell their homes.  This would devastate small and large rehabbers… but mostly the small ones. 

Typical isn’t it!  Lets pick on the little guy and kick him when he is down.  Its what the banks already do to us.  The Banks assess their risk based on the borrower’s ability to repay.  This hinges on Job Stability, Disposable Income, some metrics relative to Gross Income, other debts and obligations.   So based on the typical American the Bank looks at their less than ideal borrowing ability, due to their poor credit history or weak job history or likelihood of future employment, or a common one these days… their lack of enough gross income.  Then the Bank calculates how it can screw us harder if we are “down”… more upfront, prepayment and administrative fees, a higher interest rate, stricter default terms, adjustable rates with higher caps or more frequent adjustments. 

The law is supposed to protect us in the U.S. from the Banks “predatory lending” practices that have gotten us into this mess.  Essentially what happened is:  One bank, who got all the upfront money from the borrower (more than normal - predisposing the buyer to failure), justifies doing this based on the risk, then these banks “re-packaged” these “risky loans” with some other “less risky loans” and then they resold them as a “package” (fraudulent package in my mind) without passing on the premium or giving enough of a discount to offset the risk and in this case the eminent and subsequent failure of these large packages are what is causing the problem with liquidity. 

But it appears this well intentioned protectionist bill is also taking a whack intentional or not at Private Financing and Creative Financing.

We need Creative Financing!  If the Banks become the sole means of financing business and life, then we shall surely get screwed with or without laws on the books…  Don’t get me wrong, I am not anti-bank, I am anti bank bad behavior and anti monopoly or oligopoly.  I am very much for Private Money Lending and for Seller Financing and Creative Financing in general.  These are ways you solve problems, not create them…

As far as risk to the consumer or the bank for that matter, I would postulate that the current actuarial (statistical) tables and formulas didn’t take into account the current recession/depression we are in… The massive job loss, the steeply increasing gas prices we experienced and will likely see again…

In today’s American economy it doesn’t matter if you are a new employee or a lifelong employee.  It doesn’t matter if you are a Manager or one of many lower level worker-beings.  Anyone that doesn’t own their own company could be laid off or fired in short notice based on any number of circumstances, well beyond their own control.  Economic changes, new laws, shifts in technology, shifts in demand, foreign competition, current competition’s advances, mergers and acquisitions.   The point is no ones job is safe and no one is looking out for us. 

Owning your own company isn’t a lot better, if you quit paying your creditors and suppliers, then you will soon be out of business and have no income.

The banks have known the risk of self-employed individuals for years.  This includes people like me… A Realtor.  It is harder to get a loan from a bank right now if you are self employed, you need to have two years of tax returns to prove your ability to repay and these days they scrutinize the numbers more closely.  So if you have just left your job to do your thing… Start your own business, you likely cannot get financing from a bank.

This isn’t intended to be a rant, but the point is many people cannot get or use traditional bank type financing to purchase a home and if non-traditional financing is essentially outlawed then it will prevent these people from buying.

Home ownership is the American Dream!  So why should we prevent it? 

We should do what we can to enable Creative Financing.

We possibly need some structure and approved forms and methods to better standardize the owner financing, but I hope we do not create some huge behemoth regulatory agency and/or prohibit or even discourage it.  We already have laws on the books for fraudulent practices.

It is frustrating as a licensed Colorado Real Estate Broker that I cannot prepare the forms for lease options and mortgage wraps or subject to type deals.   The banks have mostly stopped assumable mortgages, because they got abused, but where they exist, they are a form of creative financing themselves, because the seller usually or presumably has equity and carries back a second mortgage (note and deed of trust) for some of the equity and the buyer takes over their payments where they were in their existing loan.  (NOTE:  The banks stopped because they weren’t getting as many fees, in many cases there were no fees to the buyer to assume the loan…)

Some would say this is the Governments job to protect us…  Other than protecting our country and our borders, I disagree!  I think it is our own job.  We need to Read, Write, Talk  and learn about what we are going to do.   Math skills help to!   In other words, if you only earn $10 you cannot spend $12 without creating debt… If you repeat this for very long you will quickly become insolvent.   

We shouldn’t trust wholeheartedly anything we are told, we should investigate and check it out.  But often we are lazy, don’t have time, or we just really trust someone…  This is how people get scammed and get into trouble.  With the availability of the Internet, if a person has basic reading and writing skills (that many don’t - taught and graduate from our Government managed schools), then they should be able to research just about any topic with a few hours a day for a week or so and get a good general understanding of the subject matter at hand.

Maybe I am weird, but I don’t think the concept of a loan or terms of repayment are by themselves all that complicated and actually most owner financed deals are much more straightforward, easier to understand and actually save the consumer/buyer money with simple interest (lack of compounding interest, which makes the loan seem cheaper than it actually is).  In my opinion, it’s the complicated legalease of the bank notes or mortgages that creates the need for all the regulation that this law is trying to further regulate…)

So I don’t think ”Creative Financing” is bad in any form.  Its ”Creative” after all… 

I do think that most Realtors ought to be able to understand and even fill out the forms if they existed.  As it is now, you often have a buyer with poor credit or little cash, or a seller with no equity but a sweet loan that someone else would like to take over and neither side usually wants to pay an attorney.  But at least in Colorado a Realtor cannot complete these forms (or even a lease for that matter), because they (the forms) don’t exist.  Realtors (in Colorado) are only licensed to fill out State Division of Real Estate Approved Forms.

Now for commercial Real Estate it’s different… I think a lawyer is key to making the deal work and both sides can usually afford one. 

But for residential as much as we suggest lawyers to people, in my experience, few use them.  

So often the seller drafts the paperwork (by copying something they don’t understand), since the seller can act legally on his/her own behalf.  The buyer just signs, probably often doesn’t even read the document.  THIS IS HOW PROBLEMS HAPPEN!   If these parties even had the “non-legal” assistance of a Realtor or even a Title Company acting administratively to ensure the forms were filled out correctly and all the pertinent issues discussed and addressed, then I doubt we would have many problems with this.

I would be suspicious of the Bank and Mortgage Lender lobbyist on this one, but the sad thing is, I really doubt it would bring them more business… They are already denying people the money, they don’t want this business, what will really happen is that the rich will get richer and the poor will get poorer or have more of a hurdle to climb to get out of their situation. 

More Americans will be forced to rent where they could of otherwise purchased a home.  This bill will increase the number of Americans who cannot buy a home.

Since the Government is trying to help us… Maybe the Government should give people a skip a payment coupon once a year as an advanced tax credit as a way to get the money to the banks or private lenders… and prevent the home owner/buyer from entering into default and/or foreclosure.   Few people WANT to lose their home…

Many Real Estate Investment courses teach purchasing properties with no money down using lease options and wraps and many energetic entrepreneurs go out there and make it happen just like that.  You can do sandwich leases, down payment second mortgages, etc. and these people turn around and finance their buyers with wraps.  These can work just fine, or they can default just like a regular Note and Deed of Trust from a bank.

People seem to forget or are maybe unaware that creative financing has existed for as long as money has, but the protectionist groups are pushing for more consumer protection in order to really strip us of more of our legal rights to buy and sell Real Estate.

Here is a link to the Bill Summary:

http://www.govtrack.us/congress/bill.xpd?bill=h111-1728&tab=summary

The full length version is here:

http://www.govtrack.us/congress/billtext.xpd?bill=h111-1728

I honestly haven’t read it (the full bill).  I am also afraid few of the representatives did either (usually  important things get left out of the summaries that they do read.) 

Here is what got me riled up and made me write today:

Excerpt from an Email from Peter Conti - A Real Estate Investor and Trainer from Denver, CO

A New Federal Law Will Make it Impossible For You To Sell Properties Creatively!

            HR 1728, which has already passed in Congress, will effectively keep you from:

• Selling properties with owner-carry back or wrap-around mortgages
• Selling properties using land contracts or contracts for deed
• Selling properties using lease/option
• And, possibly, borrowing private money to buy properties

Please Join Us for a CRUCIAL Conference Call to Learn What You (and all your colleagues)

Need to Do TODAY to Stop this Bill from Becoming Law!

            We’ll outline what the proposed bill says and what you need to say to your elected officials to get it STOPPED.

Sorry this post was a little unorganized but I am short on time and cannot edit any further.

Please post a question if you want further answers and I will try to dig it up for you to the best of my ability.

Remember also that if you or someone you knows needs to buy or sell a home or any type of property, please have them call or call us with their number.

Chris Ormsbee - Realtor & Broker Associate - licensed in the State of Colorado.  (970) 209-0252

Diane Haynes - Realtor & Broker Associate - licensed in the State of Colorado (970) 596-3521

I will try to edit this later to add the write your local congressman link…  We really do need to voice our concerns or they will surely be ignored or forgotten…