A Word or Two about Investors and SAFE
Confusion reigns! In the real estate investor community there’s been much hype, discussion, fear and misinformation over the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and all of its state variations. My good friend Shae Bynes makes the premise that the SAFE Act might well be the most mind boggling bit of legislation to come down the pike as of late. You can check out her rant here.
I’ve done quite a bit of research and reading of the both the federal act and its many state variations and spent hours talking with my cadre of real estate attorneys and my takeaway is this……
Investors: Stop Freaking Out about the SAFE Act!
Why? Because most of our investing activities do not fall under the provisions of the ‘‘Secure and Fair Enforcement for Mortgage Licensing Act of 2008.”
Let me explain.
In short, the SAFE Act requires that only Licensed Mortgage Originators may take mortgage loan applications; offer or negotiate terms of a residential mortgage loan for compensation or gain; assist a consumer in obtaining or applying to obtain a residential mortgage loan by advising on loan terms (including rates, fees, other costs); or collect information on behalf of the consumer. Sounds daunting, doesn’t it? And confusing.
And to add to the confusion the federal government’s version establishes only a minimum threshold of rights and protections. States are allowed their own version of the act and some states (such as TX) have enacted more stringent rules and regs. They may add more protections in their own specific versions of a federal law, but they may not go the other way and provide fewer rights or protections than the minimum threshold set by that federal law.
In order to determine how the SAFE Act affects us as investors, let’s consider the provisions of the Act as it relates to one important distinction: who’s exempt and who’s not exempt. We need to be clear as this will determine whether a particular transaction is subject to the requirements of the SAFE Act or not.
So who’s exempt? It really depends on the buyers use and purpose of the property. If the transaction does not involve a buyer who will use the property as a personal residence the transaction is exempt. Why, you may ask? Because such a transaction does not involve a residential mortgage loan. Only residential mortgage loans are covered under the SAFE Act. The Act defines a residential mortgage loan as
“…any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on residential real property or any loan primarily for personal, family, or household use that is secured by collateral that has a mortgage lien interest in residential real property.”
Thus the real estate investor may buy (using seller financing) a property to hold as a rental, sell (with seller financing) to a wholesaler or another investor, buy and sell any commercial property, and anything that does not involve a residential mortgage loan. It also means that private and hard money lenders are exempt since their loans are made for business purposes and is not a “loan primarily for personal, family, or household use.”
Who’s not exempt? A real estate investor who sells (using seller financing) to someone who intends to use the property for their personal residence. The seller financing would be considered a residential mortgage loan and a license would be required.
So, as an investor, if you sell (with seller financing) to a “buyer-occupant,” you fall under the SAFE Act. If not, you are exempt.
In any event, it is extremely important that you understand the specific laws of the state in which you live. You should consult your own real estate attorney regarding your state’s rules and regs before selling to a buyer-occupant using seller financing.
Thanks for reading. Let me know YOUR option or questions on the SAFE Act in the comment section below. And hey – tell your friends about us!
Awesome post, Bill! Thanks for breaking things down.
Thanks for stopping by Shae! And thanks for the inspiring “rant” 🙂
Another cool site that I have ever found.Your writing and ideas are very useful. Thank you for nice post.
@Winter – Thanks for the comments – and be sure to drop by again!
I’ve send this page to my fb friends. Keep this good work 🙂
Thanks for clarifying the exemptions Bill. At the same time though, in those cases where an investor does sell using owner financing to another investor/wholesaler, if I’m not mistaken, isn’t there still a limit as to how many properties you can sell using seller financing in a certain time frame?
Hi AJ! Thanks for stopping by my blog 🙂 Under the federal SAFE act, investor to investor loans are not considered a “residential mortgage” as defined in the law. Accordingly, there is no limit to the number of investor to investor transactions in which you can engage since they are exempt from SAFE act coverage. That being said, remember that all states are allowed their own versions of the act. Some states have more stringent rules than the federal act. I think that FL is one of those. You need to check out not only the federal rules and regs, but also those of the state in whcih you invest.
Bill – How did I not know about this blog until now?
I see it as affecting what I used to do and planned to do again very much. I used to sell unsellable homes to unbuyable buyers. By that I mean I took small rundown rural homes and sold them to people with horrible credit who wanted a home. All of them are still there. I sold the first in 1976. It looks great now. I do not know the rules these licensed brokers will have to follow, but I am sure it means the house has to pass all inspection rules before it can be sold which defeats the whole purpose.
Kudos to you Alice! In most states there will be a certain number of seller financed sales that you can make to an end buyer without needing to become licensed as a mortgage broker. Once you have sold your “limit” for the year, you could use lease options and other techniques to help your buyers. Feel free to contact me if you’d like to kick around some strategies. 🙂
And thanks for stopping by my blog. I hope you found it informative, and that you’ll stop by again!
Bill, I had to ask you this. If I am a licensed mortgage originator, would there still be a limit as to how many properties that can be sold by seller financing in a year if I was assisting an individual seller with the transactions?
Hi AJ – My understanding is that if you are a licensed mortgage originator your transactions would not be limited under the SAFE Act. You would, of course, need to meet all of the requirements of your state as far as registration and education (including continuing education) are concerned.
Hi Bill, I apologize for the continuation of the commenting on this post, I’m just trying to understand this thing better. After further reading articles and researching, it’s to my understanding that the only way any seller is allowed use seller financing without violating the SAFE ACT is when the property is their primary residence and they are selling to a family member. Is there something more to that, or a way around that? Some advice I was given was, you can simply cover yourself at closing by using a contract for deed.
AJ – No problem. SAFE is going to vary from state to state. The act is federal, but each state is allowed its own interpretation. One of those situations where the state law can be MORE stringent but not less. You should check out the specifics for your state.
Now to your question. If you are selling a personal residence to an end buyer and you are using owner financing you are subject to the SAFE act. Most states will allow an exemption for a certain number of transactions per year (here in TN it is five). This means that here in TN I could have five seller financed transactions without having to be licensed as a mortgage loan originator.
There is also, in most states, an exemption if you are selling to a family member.
Note that the act doesn’t prevent your from using seller financing for your transactions. It only requires that you be a licensed mortgage loan originator unless your transaction is either exempt or not covered under the act.
The best way to avoid the problem? Have a licensed mortgage originator prepare the documents for closing.
And you’d better check out the advice about covering yourself by using a land contract. If your state considers a land contract an installment sale of property (and many states do) you are still subject to the SAFE act.
Hope this helps!
Bill
Bill,
I question whether your statement is accurate regarding investors. Because of the SAFE Act, we no longer sell “subject to”. We BUY “subject to” from the original seller and then sell with a Land Contract or Lease Option. This way, title is never passed on the the buyer UNTIL the Land Contract is satisfied or, in the case of the lease option, the buyer obtains new financing. It’s when the title passes to the new buyer (as in the case of typical financing of primary residences) is when investors would require a license. What is your take?
Hi Troy! Thanks for stopping by…and thanks for your comments. My take is, I agree with you 100% IF you are selling to a buyer who intends to use the house as his primary residence. And that is exactly how I sell to my buyer/occupants. In my post I said that as a real estate investor, if you sell (with seller financing) to a “buyer-occupant,” you fall under the SAFE Act. If not, you are exempt.” That being said, I was referencing the federal act. Each state has its own rules and regs and may have more stringent standards to which you must adhere. For instance, there are a few states that consider a Land Contract (but not a Lease Option) to be a “residential mortgage.”
So, I’m a bit confused as to which statement you question as being accurate? If you care to be more specific I’ll be glad to address it. Thanks! 🙂
Bill-
Loved the post! Do you have any thoughts on where the market is going right now? Obviously the best strategy is to “buy low” and “sell high”, the problem is the “selling high” part. What can investors expect in the near future?