Hitting the NC Sub2 Bill Head On - Quick & Dirty Analysis

Quick & Dirty Analysis of North Carolina Bill 725 (subject to revision)



Prepared by Ohio Attorney John Hyre (www.realestatetaxlaw.com)





This bill essentially outlaws any transaction whereby an interest in real estate is transferred if the transferred real estate remains subject to an existing mortgage or deed of trust.



Specifically:





I. TRANSACTIONS COVERED:



All transactions whereby any interest in real estate is transferred (lease option, land contract, transfer of interest in a trust, etc.) while still subject to an existing deed of trust (mortgage) are required to comply with the near-impossible requirements of this bill. To reiterate: This bill is VERY broadly drafted and touches on a massive swathe of transactions.


The first transaction entered into per year per person is exempt from this statute's requirements. The definition of "person" is apparently intended to be broad (e.g., to preclude using multiple entities to use the "once per year" exemption over and over) but so poorly drafted that it may not have the intended effect. Anyone engaging in the above type of transaction is a "dealer".





II. STATUTORY REQUIREMENTS:





A) Disclosures to Sellers: At least seven days before entering into a covered transaction, the following disclosure must be provided:



IMPORTANT DISCLOSURES TO HOMEOWNER/SELLER REQUIRED BY NORTH CAROLINA LAW



The State of North Carolina has not reviewed and does not approve, recommend, endorse, or sponsor any real estate resale transaction. The information contained in this disclosure has not been verified by the State. If you have any questions about this transaction, consult an attorney before you sign a contract or agreement.



The above is the required first page. The second page is below.



1) This transaction does not extinguish your responsibility to pay your mortgage. If the real estate resale dealer fails to make payments to your lender, you will be held responsible for any delinquencies or defaults. Comments: This is actually fair and helps protect the investor from later accusations raised by sellers. I recommend similar language to my clients when they purchase subject to an existing loan.



2) Your current mortgage loan or deed of trust may contain a due-on-sale clause which obligates you to inform your lender at any time you transfer actual or equitable title to your property. If you transfer actual or equitable title in your home to this real estate resale dealer and your deed of trust contains a due on sale clause, you must notify your lender of this proposed transaction, and your lender has the right to call the entire amount of your loan due at that time. Comments: This is actually fair and helps protect investors from later accusations raised by sellers. I recommend similar language to my clients when they purchase subject to an existing loan. Due on sale clauses do not always require notice of a breach. In the present environment (high foreclosures), very few lenders in fact call loans due for DOS violations. That circumstance may change once interest rates go up significantly.



3) The homeowner/seller should consult an attorney as to his or her liability and obligations for providing insurance and for maintenance of the property. Comments: This is a fair statement.



4) As required by North Carolina law, this real estate resale dealer has secured a bond by (name and address of surety company), a surety authorized to do business in this State. Before signing a contract with this real estate resale dealer, you should check with the surety company to determine the bond's current status. Comments: This disclosure refers to a requirement, discussed elsewhere in this report, that the buyer post a bond on the purchase. The requirement is unreasonable, as is this disclosure. A similar disclosure applies if the buyer uses a trust to fund "insurance", as opposed to a bond.



5) The name of the real estate resale dealer Comments: Vague, poorly drafted. Appears to require disclosure of the name of the individual who owns a company. This is a needless intrusion into a business' privacy. There is no need for a consumer to know who the owner of the purchasing company in the case of a "subject to" purchase.; whether the dealer is doing business as an individual, partnership, or corporation;Comments: Redundant. An enforceable purchase contract makes clear who the principal is.the name under which the dealer has engaged in, is engaging in, or intends to engage in business Comments: Meaningless to the consumer. A needless intrusion into privacy; and the name of any parent or affiliated companies. Comments: Irrelevant and a needless intrusion into a business' privacy. Anyone who has done business with the general public has a rational desire for privacy, given the potential for unstable people to show up on the doorstep. Such a risk has no meaning to lifelong bureaucrats but poses real risk in the real world.



6) The names, addresses, and titles of the real estate resale dealer's officers, directors, trustees, general partners, general managers, principal executives, and any other persons charged with responsibility for the real estate resale dealer's business activities. Comments: A gross violation of privacy. Such information is available through the legal process. Making it publicly available is completely unnecessary and could pose a danger to those named.



7) The length of time the real estate resale dealer has conducted business as a real estate resale dealer. Comments: Discriminatory. Such a requirement applied to commerce as a whole would meet with justifiable outrage. There is no reason unique to "Dealers" that justifies imposition of this singular burden.



8) The total number of real estate resale dealer transactions the dealer has entered into within the past 12 months and the number of transactions within the last 12 months that the real estate resale dealer has successfully sold a property in fee simple for a homeowner/seller and had the existing deed of trust on that property extinguished. Comments: See 7, above. Modifying to disclose percentage of properties that have eventually transferred or period expected to remain with mortgage/deed of trust in place is not unreasonable.



9) A full, detailed description of the actual services that the real estate resale dealer undertakes to perform for the homeowner/seller, including whether the real estate resale dealer intends to reside in the property or have someone else reside in the property and in the event someone else will reside in the property, the nature of that person's tenancy. Comments: Poorly drafted. Borderline reasonable. Most people willing to sell "subject to" won't care.





B) Disclosures to Buyers/Tenants







1) It is against North Carolina law for a real estate resale dealer to charge a consumer a nonrefundable deposit, payment, fee, or similar consideration on a rent-to-own agreement, an option to buy contract, a contract or offer to purchase, a lease option or lease purchase agreement, an installment land sale contract with right of possession in the buyer, a land trust agreement, or some similar arrangement if the real estate resale dealer has taken control of the property while the property is subject to a deed of trust in someone else's name. Comments: In other words, all deals sold or lease-optioned where the seller bought subject to an existing deed of trust/mortgage MUST be sold/leased zero-down!



2) The property you are renting or may have contracted to purchase is subject to an outstanding deed of trust in another person's name. (Name and address) is the person obligated to pay the deed of trust. If the person does not make the payments to the lender, the lender may foreclose on the property and extinguish any rights you may have in the property, even if you are current on your rent or payments. Comments: Unnecessary. Most landlords own leveraged properties. If they do not pay on the underlying loans, the tenants will be prejudiced. This situation is no different. The fact that there is no relevant difference between the position of a tenant (or buyer on land contract, etc.) who rents from a standard landlord and a tenant who rents from a dealer makes this clause discriminatory. Furthermore, frightening off tenants for no good reason increases vacancies. Increased vacancies reduce a "dealer's" solvency, thereby making a default on debt taken subject to more likely, which in turn increases the danger to seller-consumers. In short, this provision is so anti-dealer, anti-business and anti-profit that the consumers it purports to protect are in fact prejudiced. This provision was clearly drafted for no other reason than a malicious wish to prejudice dealers and hurts consumers in the process.



3) Consult a nonprofit credit counseling agency to determine whether or not you are a good candidate to get a mortgage now or in the future. Comments: Discriminatory. Regular landlords are not required to see if their tenants would rather buy than rent. In situations where credit worthiness is relevant (e.g., when a dealer sells on land contract with a balloon), urging a potential buyer to explore their credit-worthiness is appropriate. Urging a non-profit counselor is discriminatory and betrays what is by a common theme in this bill a profound anti-business and anti-profit animus that results in harm to businesses and consumers alike.



4) The total number of real estate resale transactions the real estate resale dealer has entered into within the past 12 months and the number of those transactions where the tenant/buyer has taken title to the real property and had the original deed of trust satisfied. Comments: Absolutely irrelevant to the tenant/buyer. Also discriminatory vis-a-vis landlords. Tantamount to forcing landlords to disclose! How many homes do you own free and clear??.



5) A full, detailed description of the actual services that the resale dealer undertakes to perform for the tenant/buyer. Comments: Redundant. Also known as a "sales contract" or "lease", as the case may be. Displays massive ignorance of the difference between "contracts" and "disclosures of points within the contract".



6) As required by North Carolina law, this real estate resale dealer has secured a bond by (name and address of surety company), a surety authorized to do business in this State. Before signing a contract with this real estate resale dealer, you should check with the surety company to determine the bond's current status. Comments: This disclosure refers to a requirement, discussed elsewhere in this report, that the "dealer" post a bond on the purchase. The requirement is unreasonable, as is this disclosure. A similar disclosure applies if the buyer uses a trust to fund "insurance", as opposed to a bond.





C) Bond or Trust Account: "Dealers" are required to obtain a bond or trust account in the amount of $200,000 per transaction in favor of the state. The purpose of the bond account is to allow anyone damaged by the dealer to recover. Comments: Risk is present in all business transactions. Bonds are required only in truly extraordinary situations, and even then typically on a one-time basis, as opposed to repeatedly. They impose an undue economic burden on "dealers". In this case, the burden may be high enough to essentially ban dealer activity the true purpose of this statute. In this case, they would also invite litigation because the disclosure essentially trumpets the guaranteed availability of money to parties willing to sue.





D) Lender Consent: Dealers are required to inform the lender of the breach of the due on sale clause. Comments: This is a reasonable requirement that can also serve to protect the "dealer" and other consumers by creating an argument that the bank waived its rights by being informed of the due on sale breach but declined to act on the breach which is what typically happens.



The statute also requires that the lender give written permission for the transfer. Comments: First, this constitutes very poor draftsmanship. Why all of the due-on-sale disclosures if the bank has, by definition, waived its rights? Far more importantly, this requirement is absolutely tantamount to banning subject to transactions altogether. Banks routinely ignore DOS violations, because they either do not wish to create more foreclosures or their bureaucracy simply does not place priority on this issue. Anyone with any experience in dealing with banks knows it's hard enough to get a bank to respond on a mere lien release or simple payoff request. The expectation that banks will respond to some esoteric clause that means little to them is laughable. Just waiting for a bank to respond will scuttle most deals by unreasonably lengthening the sales process. If the true purpose of this statute were to protect banks and consumers, provision of notice via certified mail would suffice. The effect of this provision, like others in this statute, is to effectively ban subject-to transactions.





D. Advertising: The dealer may not advertise that he/she buys houses. Comments: Under state law, most subject to transactions constitute a bona-fide purchase and sale. The consideration, among other things, are the payments made on the existing mortgage taken subject to. Banning such advertising subverts the truth and is likely a First Amendment violation, even under the relaxed standards that apply to commercial speech. Such a ban restricts the availability of home sales options to consumers who are often in dire need of exactly such options. Once again, the effect (and evident purpose) is to attack dealers, as opposed to protecting consumers.



E. All Subject-To Sales and Leases Must Be Zero-Down: The dealer cannot accept non-refundable consideration upon selling or leasing the property in question. Comments: This provision alone nearly constitutes a ban on buying "subject to", because few investors will buy in such a manner if they cannot collect a down payment when selling. For those dealers who still choose to take a property subject to an existing loan, this requirement adds great risk to the dealer AND the consumer because it inhibits a "dealer's" ability to make the payments on a loan taken "subject to" by limiting the revenue that can be generated , in other words, the dealer's reserves and ability to pay on the loan are reduced and their likelihood of default increased because they are banned from collecting a down payment! Also, purchasers/tenants who enter a property via zero-down arrangements have less of a stake in the property and are generally much more likely to trash it and leave. Property destruction and vacancies are much more likely to weaken a "dealer's" finances and thereby cause a default. This provision harms those whom it was designed to protect (e.g., sellers who sell subject to, banks holding the loans) in order to essentially ban dealers from buying subject to an existing deed of trust/mortgage. It is needlessly punitive (it is a clear attempt to limit that dirty word, "profit") AND highly disingenuous. An outright ban on purchasing subject to would be far more honest. This provision displays an immense ignorance of business realities, a profound hatred for profit, a clear intent to harm consumers, or all three.



F. No Misleading, Untrue or Deceptive Statements: The dealer may not make misleading, untrue or deceptive statements. Comments: Redundant. North Carolina's Unfair/Deceptive Business Practices statute already prohibits such statements. The Attorney General is quite capable of enforcing that statute.







GENERAL COMMENTS:





1) Source of this Bill: This statute was 99.99% likely drafted by the NC Attorney General's Office. I make this assertion because I have taken on a case pro-bono in which the AG is attempting to drive a small "dealer" out of business. This dealer bought approximately a dozen properties subject-to. Because this small dealer has purchased the properties at or near fair market value (as suggested by various courses, including the "Get the Deed" series by Randy and Charlie France), she has been losing money on those purchases. In spite of that, she has done the right thing and made the payments on the mortgages taken subject to, at considerable personal expense. Her reward: The AG is using the massive resources of the state to drive this small dealer (and consumer of real estate courses, whom they are supposed to be protecting!) out of business. This proposed legislation is a near perfect duplicate of the "settlement" that the AG is set to force on the dealer in question. To date, my experience has been that the AG knows little about business in general and even less about subject-to's in particular. Roy Cooper is the North Carolina Attorney General and is the elected official apparently responsible for this intensely anti-consumer, anti-business and anti-bank legislation. In my personal opinion, consumers and small businesses alike should hold him accountable in the press and most especially at the polls for promoting such an anti-consumer and anti-business policy.





2) Ban on Owner-Financing: Given the unreasonable requirements of this bill (e.g., obtaining bank consent for a subject to transaction, no down-payment allowed upon resale/rental), this bill constitutes a de facto ban on subject-to transactions.





3) Anti-Consumer, Anti Bank and Anti-Business: In a free society, citizens make their own choices. In other types of societies, citizens choices are made by the government, generally "for their own good", generally by someone who thinks that they "know better". This bill unreasonably restricts consumer options. Many consumers who choose to engage in a subject to transaction are:

a) Set to walk away from the property anyway and let it go to foreclosure; or

b) In other circumstances, educated enough to weigh the risks (e.g., investors selling, professional who have built new homes and are tired of making payments on an empty property.)



By removing consumer choice, many of the consumers most in need of options will simply be forced into foreclosure instead. This is bad for the consumer, bad for the banks and bad for the businesses that could otherwise profit and use such profits to hire NC employees and pay NC taxes. Making sure that consumers are informed is appropriate. Making sure that consumers are protected from unscrupulous operators in any business is something we can all stand behind. Making decisions for consumers, especially when based on inaccurate information and an anti-business bias is not appropriate.





4) Reduces Home Values and Property Tax Revenues: Many times, a house is sold "subject to" because no one will pay the asking price in cash. The flexible terms of a subject to deal allow a property to be sold at a price that is otherwise not obtainable. Such sales help support home prices, which in turn maximizes property tax revenues. In many instances, "dealers" spend significant sums to rehabilitate houses taken subject-to, further increasing home values. When banks repossess houses, the properties generally sit vacant and deteriorate in value. Such deterioration reduces property tax revenues and contributes to urban blight.





5) The Proposed Law is Much Too Broad: In every business, there are bad operators who engage in bad practices. Good law is tailored to ban the bad practices, but not the underlying business. This bill is the equivalent to banning cars because some people drive drunk. The vehicle is not the problem, the bad practices are. This sort of legislative overkill will harm consumers, harm banks and harm small businesses. This bill would make for very bad law. Informing consumers is appropriate. Making choices for them is not.



6) The Proposed Disclosures Are Nearly Reasonable: Clearly worded and rational disclosures protect consumers, banks and "dealers" alike. Given the lack of good disclosures in many courses sold to would-be "dealers" by speakers looking for little other than a fast buck, a modified version of the disclosures proposed in this bill could be of value to all concerned. Informed consumer choice would be the result.