Dodd-Frank Fallout: Colorado Removes Seller Financing Provision From Contracts

Colorado…

Where it’s easy to buy marijuana but hard to sell a home with seller financing.

In reaction to the Dodd-Frank Act, the Colorado Real Estate Division has issued a bulletin on the removal of the seller financing provision in the state regulated Contract to Buy and Sell Real Estate.

While the creation of new seller-carry notes is holding strong since the implementation of the Act in early 2014, we are starting to see changes in the way individual States, real estate professionals, and investors handle transactions.

Colorado acknowledges that seller financing is legal and permissible under both State Law and the Federal Dodd-Frank Act.  So why the change?

Well, it’s complicated…

That’s not stealing a line from the last bad relationship break-up. It’s straight from the bulletin.

“These new federal requirements are extremely complicated, but do permit seller-financed residential real estate transactions, as long as certain requirements are followed.

Due to the sweeping regulations that have been passed at the federal level, and the complex rules that have been promulgated since the passage of the Dodd-Frank Act, the Real Estate Commission removed the seller financing provisions from the Contract to Buy and Sell Real Estate in 2013. Instead, section 4.7 of the contract now provides the following warning:

WARNING: Unless the transaction is exempt, federal and state laws impose licensing, other requirements and restrictions on sellers and private financiers. Contract provisions on financing and financing documents, unless exempt, should be prepared by a licensed Colorado attorney or licensed mortgage loan originator. Brokers should not prepare or advise the parties on the specifics of financing, including whether or not a party is exempt from the law.

Source: DORA (Colorado Department Of Regulatory Agencies – Real Estate Division)

Click Here To Download The Full Colorado Seller Financing Bulletin

Part of the challenge is that even though seller financing is allowed, real estate brokers could be seen as mortgage loan originators and subject to those licensing laws.  This creates potential liability and exposure that Colorado hopes to avoid.

“The Colorado Real Estate Commission says Dodd Frank is too complex and creates liability for both the Realtor and seller. They have basically told Realtors not to get involved in any seller financed transaction”, explains Ric Thom, President of Security Escrow.

As a servicing agent for seller financed debt in the neighboring state of New Mexico, Ric has been following recent regulations closely.  “They say refer buyers and sellers to a LO (loan officer) or a lawyer instead. You can’t find a LO who wants to get involved with a seller financed transaction. Not all buyers and sellers can afford a $250 an hour attorney. Now property owners and buyers who want to use an installment sale in Colorado are being denied access to a Realtor.”

Find The Opportunity

The bottom line is that life in the note business would be easier without this regulation (or at least regulation that was less complicated).

It’s hard for the average property seller to navigate the maze of lawmakers. As investors or brokers we need to avoid the same potential liability real estate agents are worried about.

But one thing 20+ years in the note investing business has taught me is that we need to find the opportunity in every market or situation.

Sounds good in theory but how about some real ideas?

Embrace The Change

Where there is confusion there is opportunity to provide answers.  Seek out experts in your area like attorneys or licensed mortgage loan officers and team up to provide solutions. Look at establishing packages or flat fee services for seller financed closings so everyone knows what to expect.

We are already seeing people taking this approach. The Colorado Real Estate Guy shares his insights as a broker and attorney in his blog post titled Seller Finance Gets Tougher No Thanks to Dodd-Frank. Over in Texas, Fred Hobbs of Texas Mortgage Capital is a licensed mortgage broker offering packages that are compliant with both Dodd-Frank and the Safe Act.

Stay Exempt

Another option is to just avoid the situation altogether. How?  Focus your investment parameters on the transactions that are exempt. Consider marketing for seller carry notes that:

• involve real estate investors as buyers/payers (versus homeowners that plan to live in the home)
• already exist and the seller meets either the single or three home exemption
• are secured by non-residential property as defined by the act.

The one thing you don’t want to do is ignore it. Get informed and make a plan. While we strive to share useful information we are not licensed to provide legal advice so always consult with qualified legal and tax advisors to see how laws apply in your situation.