THE FINE PRINT - November 2012 Issue
BE SAFE: Comply with S.A.F.E.!
Question: I am a licensed real estate broker in Oregon
Answer: Yes! You must be thinking of Oregon
Because
the Act’s broad definition of a "mortgage loan originator" will
generally apply to (1) a seller of the seller’s own property if the seller
offers or negotiates the terms of seller carryback financing, as well as (2) a
real estate broker in the representation of a seller which includes the offer
or negotiation of the terms of seller carryback financing and receives
compensation (i.e., the commission) from the seller. There is no safe harbor
provision under the Act (as there is for private money lenders) and therefore
even one such transaction will bring the seller or the real estate broker under
the Act. If the Act applies, and a seller or real estate broker engages in a
transaction as an unlicensed mortgage loan originator, the State of Oregon
Therefore
in such circumstances, what should the real estate broker know, and how can the
real estate broker protect himself or herself as well as assist the client
seller in being aware of the Act? First, know the conditions and exclusions.
A.
The Act only applies to the sale of residential real property (1‑4 dwelling
units, or bare land which is planned for construction of a residential 1‑4 unit
improvement). The focus is on the type of property and not the type of loan, so
even the sale of investment, vacation, or other business purpose properties
will be covered. The sale of commercial
real estate would not be covered. However, note that the Act arguably will
apply to a mixed use property, such as the sale of a unit with retail space on
the ground floor and residential space on the upper floors.
ALERT:
the Act would apply to a builder who sells a lot which is intended for
construction of a home and proposes to carry the financing of the purchase of
the lot and construction of the home.
B.
The seller will not have to be licensed as a mortgage loan originator if the
residential real property is or was formerly occupied as the bona fide dwelling
of the seller. If the property is now
rented out, but was previously occupied by the seller as the seller’s dwelling,
the seller will not have to be licensed. But if a seller were to just move into
a property for a brief period of time in order to avoid application of the Act,
licensing would arguably still be required.
If
you find yourself in a situation where you are asked to represent a seller who
does not currently occupy the property, but who says he or she did in the past,
here is a practice tip: obtain a
declaration or affidavit from the seller as to the circumstances of the prior
occupancy and why the move out, and keep this in your file. Also note that the
Act does apply in such a situation ‑ it just provides that the seller does not
have to be licensed. Therefore, you should not be involved in any respect in
the negotiation over the terms of the seller carryback financing, and that
element of the transaction should be limited to the seller.
C.
The seller will not have to be licensed if the sale of the property is to a
member of the seller’s family. Again, the Act does apply, so in such a
circumstance, you should not be involved in any aspect of the negotiations over
the terms of the seller carryback financing.
D.
The Act will not apply to a licensed real estate broker who represents the
seller and engages in the negotiations of the terms of seller carryback
financing as part of the sales transaction, provided the real estate broker is
not compensated by the seller. Obviously no real estate broker wants to work
for free, so this exception is of no practical assistance to you.
E.
The Act does not apply to the buyer of a property involving seller carryback
financing, but there is a catch here for the real estate broker ‑ given that
commission is generally paid to both the listing broker and the selling broker
by the seller, the Act could apply to the selling broker as well as the listing
broker!
There
are other exceptions set out in the Act, but the foregoing are generally the
ones which will be of the most concern to real estate brokers.
What
if the Act does apply or appears to apply? You should inform the seller in
writing of this fact (undoubtedly many sellers have never heard of the Act),
and urge the seller to obtain competent legal advice as to what the seller can
or cannot do (obviously you cannot provide such advice). Next, know and comply
with your own limitations in connection with the process. Based in part upon a
recent webinar put on by the State of Oregon
1.
You can include in the MLS listing the fact that the seller is willing to
consider seller carryback financing, but you should not include any specifics
as to the terms of the financing, such as interest rate, term, and so on, and
simply state that it is subject to negotiation.
2.
If you receive a purchase offer which includes specifics about proposed seller
carryback financing terms, you should not engage in any negotiations over such
terms, and the seller should not do so either. Instead, at this point, the
seller should secure the services of a licensed mortgage loan originator
("MLO") to handle the negotiation of the terms of the seller
carryback financing. There is also the possibility of getting an attorney
involved in the negotiation of those terms, which will be discussed in more
detail below. If the seller refuses to comply with the Act, I believe you
should withdraw from the representation of the seller and terminate the
listing.
3.
If the seller elects to retain the services of a licensed MLO, then it will be
up to that licensed MLO to engage in the negotiations with the buyer and the
buyer’s broker, on behalf of the seller, as to the specific terms of the seller
carryback financing. You should not participate in any of those negotiations.
As
noted above, there is a role to be played by an attorney in seller carryback
financing transactions. The Act specifically provides that an attorney can
engage in the negotiations over terms of financing, whether seller carryback
financing or otherwise, if the work is ancillary to the attorney’s
representation of the client and there is no compensation paid to the attorney
by certain defined parties. While it may seem circular, the way the law reads,
it would appear the attorney can represent the seller in negotiating terms of
seller carryback financing, as long as the attorney is not compensated by the
seller. Similar to the way it works for a real estate broker, except that an
attorney would still be considered a mortgage loan originator ‑ just that the
attorney would not have to be licensed. Clear as mud?
So,
how does the seller help the process of seller carryback financing? By entering
into an arrangement where the attorney represents the seller in negotiating the
terms of the seller carryback financing, but is paid for the legal services by
the buyer. This could be structured as part of the purchase and sale terms.
There are ways to do this which also protect your client, the seller, in the
event of a failed sale, which I have heard from a number of real estate
investors is a matter of concern to them. If you or your client would like to
discuss how this can be done in more detail, feel free to contact me.
Bottom
line: for better or for worse, we
are in a new era of regulation. If the subject of seller carryback financing
comes up in a deal you are being asked to be involved in, whether on behalf of
the seller or buyer, be cautious, watch your back (and that of your client),
and pay attention to the rules.
The full text of the Act can
be found at Oregon Revised Statutes Chapter 86A, beginning at 86A.200. The
Oregon Division of Finance and Corporate Securities does have available at its
website an FAQ page: http://www.cbs.state.or.us/dfcs/ml/faq/seller_carry.html,
which provides quite a bit of useful information on the Act.
David R. Ambrose, CEO
Ambrose Law Group LLC
200 Buddha Building
312 NW
Direct Dial: 503.467.7237
Direct Fax: 503.467.7238
drambrose@ambroselaw.com
Disclaimer: this column does not constitute the
giving of legal advice, and your reading this column does not create an
attorney/client relationship. You are encouraged to consult a lawyer or
accountant should you have questions about how this information may be
applicable to your particular situation.
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