Archive for the ‘ Information ’ Category

Frequency of Seller Financing in New Mexico

November 1st, 2011

In 2010 there were 1,827 real estate contracts recorded at the county clerk’s offices in the counties of Bernalillo, Sandoval, and Valencia (Albuquerque Area).  These are properties that have been closed using an installment sale (seller financing).  I do not have research on the rest of the state, but because of the following facts I would assume that there are at least the same number of RECs, or more, recorded in the rest of the State because of the following:

  • The fact that half the population in the state of New Mexico lives outside the Albuquerque area.
  • Most of those areas are rural areas where conventional financing is difficult to obtain.
  • Thirdly, there are 14 escrow companies in NM.  Five are in the Albuquerque area and the nine others are spread out across the state.
  • Fourthly, half the Realtors in NM operate outside of the Albuquerque area.

I think you can safely say there are between 3,600 and 4,000 real estate transactions closed every year in the State of New Mexico using real estate contracts.  It looks like this year is tracking about the same as last year.  By the way, Security Escrow has a 42% market share in the Albuquerque area.  Our closest competitor has a 21% share.  In addition, 38% of the total contracts we receive every year are sent to us by property owners, Realtors and title companies from outside the Albuquerque area.

35% of New Mexicans own their homes free and clear.  This makes them prime candidates to use seller financing.  It’s up to you to let them know about seller financing (also known as owner financing, seller carry-back and contract for deed).  I have written previous articles for this blog that will help you and your client better understand seller financing.

Unless the seller needs all their equity out of the property, seller financing offers them a great investment opportunity. Where else would they put cash at this point in time?  Bank CDs pay less than 1%.  The stock market is extremely volatile and who knows about gold.  If they use seller financing they can get 5, 6 or 7% interest on their equity, which is secured by the property they just sold.  Selling your property on an installment sale can easily beat returns that you might receive if you turn the property into a rental.  In addition, it’s the buyer who pays for taxes, insurance and maintains the property.

The seller does not have to own the property free and clear to use an installment sale.  They would simply sell it on a real estate contract and use part or all of the payment they receive to pay their mortgage monthly as long as the mortgage will pay off before or at the same time the contract pays off.  You use an escrow company to facilitate this.

Please check the class schedule on this blog to see when my next four hour continuing education course for Realtors is scheduled.  Some of these classes have sold out in the past.


No Title Insurance?

September 15th, 2011

No title Insurance?  Really?  Why wouldn’t a buyer get title insurance when using owner financing?  Would you or I tell a cash buyer they don’t need title insurance?  Of course we wouldn’t.  However, it has come to my attention there are real estate brokers telling their buyers and sellers, and other brokers, that it is not necessary to get title insurance when using owner financing.  While it is true that title insurance is not required to close an owner financed transaction when using a real estate contract, it is poor risk management for the buyer, seller, and broker not to get a title insurance policy.  After all, this is a sale.  It is not a rent to own.  This practice could lead to the buyer ending up with an undiscovered lien on the property or a title defect with no insurance company to go to for help.  This could also lead to a very costly lawsuit against the seller and the brokers that were involved.

Apparently some brokers are closing the buyer and seller at their office, or at a location other than a title company, using only a title search instead of a title policy.  Let me give you just one example of how this could backfire; the buyer and seller enter into a purchase agreement not requiring title insurance, only a title search.  On Monday the title company gives the title search to one of the brokers.  Everyone agrees to close on Thursday not using a title company.  On Wednesday, unbeknownst to the parties, the IRS files a federal tax lien against the seller and the property.  Buyer and seller close on Thursday and record the contract.  Several years later the buyer tries to refinance the property to pay off the real estate contract.  They are prohibited from doing this unless they come up with enough additional funds to pay off the IRS lien that slipped in between the title search and closing.  The buyer sues the seller and both brokers.  This all could have been avoided by closing at a title company and getting title insurance.

Standard practice used to be to close at a title company and the seller would wait until the contract was paid off to give the buyer title insurance.  This too proved to be problematic.  An example is that the seller died and the seller’s heirs refused to pay for a title insurance policy on a property that sold 20 years ago because now the policy premium is three times what it would have cost if purchased at closing.  The buyer has zero leverage and has to pay for the cost of the policy themselves.  Standard practice now, as evidenced by paragraph 7 of RANM Form 2401 is that the seller will deliver a title policy to the buyer at the time the sale is closed.  Because this is now standard practice there is some question as to whether or not a broker’s E&O insurance would cover a broker involved in an owner financed sale that only used a title search, rather than a title policy.  (You might want to consult your attorney on that one).

Cutting costs by not closing at a title company and getting title insurance at closing could be very costly in the future.


How the Safe Act and Wall Street Reform Act affect Owner Financing

January 11th, 2011

Reprinted with permission from The REALTOR® Voice, Legal Corner
Volume 13, Edition 3, Third Quarter 2010

First came the fall-out from questionable lending practices, and then came a series of state and federal laws aimed at avoiding a repeat performance.

In 2008, Congress passed the Secure and Fair Enforcement of Mortgage Licensing (SAFE) Act which set forth a minimum standard for the licensing and regulation of mortgage loan originators (MLOs). In defining MLOs, the SAFE Act exempted “a seller who provides financing to a buyer pursuant to the sale of the seller’s own residence.” The SAFE Act gave HUD the authority to usurp the regulation of MLOs from states that did not enact laws that met the minimum requirements for licensing and regulation of MLOs as set forth in the SAFE Act.

In response, in 2009, New Mexico passed the Mortgage Loan Originator Licensing Act (Act). The Act defined MLOs similarly to the SAFE Ace; however the Act exempted from the requirements of licensing a seller who offers seller’s financing on any of his/her properties, not just his/her own residence. While HUD indicated it was not in agreement with this expanded exemption, it has taken no further action. As a side side note, 14 other states have enacted an exemption similar to New Mexico’s.

The latest law to pass that affects seller financing is the Wall Street Reform and Consumer Protection Act (Wall Street Reform Act) which was signed July 21, 2010. This law broadened the definition of MLO, but again carved out an exception for seller financed transactions. The Wall Street Reform Act exempts persons who provide seller financing for the sale of no more than three properties in any 12-month period provided that the loan meets certain criteria: the loan is not made by a person that has constructed or acted as a contractor for consideration for the construction of the residence on the property in the ordinary course of business of such person; the loan is fully amortizing (no balloons); the seller has determined in good faith and with documentation that the buyer has a reasonable ability to repay the loan; the loan has a fixed rate or an adjustable rate mortgage that is adjusted after five or more years and is subject to reasonable annual and lifetime limitations on interest rate increases; and the loan meets other criteria that the federal banking agencies may prescribe.

What does this all mean? We are currently unclear as to how the different exemptions for seller-financed transactions under the Safe Act and the Wall Street Reform Act will be reconciled. Once this is determined, New Mexico will evaluate how to proceed. In the mean time, the only law certain is the New Mexico Mortgage Loan Originator Act which full exempts all seller financed transactions.

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Legal Corner provides a limited and general discussion of some, but not all, aspects of issues that is intended but not guaranteed to be accurate as of the date published. This information may become outdated and is the responsibility of the user to determine if it is current. No summary of the law is a substitute for legal advice with the respect to a particular matter. No attorney-client relationship is intended or implied. If legal advice is required, the services of a competent attorney should be obtained. RANM members are cautioned against engaging in the unauthorized practice of law by advising a consumer of legal rights and obligations or by applying the law to particular facts and circumstances. ©2010 REALTORS® Association of New Mexico.


An Update on the Laws Associated with Owner Financing in New Mexico

January 11th, 2011

At this point in time in New Mexico rules and regulations pertaining to owner financing are the same as they have always been. The State of New Mexico has exempted seller financing from their mortgage loan origination act. You can go to www.rld.state.nm.us. On the left hand side click on Financial Institutions, then click on FAQ. Scroll down to 16. (3) Mortgage Exemptions for Mortgage Loan Originators. (3) An individual who offers or negotiates terms of a real property sale financed in whole or in part by the seller and secured by the seller’s real property.

The federal government has passed two different and conflicting laws concerning owner financing. It appears that sometime in the future it will be up to the states to either adopt these new federal laws or stay with current state laws. 14 states have exempted owner financing to some degree from their mortgage loan origination acts. All states have different rules, regulations, case law and statutes. But, as of now, RANM, my attorneys and I are all in agreement that owner financing is exempt from any of these regulations in New Mexico. I am attaching an article that legal counsel for RANM recently released.


Escrow Fees

December 15th, 2010

There’s no free lunch. Escrow companies have the same expenses that other small businesses have: employee payroll, health insurance, E & O insurance, rent, postage, accounting, legal, advertising and computers to name a few. These expenses are met by charging fees to the parties to the real estate contract. Your clients will ask you about these fees. These fees vary from Escrow Company to escrow company across the state. Furthermore, any escrow company can service any real estate contract, regardless of where the property is located in the state. Almost everything is done by mail. Who pays these fees is negotiated between buyer and seller when the purchase agreement is negotiated. The buyer can pay all the fees, the seller can pay them; they can split them 50/50 or 70/30. It’s negotiable.

I will attempt to explain the most commonly charged fees. Most escrow companies have them posted on their websites. These fees differ from company to company.

The Set-up Fee: This fee can range anywhere from no charge to $50 depending on the escrow company. This is charged through the title company at closing on behalf of the escrow company. It is a one time charge. The rationale for this charge is that the escrow company has to enter into the computer all the terms of the contract, place the deeds in a fireproof safe, send out an amortization schedule, and mail payment coupons to the buyer. We do not charge a set up fee.

Disbursement Fee: This is an ongoing charge, which is usually charged monthly. This fee is based on the amount of the payment that is received from the buyer. For instance, if the buyer’s payment is $900, then the escrow company might charge a $10 fee. If the buyer is suppose to pay 100% of the fee, then they would send in $910 every month. If the seller pays 100% of the fee, then the buyer would send the escrow company $900 and the escrow company would subtract $10 and send the seller $890. This fee is an escrow company’s main source of income, which pays the bulk of the expenses.

Additional Disbursement Fee: Let’s say two sisters are the sellers in the property and they wanted the escrow company to send each sister a check for $450 every month. Using the example above, there would be a fee of $10 for the first check disbursed and the charge of $3, or so, for the second check disbursed.

Taxes and Insurance Escrow Fee: As I’ve stated in previous articles, the number one dispute or concern when it comes to a real estate contract is not over the monthly payment, but over whether or not the property taxes and/or hazard insurance premiums have been paid by the buyer. The escrow company can escrow funds monthly to pay these items if the buyer and seller agree to this and put it n the REC. There is usually a monthly charge of around $4 for this service. Believe me; this service is well worth every penny. Most escrow companies charge a monthly fee for this and some charge another fee when they write the check to the county or the insurance company.

Close-out Fee: This is a one time charge. A real estate contract typically closes out at an escrow company in one of two ways. 95to 97% of the time the buyer simply pays the contract off over time and the escrow company gives them the warranty deed that the seller delivered to the escrow company at closing. Before this is done the escrow company reconciles and reviews the account to make sure the seller received all monies due, or that the buyer has not overpaid. On the other hand, 3-5% of the buyers default and the sellers take the property back by terminating the REC. In this case the escrow company decides if it was a valid default and, if so, releases the special warranty deed to the seller that the buyer delivered to the escrow company at closing. This fee varies statewide and can be anywhere from $25 to $125.

Fees should be important to you and your clients. But fees should not be the one and only deciding factor as to which company to choose. Seller financing and real estate contracts are a long term commitment and investment. Your client should choose an escrow company that they feel comfortable with. Things change during the life of a contract and in the life of the buyer and seller. Your client needs to pick an escrow company they feel has the experience and knowledge to carry out the instructions put forth in their contract.