Possible Conflict Of Interest?
this is for all the LO's and brokers out there.
Last week a couple approached me - they purchased a home in vegas for 132,000 and are currently renting the property to a family member. They spent 24,000 out of pocket to close because their credit is *horrendously bad* (510 midline).
Now they *really* need this cash back. They had a "sellers" appraisal for about 10% above what the market in this particular area will sell for, which was (obviously) just a tactic to encourage them to *MOVE* quickly on a "discounted" deal. Their appraisal just came in a 140k - which is still a moderately good return for 2 months of ownership.
I ordered the new appraisal (with my fingers crossed) knowing full well that they may have simply bought into something at market value. They believed that they had something worth at least 158,000 - but even with a cursory glance at trailing comps I knew it wasn't likely.
They need to sell this house to get their money back. As it is, they are at par rent vs. mortgage because they are paying through the roof on financing.
My only hope was that it really would come in higher so that we could do a small cash-out refi to 90% on the house to hold them over until they could get their credit cleaned up. I'll be talking to them on tuesday to let them know about the appraisal results et al..
Here's the thing. I have an open file with a newer investor who has 300k+ liquid assets, a desire to start investing in property - but very little time. If the owners were interested in selling this house, I am relatively sure that he would be interested in jumping into it - he more than qualifies for a 5 year fixed pay interest only ARM.
With his credit he could get into this house with an immediate cash flow (there's a 1 year lease on the property). FYI, the existing tenant would like to purchase the property in the future, but they are working on fixing their credit as well. My investor might even be interested in this property as a lease option locked to a 2% yearly adjustment (for instance).
Is it a conflict of interest for me as a loan officer to be in any way involved in any potential negotiations? I am not a realtor.. I have my RE license which (i believe) can actually be a hinderance in a situation like this.
I would (obviously) like to make money on this deal if the buyer wants to buy and the seller wants to sell. Is it legal for me to have the seller pay closing costs (origination) and the buyer pay points? Can I roll my compensation into the loan itself and still be golden?
too many questions?
Any help is appreciated.
Thanks,
Milliken
It legally might not be a conflict of interest but you could still get into a bind.
1. You could just pair the two up and let them work it out. They can agree any deal they like and split the fees how they think it will work. Sounds like neither party will know how to put this together though.
2. Or you could become a principle to the deal and then the 'conflict' is not there. Just be clear on the disclosure if you go this route.
3. If you start brokering the deal (suggesting how to do the deal and what to offer), you are offering advice. You might be just offering financing advice but I think this crosses the line into RE advice. Having a license means you should know better. If you have a license and it is not registered with a broker you are in trouble. If there is a broker see if the broker can deal with question.
John
[addsig]
Well you've got a couple of problems here. Not only do you have to worry about CA law but since the house is in NV you have to check there as well. But I don't believe that having your real estate license is going to hurt you here.
That said I don't think I'd broker this deal. Somebody is likely to end up very angry. The seller is, I assume, trying to get all or nearly all of their $24k downstroke back. So your guy, if he bought is buying very close to market value. Even if he's got a positive cash flow on the arm when the rate adjusts he's going to be break even. So to make it a good deal for him you've got to get the seller to discount and that they don't want to do. There just isn't enough equity here to make everybody happy.
There are much better deals for your cash-heavy investor.
So if you choose to ignore my advice on this matter this is how I would structure the deal. Let investor co-sign a loan for seller/borrower. He charges a couple of points for the priveledge of them using his credit each year until they can refinance and get him out of the deal. Work closely with them to clean up that credit score and get your guy out. Although its tricky I'd also insist on a deed from the borrower to be held in escrow by somebody and recorded in the event they default. Then if they screw up (and I think the odds of that happening are very high) your guy can record the deed and sell the property with minimum hassle.
Well Milliken, after reading your other post seeking bird dogs I have another comment. If you cannot figure out how to do this deal without advice then I don't think your portrayal of yourself on the other post is very accurate. I guess I need to figure something out before I could give more advice. What are you trying to accomplish here? I have the impression you're tired of being a loan broker and are trying to become a deal maker but don't quite know how to do it.
You are right to worry. There are lots of ways to get in trouble with the law in this biz and conflicts of interest are only one. Representing yourself as a loan broker when doing securities transactions is one way. I suggest you spend some time and money on a good securities law course. A review of the CA and NV blue skys laws wouldn't hurt either.
You've been on this site kinda a long time but suddenly you've become much more active. What is the cause of that transformation?
You are correct - I am now involved with a company who's primary interest is in creating client relationships vs. 1 time customer relationships.
My experience up to this point has been almost entirely OO purchase/refi loans. I am not "tired" of doing this, but in the process of dealing with these clients I have found a considerable lack of one thing or the other (cash or time). The perfect investor would be the mix of all my files - the desire, cash, time and understanding of real estate transactions.
Unfortunately, I don't have this blend in any single investor - but I do see that what one person has another may want.
I have been searching the ca dept. of real estate to get a clear answer on some of the less murkier subjects, but I was asking on here to see if there was anybody who had ever been in the same situation.
Again, I am sorry if I seemed to misrepresent myself in any other post, and yes, I have not been too involved in this site for some time. I plan to change that - especially now that I am now a cog in the wheel of the real estate investing machine.
Thanks for your input,
Milliken
OK Milliken, then I will give you a next round of advice.
1) Take a couple of weeks and look for a really good attny. One who specializes in CA professional regulation. Spend a couple of grand (maybe more but not a lot more) and get him to write for you an outline of what licenses you have to have to do what kind of work: Mortgage brokerage, Real estate brokerage, securities packaging. Get descriptions of what is and is not included in each license. Especially you are interested in "safe haven" definitions of what is and is not allowed. Spend some time taking the courses for each of those licenses even if you don't think you need the license.
If you have the smarts to do it you can make a lot of money structuring the kind of deals you are describing. But you have to watch out for the legalities of the thing. A wrong step or two and you will have more to worry about than the TCI virtual jail.
2) The other thing you need to work on is developing an understanding of loan underwriting from this rather unconventional point of view. Be aware, if you loose the money of investors there is a very good chance of going to jail. A good friend is just getting out after 40 months in the federal prison camp in Terre Haute for attempting to do just these kind of deals. On the other hand he's not too bright and did not take my "go to a good lawyer" advice in the begining. Instead he thought he understood securities law on his own. $500 6 years ago would have saved him $20,000 in legal fees defending a case he lost and 40 months in jail to boot.
3) If you really want to build relationships with clients over a long haul then go to people who are doing lots of deals. That means don't do creative deals like this for newbies and wannabes. Especially on the investor side. You want clients who are sophisticated-- then if something blows up you can use the defense that they are smarter than you are and so you couldn't possibly have been taking advantage of them.
4) Finally there is one part of your plan that I applaud wholeheartedly. You are trying to do something that is not easily replicated. There gotta be a million guys in this country trying to broker OO buy and refi loans. The number who can actually be creative in the process and who have a stable of investors who can do the unconventional deal cannot number more than 1 or 2% of that. If you can build such a base without getting yourself in major trouble along the line (and I hope I have sufficently frighted you about the myriad ways to get into major trouble) you become a very valuable guy.
The real money is always made in doing something that not many people are doing.