Who, or what is, Dodd-Frank?
Well, you probably know all too well what the Dodd-Frank Act is and how it impacts your business. But for those of you whose bells aren’t ringing, or perhaps you need some clarification… here’s a refresher.
What is the Dodd-Frank Wall Street Reform and Consumer Protection Act?
The Dodd-Frank Act is a massive piece of financial reform legislation passed by the Obama Administration in 2010, and is the result of the 2008 financial crisis (a.k.a. The Crash).
The Act is named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank, and its purpose is to decrease certain risks in our country’s financial systems. Various government agencies oversee different components of the Act and banking systems.
It’s no surprise that Dodd-Frank has been widely criticized…
Some say it has done more harm than good, creating higher unemployment rates, lower wages and slower growth in terms of wealth and living standards. And taxpayers everywhere (that would be me and you) are less than pleased to be funding those oversight agencies.
It was said when the Dodd-Frank Act was first implemented that it would take years to determine the full impact of the Act. But I can say from personal experience – as I’m sure you can, too – that Dodd-Frank has absolutely changed how we do business.
So today, I’d like to discuss some notable issues in real estate investing that I’ve seen and experienced for myself over the years regarding seller financing, private lenders, points, fees and lease options – all of which have an impact on investors. Many clients ask about the Act, and the implications of Dodd-Frank still seem unclear to many of them. Even the future of the Act is uncertain under our new administration but it is still in place as of now.
So let’s bring Dodd-Frank into focus and talk some specifics about how it affects us investors…
Make Your Middleman a Mortgage Professional
Like any other massive piece of legislation, the Dodd-Frank Act has brought about consequences and questions for real estate investors (and professionals) everywhere.
If you’re an investor who wants to sell houses, you might go the seller financing route, which is a great strategy, especially if you already have long-term financing on the property and because your buyer has damaged credit can’t go to the bank. This is a great way to get a premium price for cash flow AND a buyer instead of a tenant.
Well…it may sound sweet but this process actually puts your business under the Dodd-Frank umbrella. It also puts a cap on these types of transactions…
If you complete more than 5 of these transactions per year, meaning you create more than 5 new notes and mortgages, you’re going to need to consider getting a mortgage broker’s license.
And I’m guessing you didn’t plan for that.
Okay, so… what if you’re an investor with no intentions of getting your mortgage broker’s license?
This quickly becomes a hindrance, an unexpected hiccup in your business plan. And it doesn’t stop there…
Once you get your mortgage broker’s license, you’ll need to complete (and pay for) continuing education. It’s a complication to say the least.
The good news is – I’ve done my homework…
I’ve talked with other investors and trusted attorneys, and I’ve come up with what I believe is a solution. The answer is to use a mortgage professional as the middleman between you and your buyer. Having that middleman mortgage professional will create a loan with terms that fall within the Dodd-Frank guidelines.
See, the Act has an issue with balloon notes and balloon mortgages, origination fees, interest rates, affordability checks – the list goes on…
YOU are supposed to use a formula to determine if your buyer can actually afford their mortgage. But this should be a task for a mortgage professional that can help ensure you’re compliant, while carrying the liability so that you don’t have to.
Hopefully, now you can see how this makes sense.
What about Private Lenders?
I work with them all the time…
I’m sure you do too, but the same transaction cap I mentioned above also applies to private lenders. If the lender writes more than 5 mortgages per year, they will also need to consider getting a mortgage broker’s license. For most lenders, this isn’t realistic or ideal.
So here again, the solution is to use a mortgage professional to be the middleman between you and your lender to be sure you’re compliant with the Dodd-Frank Act.
Keep in mind that you (obviously) need to pay your mortgage professional, but fees are nominal. We’re talking $200-$500 depending on the loan size and frequency of work.
So when do YOU pay?
Let’s put it this way… if I’m selling on seller financing, I would require the borrower to pay. But if I’m borrowing from a private lender, I would pay the fee.
More government regulations mean more expenses for the end user. It trickles down from the top. That’s how it works – like it or not. If you don’t like it, I suggest you vote and when you do you choose carefully.
Let’s Talk Lease Options
If you’re selling properties on lease options with no note or mortgage, you may think that Dodd-Frank doesn’t apply. And once upon a time, I thought the same…
However, the challenge with lease options is that they’re put under close scrutiny by the Act.
According to the laws, an interest rate can be extracted from a lease option, especially (in my opinion) if your tenant buyer is receiving some sort of credit from their payment that is being applied to the purchase price.
According to Dodd-Frank, that’s a no-no. So my suggestion on lease options is simple…
Don’t apply ANY of the payment to the purchase price of the property, or to principle reduction. That’s how I bypass the law and maintain what I believe is a compliant lease option system in my business.
Making Transactional Funding Work for You
My team and I have been doing transactional funding forever… and we’re good at it. My training and consulting business is largely built on providing this service to our clients, not only all over the country but all over the world. In fact, we even funded a deal for a client who was far away in Israel, who flipped a property here in the states.
No matter where we fund a deal, the bottom line is this: The funding happens between businesses, not individuals.
My business funds your business, which means that the transaction falls into the commercial lending category where no consumer is involved.
Then what spooked me about the Dodd-Frank act was the part in it about prohibiting lenders from over charging their borrowers. While I’ve never done that, if you consider a 2% fee to fund a same-day deal on an annualized basis, holy cow that’s high. That’s dirt cheap for the use of the money if you don’t have it and therefore would be unable to do the deal without it but… it could be looked at differently. So after going through a 3 day funk after reading the law, I realized that if I was going to keep funding deals for my clients, I was going to have to get creative. So what I came up with was a way for us to fund your deals, AND avoid Dodd-Frank infringements and it was to eliminate any and all funding fees.
That means no application fees, no interest fees and no prepayment penalties. Nada. I figured if I charged you nothing to fund your deals no one could ever accuse me of charging too much.
Instead, we now collect an upfront set-up charge that’s dirt cheap and will fund an unlimited number of deals for you, with no fees, for a full year.. Plus, with the funding you also get all sorts of powerful tools and software to make doing more deals simple. So the offer is a no brainer and we’re compliant!
People say I am creative. This is proof that I am!
Yes, I know what you’re probably thinking… “That’s crazy talk Cam.” Well folks, I know that it sounds too good to be true, even my peers told me I was crazy to do it but.. I’ve been able to offer this program and not only prove my naysayers wrong, but also help hundreds of investors, just like you, create substantial real estate profits without paying any fees or points!
So we offer our clients funding on an unlimited number of deals for a full year. The set up charge keeps us modestly profitable and we save our clients a fortune in funding fees along the way. It’s a win-win for everyone.
The Bottom Line
Some said Dodd-Frank laws would never be enforced. Man, were they wrong. They’re being enforced for sure, but that doesn’t mean your business has to pay the price. There are ways to stay afloat and continue to thrive if you know how to stay compliant.
Deploy the solutions I’ve shared with you today within your own real estate investing business to keep your clients happy and to make money. Learn how to work with the legislation – as painful as it may be – by changing your business models and systems, if needed.
Adapt, so you can continue to grow your business. We know that the current administration has dismantling or repealing the law on their list but who knows when it will happen so for now, we have no choice to but to obey the law of the land.
How has Dodd-Frank affected your real estate investment business? Share your thoughts and stories below, or if you have any questions or comments about anything that we have discussed, please feel free to leave those below. I personally monitor and respond to them.