My Ruminations On The Dodd-Frank Act And The Destruction Of Real Estate Investing As We Know It
I got this email the other day…
Have been getting your emails for awhile; and have recently thought about getting more into what you teach.
But recently, I was informed about the new law, “the Dodd Frank law” regarding seller financing. It appears as though it is going to be very limiting when it comes to any type of seller financing, lease options, etc.
Do you know about these new changes, and if so, how will it affect your course, lease options, and assignments?
This is a good question and it’s one I’ve been getting from a lot of my readers lately.
I’m no attorney – I don’t even play one on TV – so don’t take this as legal advice. But with 25 years of experience as an investor, seeing everything, good and bad, under the sun, here is my first shot at answering it…
The Dodd-Frank Act is almost a thousand pages long. The full implications of it will not be fully known for years to come as legal challenges to it arise over time.
Here is an interesting set of stats that I found on the internet:
“Dodd Frank and its 848 pages of legislation, required that 387 sets of rules be implemented. Twenty-six rules were to be implemented by April 15, 2011, the nine-month anniversary of the legislation. Very few of the deadlines set for April 2011 were met (one statistic placed the compliance rate at around 5.4%). Another whole year plus has now gone by. As of July 2012, reports show that a total of about 221 Dodd Frank rulemaking deadlines have passed. Of them, 140 (63%) have been missed and only 81 (37%) have been met with finalized rules. Additionally, about 142 rule making requirements have not yet even been proposed. Let’s just say that the process is not moving exactly as planned.” – Clark Hill
That was 2012. What is coming is also uncertain.
What we know is that fund managers might be affected. This means that if you create a Limited Partnership (LP) or Limited Liability Company (LLC) and fund it with private equity from sources other than yourself, you may be required to register as an “Investment Adviser.” We aren’t sure yet. Precedent will apply over time.
Most “Mom and Pop” real estate investor companies don’t use Private Money. There are a LOT of training programs and ‘gurus” out there that teach you how to raise private equity from folks who want to invest in real estate, but the only way that anyone with money is going to give it to you is if you have experience, credibility and the ability to convince people with a lot of money to invest in your management abilities. Not an easy thing to do for an experienced investor, let alone a newbie.
If you have these things and can raise the money, getting registered as an Investment Adviser might make sense.
If you don’t have these things, doing it the way I teach makes a lot more sense.
I HATE to ask others for help. This has been, perhaps, one of the biggest weaknesses in my life, but it has defined the way I built my business.
I want control of the deals I do. That means that I don’t want to wait for a bank or an investor or an inspector or ANYONE to give me “permission” to do a deal. I want to have a Buyer, a Seller and myself involved in the transaction. I want those 3 people to decide if the deal is going to happen and have it happen because it benefits all three – not because it’s a revenue generator for a large corporation.
Every deal I do must benefit everyone in the deal – or I don’t do it. Period. I believe this to be an ethical way to do business. I’m not a “corporate raider” – I’m not going to find people in distress and steal from them. Instead, I prefer to take people who need my help and solve their problem… and get paid well for it. Similar to what a brain surgeon does – charges a lot of money for a specific skill that will save your life – despite the fact that he has to cut into your brain and cause a good deal of pain to do it.
Let’s go even deeper – you may remember that a few years ago, Texas implemented one of the most restrictive Lease Option laws in the country. They didn’t restrict Lease Options, they just required new disclosures. We fully comply with this law in Texas when we do deals there – it is MORE restrictive than the Dodd-Frank Act, by the way.
We do it by changing the way we do Lease Options in Texas. We still do them there, we just make sure that we fall outside the guidelines of the law so we don’t have to comply.
By the way, I know of NO INVESTOR in Texas over the past 3 or 4 years since the Texas Law was implemented, who has fallen afoul of that law. I know for CERTAIN that there are investors who don’t do things the way I teach (in order to comply with the law). They do Lease Options the way we do them in the rest of the country/world. They do NOT comply with the law. Despite this, I have never seen anyone have to pay back the lease option buyer because of this law or get fined because of non-compliance.
That doesn’t mean it hasn’t happened or won’t happen, and if it has happened to you, I would be interested in hearing your story – I may even post it here on my blog.
But what it means to me is that the courts are not enforcing it… and if it’s not enforced (like spitting on the sidewalk, jaywalking, etc.) AND you are handling your business ethically and honorably, then is it something to worry about?
If and when Dodd-Frank is implemented. If and when we see rulings on seller financing and lease options. If these things happen, then I believe we need to comply with the rules and find other ways to do business.
Everything I teach complies with the rules – and when they change, I change the way I do business and the way I teach. It’s not that difficult to do. Most legislation is implemented in order to FORCE investors to act ethically. If you START from that position, you don’t have to make many changes to comply with rules that require it.
So – my advice to you?
Don’t be afraid – our business as real estate investors WILL CONTINUE. We will not get shut down. I know there are a lot of “teachers” out there that may want you to think otherwise so they can sell you an information product or service, but use your own head and think this through yourself.
Unless we see a complete failure of capitalism (which I do not believe will happen in my lifetime), we will be able to do business. I speak from over 25 years of experience. I speak from seeing new laws, new methods, new financing, and new ways of doing business. I speak from seeing dozens of laws that the ‘gurus’ purported would END real estate investor business for the small investor. None of them were true.
We always found a way.
With all that said – I am not an attorney and can’t give legal advice. If you feel you need legal help, find an attorney – but find someone who is ACTIVELY investing in creative real estate… don’t just listen to the attorney who gets paid to give you bad news. A good attorney will show you how to comply without ruining your business. If the advice you get from your attorney ruins your business, you need a new attorney. You need a second (or third) opinion and you need to think creatively – Most real estate attorneys don’t even know what a “Subject To” deal is – even though that term is on a HUD-1 document – the document that every conventional closing uses.
More on Dodd-Frank as things progress. Stay tuned.
My summary: I believe it is better to ask forgiveness than it is to ask for permission. If you have to ask permission for everything you do, you won’t get anything accomplished… and rarely is it difficult to ask and receive forgiveness when someone is unhappy if your intentions were honorable to begin with.
So that’s it – hope it helps.