Playing it Safe with The S.A.F.E. Act

One of the hottest topics in mobile home park ownership for those owners who wish to sell park owned homes to tenants is the SAFE Act. In fact, at the recent SECO Conference this was a topic the audience could not get enough of. Spencer Roane is considered to be one of the foremost experts on this topic and he spoke at as much length as he possibly could at the SECO Conference. In fact, we are often asked about the SAFE Act and the dangers of lease-options of mobile homes to tenants, and for those who could not attend the SECO Conference we hope to share some highlights of Spencer's expertise here.

1. When lease-options are not the same as mortgages

A great number of states do not consider the lease-option to be a mortgage and are in turn exempt from licensure requirements. Additionally, each state interprets the SAFE act differently. To find out where your state stands, please refer to your state's legislation resources or the Office of the Federal Register.

2. L-O vs L-P vs R-2-O

A lease-option is not the same as a lease-purchase, and is not the same as rent-to-own. Let's briefly review these easily mixed-up terms.

* Lease-Option = a lease with an option to purchase that must be exercised in writing by the tenant, usually within a certain time period as outlined in the rental lease

* Lease-Purchase = a lease with an obligation to purchase. This is a binding agreement.

* Rent-To-Own = the tenant makes equal payments each month which eventually accrues to purchase the home/until ownership is transferred

Two of the above are considered a credit-transaction, also known as an "installment sale."

3. You don't want it to be an installment sale

Lease-purchase and rent-to-own are considered installment sales, and if what you are calling a lease-option is really a lease-purchase or a rent-to-own you'll be treading the dangerous waters of the SAFE Act. What is the take-away here? You can still provide your tenants with home ownership opportunities, but you must do so carefully and make sure you are not entering installment sale territory by following these simple guidelines to minimize that possibility, as explained by Spencer Roane:

• You, the landlord/owner of the mobile home, acts fully as the owner of the home until your tenant officially exercises the option in writing, and not before.

• During the lease period you ensure that the lease payments are within the fair market rent value.

• You ensure that the "Option Payment" (amount paid up-front for the option, or right to purchase) is a significant percentage of the value of the home and you call it as such.

• Do not apply any lease payments toward the purchase of the home.

• Set the Option Price (the amount paid to purchase the asset once the option is exercised) at or very close to equal to the fair market value of the moble home at that point in time.

• Keep it clean! Do not engage in “side deals”, hidden agendas, or special incentives between you and the tenant turned buyer.

We will be examining this topic in more depth in the near future. We hope this introduction to the critical aspects of the SAFE Act was helpful! If you have any questions, please contact me at stephanie.mcanuff@marcusmillichap.com.

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