Dear Stephanie: SAFE Act endangering lease-options at MHPs?
I love to do lease-options on my park for park-owned homes. It has been a win-win for me and my tenants, many of whom would not be able to own a home otherwise. It is profitable and helps people realize a dream of home ownership. But, with the SAFE Act legislation that was recently passed is this going to kill the lease-option for MHP owners and operators?
- Lease-Option Lois in LaFrance, SC
Hi Lease-Option Lois,
I understand your concerns. Doing a lease-option to purchase has very attractive attributes for all parties: asset, term, monthly payment, plus maintenance, taxes, and insurance handled by the tenant-owner. With an initial payment on an option price which is typically Fair Market Value at the time of purchase, and includes a credit for the option payment, it provides a great opportunity for home ownership. But to recap for all our readers, a lease-option to purchase is not to be confused with the following: rent to own where you buy upon receipt of the last payment, lease purchase with an obligation to buy, security deposit with an interest rate shown on an amortization schedule and used along with a promissory note. Now, in days past, an owner/operator could enter into a lease-option to purchase, also known as “seller financing”, which constituted a mortgage/credit transaction and they retained the title to the home by putting in place a promissory note with an interest rate, term and an amortization schedule. However, per your concern, today SAFE Act legislation does not allow for this type of transaction unless the owner/operator holds a SAFE Act license, which requires a lot of time and red tape, and varies from state to state. Now why would this be important? To protect the consumer from unscrupulous sellers acting on the desperation of others, not honest MHP operators like yourself. A possible alternative to originating a mortgage would be to rent the homes with financing using a consumer/resident lease-option contract. The characteristics of this type of transaction would be to lease the home for a specified term with a monthly payment which would include maintenance, taxes, insurance, etc. The Option payment and/or initial payment would be credited to the fair market value of the home. How can I finance the balance of the option price without originating a mortgage? Another alternative used by owners/operators is to relinquish title for unsecured promissory note when resident exercises option to purchase after the resident has proven themselves with years of good payment history, relocation is unlikely and a promissory note helps avoid SAFE Act licensing. In addition, the owners/operators that have implemented the unsecured promissory note have made it a practice to sit down with the resident and to go over their ability to repay by going over their debt-to-income ratio.
Hope this helps!
Please send me your questions! I'm happy to answer them! Stephanie@McAnuffGroup.com