'Carry-back' owner financing a way to help landlords flourish

February 26, 2010
| By Pete Daly |
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Attention, rental property owners: Lou Brown wants to convert you.

Brown is going to speak March 13 at the Rental Property Owners Association/Real Estate Investors of Michigan Annual Conference & Expo at DeVos Place. He's on a mission to teach them "about converting themselves from being landlords into being the bank," said Brown.

Brown's company, Trust Properties, owns more than 100 properties in the Atlanta, Ga., area, mostly single-family and small multi-family homes. He is known for seminars in which he teaches people how to "convert their rentals into sales" with the use of "carry-back" owner financing. Brown said that equates to land contract arrangements, also known as "agreement for deed."

"I've been in this business for over 30 years and we've never quite seen it like this, where there is so much opportunity on one hand — you can buy properties for literally pennies on the dollar," said Brown. The flip side is the fact that due to the combination of job losses and regulatory fall-out from the subprime mortgage meltdown, many would-be buyers can no longer qualify for a loan.

The secret ingredient in Brown's recipe for success is the $8,000 federal income tax credit for first-time home buyers.

"This is a phenomenal opportunity to help them access the $8,000 and then use it as down payment money for the house we're going to sell them," said Brown.

"This is a phenomenal time," he said. "Quite frankly, most of the tenants any of us ever see could never see $8,000 in one place at one time."

The FHA has tightened up its lending guidelines and "just announced new rules, making it even harder for people to qualify for loans — so that plays right into our hands, so to speak," he said.

"Right now, there is no shortage of buyers. There are plenty of people that do want to buy a home," he said. But the problem, in his view, is that "the very banks who were happy to hand out money before are the very ones who won't give it out now under any circumstances."

"We've seen people with very decent credit scores and very good longevity on the job — we've seen them turned down for loans. We just smile, because that's no problem for us; we're happy to give them a loan," said Brown.

Time is critical right now, in Brown's formula for selling homes, because the tax credit for first-time buyers is set to expire April 30. A sales contract made by April 30 then has up to June 30 to close in order to qualify for the tax credit.

Brown is optimistic the tax credit isn't going away. He said "the numbers aren't looking very positive at all for housing, so it's very likely they will go ahead and do another extension on that, which could work very well for all of us in real estate."

Some rental property owners may be ready to begin buying and selling homes rather than renting because of the challenges of collecting rents — “and particularly now with people losing their jobs," said Brown.

Some of the other related topics he includes in his seminars are listed on his Web site, such as "secret ways to lock in zero interest owner financing" and "how to lock your deals up tight so sellers can't wiggle out of them, sell to another investor, or get cold feet."

Brown is one of two keynote speakers at the conference and expo. The other is Jeffrey Taylor, an author and the creator of the MrLandlord.com Web site. His professional expertise has earned him an honorary master’s degree in real estate investing from UCLA, according to RPOA. Taylor's presentation is titled "How to Fill Vacancies in 72 Hours."

These are, indeed, difficult times for landlords. Clay B. Powell, director of the RPOA of Kent County, said there is a "continued … need to drop rents in order to get someone to even look" at a rental unit.

"There seems be a magic number for each individual unit that draws in customers," said Powell. "It tends to keep moving down, so that's a little frustrating."

Vacancies are up, too. Powell said the vacancy rate here is "hovering around 10 to 12 percent" across the board. "And they are generally between 5 and 10 percent," he added. In some urban areas, Powell said, "we are seeing upwards of 15 to 20 percent vacancy rates."

About 1,300 Kent County landlords are members of the RPOA, plus about 300 more from Kalamazoo and Muskegon. Powell said he guesses there are between 4,000 and 6,000 landlords in the Grand Rapids area. In the 2000 census, about 45 percent of all housing units in Grand Rapids were rentals, according to Powell.

"A lot of those are owned by folks who only own one or two, and that seems to be increasing now, because you have a lot of folks who can't sell their house who are getting into the rental market," said Powell.

"Not in anybody's recent memory has it ever been this bad," said Powell. He said he heard the rental business was "a struggle in the early 80s, but nothing as bad as this."

Powell said some investors who like to buy foreclosed homes and sell them seem to be doing "pretty well" because there are so many available, but he said new rules from HUD could change things in the near future.

Powell was referring to the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, passed by Congress. It gave states one year to pass legislation requiring the licensure of mortgage loan originators, according to national standards, and the participation of the state agencies on the Nationwide Mortgage Licensing System and Registry. The SAFE Act is designed to enhance consumer protection and reduce fraud, according to nationwidelicensingsystem.org. Powell is not aware of any licensing requirements issued by Michigan yet.

Powell said the act seems to imply that anyone who originates a loan would have to be licensed, perhaps even an individual selling her or his own home on land contract.

"It adds cost and a lot more complications to doing something you used to be able to do fairly easily," said Powell.

The vacancy rate in Grand Rapids has been about the same for a year now, said Powell.

"It had gotten a little bit better before the feds came out with the $8,000 tax credit" for first-time homebuyers, he said, but when that took effect, it "kind of slammed the door on the improvement" in the rental industry.

A two-bedroom single family home in urban areas in Kent County is typically renting for $625 to $750 a month. In the past, "that bottom number was probably in the $700s," said Powell. It’s even possible to find some houses renting for less than $600 a month, he said.

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