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Real Estate Reading Room [Home Buying]
Articles and Advice about Home Buying from Real Estate Reading Room

"Big Brother" is Watching YOU! New (BAD) Legislation Coming Your Way
by William Bronchick

Well, it seems that with everything you do right, there's always someone else doing it wrong, do it badly, or doing it illegally. Enter Big Brother... the "well-intentioned" leglislator who wants to get re-elected by passing a law that protects the innocent from bad people or from their own stupidity.

What am I talking about? Several states have passed or are about to pass a rash of laws that will make being a real estate investor a very difficult vocation. While I do understand the need for SOME guidelines and disclosures from the government to make sure that people are making informed choices and are protected from bad people, these laws are THROWING OUT THE BABY WITH THE BATH WATER and will likely cause financial harm to the real estate markets in those states.

The following is a review of some recent laws and bills that are pending.

IT IS IMPORTANT THAT YOU READ THIS EVEN IF YOU ARE NOT IN THESE STATES. When it comes to laws like these, it's "monkey see, money do", resulting in the domino effect. Your state can be next, so pay attention. Visit you state's website and review pending bills. Form a local political action committee. Be involved in the political process. If you are in one of these states, call, fax and email your representatives. Email all your friends and business associates. Picket in from of the state buildings. Contact your local news people. If you sit silent, you have no right to complain!

"We Deserve the Government We Elect"

Texas - Senate Bill 629

This bill is an amendment to an earlier law passed in 2001 that regulated installment land contracts. The current law calls these "executory contracts" and requires certain disclosures, most of which are not big deal. However, the penalties for non-compliance are SUBSTANTIAL and bear no relationship to the supposed harm the consumers would bear if the disclosures are not followed. It's basically a windfall for buyers who find a good lawyer to hammer a technicality that most investors are not aware of.

SB 629 take it up a notch classifying lease/options as "executory contracts", the same as land contracts. This is DEADLY for investors who want to keep the tax benefits ownership when selling on lease/option and taking advantage of capital gains rates. If Texas calls a lease/option an executory contract, it makes it a SALE, thus having a negative tax impact on the seller who may want to defer his gains through a 1031 exchange when the tenant exercises his option to purchase.

And, we're just getting started...

The bill further disallows an investor from selling a property by lease/option OR land contract if the seller has an underlying loan on the property. Since few, if any, investors have free and clear properties, this would effective ELIMINATE the process of buying a property, financing it, then reselling on a lease/option or land contract.

This is BAD because it hurts not just investors but ANYONE who has a house that they want to move. Builders often sell properties on a "rent-to-own" basis, and now will be prohibited from doing so if there is underlying financing on the property. What if you do a fix-and-flip, but are unable to resell the property for cash? Maybe the lease/option would be the solution so you can cover your mortgage payments while still getting a sale? It won't be possible in Texas if this bill passes.

And, it gets WORSE!

SB 629 states that you cannot sell a property under an executory contract unless you have title to the property. That means you cannot do a sandwich lease/option in Texas - PERIOD.

The bill also has a bunch of disclosures and regulations on lease/options, none of which are objectionable.

Read the bill here: Senate Bill 629

Then contact your representatives and MAKE SOME NOISE

http://www.senate.state.tx.us/75r/Senate/Members.htm

http://www.house.state.tx.us

NORTH CAROLINA - HOUSE BILL 725

House Bill 725 is a push from the North Carolina Attorney General's office, which has been on the rampage against investors for some time. The AG's office claims to have "hundreds of complaints" from people who were hurt by investors who bought properties "subject to" existing mortgage loans, then defaulted. I find it very hard to believe that more than a few complaints were ever filed. From the way the bill is written it's clear they just don't understand how these transactions work.

This bill is targeted against the investor who buys a property subject to an existing loan, the resells the property by lease/option or land contract to a consumer. The bill requires a number of disclosures to all parties involved, some of which are fine and some of which are absurd and irrelevant.

The proposed bill requires the seller to get express written permission from his lender before transferring a property subject to an existing deed of trust, which will never likely happen. And, even if it were possible, the time frame it takes for a seller to get his lender's permission while he is in foreclosure is wholly impractical. This will hurt the seller who is in foreclosure and seeking to simply "dump" his property for whatever he can get. If the investor can cure the seller's back payments and/or negotiate a short sale with the lender, everyone walks away happy. If a seller has no options, he is going to walk away from the property and the bank will have another REO. Everyone loses.

Now, admittedly, some dumb or unscrupulous investors have taken deeds from sellers, promised to pay, then defaulted, leaving the seller with the short end of the stick. The right thing to do is require disclosures so that the seller enters into the deal KNOWING THE RISK. Adjustable rate mortgages are very dangerous, too, which is why RESPA requires disclosures. The government didn't go off the deed end and outlaw ARM loans.

Curiously, the bill exempts real estate agents from the law, which means a licensed agent could theoretically buy a property subject to an existing deed of trust without lender permission and without the same disclosures as a non-licensed investor would be required to give. The suspicious side of me thinks that the real estate agents are also behind this bill, trying to corner the market on investing or requiring an agent's assistance on these deals so they can profit.

And, the most laughable porition of the bill addressed people like me, requiring all educational seminars to include a copy of the new law in our materials. I suppose the drafters of this bill failed to examine the first amendment, which prohibits the government from restricting the content of free speech.

I don't regularly give seminars in North Carolina, but I might consider it just so I can dare them to enforce it on me.

Read the bill here: House Bill 725

Then contact your representatives and MAKE SOME NOISE:

North Carolina House of Representatives

MARYLAND - HOUSE BILL 1288

House Bill 1288 which has passed the House and Senate, is now on its way to the governer's office for signature. This law is aimed at foreclosure investors and prohibits a whole littany of activities when dealing with a seller in foreclosure.

The 22 pages of requirements are very technical, so you should review it in detail with a local attorney. The basic idea of the law is to give the seller in foreclosure a 10 day right of recission when selling a property to an investor. In my experience, this does little more than give a seller a right to "shop" his agreement with you among various investors to see who offers the highest bid. It also restricts a "foreclosure conveyance" (an agreement to resell the property back to the owner) by limiting the amount of profit you can make if you resell the property. And, there's a dozen other various disclosures, requlations and rules that basically make the good old days of "getting the deed" impossible in Maryland.

If you are in Maryland, do not even THINK about buying a property from a seller in foreclosure without attorney representation in the transaction.

House Bill 1288 - Full Text in PDF Format

CONCLUSION

I have mixed feelings about these bills... on the one hand, they are rash responses the side effects of a strong real estate market, discouraging investors from getting involved in deals and resulting in more properties going to the bank.

On the other hand, some of these bills provide "safe harbors" for investors that follow the letter of the law. Since there are really few laws that relate to "creative" real estate investing, providing detailed rules make litigation by a disgruntled seller or tenant/buyer more difficult. It's hard to say, "you didn't disclose X, Y & Z" when in fact the law only requires "A, B & C". If investors in these states MAKE SOME NOISE by contacting their state representatives right away, a modified version of these bills may get passed, making everyone happy. And, if something comes up in your own state, get involved in the process before a bad piece of legislation puts you out of businesss.

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William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.

William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.

You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:

Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com

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