Most people who invest in real estate for commercial or personal reasons are aware of the nifty little transaction that is the “installment land contract.”  This type of arrangement allows an owner of an investment property sell to a buyer over time.  Usually the buyer has poor credit or not enough money for a down payment.  Sometimes the buyer wants to “rent to own.”  The tricky part of these contracts is when title passes from seller to buyer.  Generally speaking, the seller holds title until the buyer has paid all of the installment payments under the contract.  However, there have been circumstances where courts have found that title will pass EARLIER to buyers if the buyer has paid a substantial portion of the installments and the buyer has made improvements to the property, paid the taxes, or otherwise increased the value or acted as if it had title and possession.  There are lots of other potential pitfalls for buyers and sellers under these arrangements – risks such as whether the seller can encumber title during the contract, whether the buyer has sufficient credit to make the payments, whether the agreement should be recorded, etc.  

However, recent legislation has uncovered a new risk: selling an investment property on contract could require a mortgage loan originator license.  The SAFE Act is a federal mandate which allows for the individual states to adopt and add to it.  Indiana’s version can be found at IC 24-4.4-1, First Lien Mortgage Lending. 

A mortgage loan originator license is required under the SAFE Act to sell certain types of loans associated with real estate, in particular, loans associated with a “first lien mortgage” or with a “mortgage transaction.”  A “first lien mortgage” or “mortgage transaction” specifically excludes a “land contract.”  Pursuant to IC 24-4.4-1-301, a land contract means a contract for the sale of real estate in which the seller of the real estate retains legal title to the real estate until the total contract price is paid by the borrower. 

Therefore, if a property owner sells real estate on contract, so long as the seller retains title until all installments are paid, the seller is not required to obtain a mortgage loan originator license.  However, it is far more common that a seller transfers title (either by implied or express conduct) prior to receipt of all installment payments.  Under that scenario, the seller is acting as a holder of a mortgage or note on the property and the seller is required to be licensed as a mortgage loan originator.  Note – this analysis only applies if no exemptions apply.  Exemptions may be available if the property is the seller’s own residence.  

The scary part is the penalties.  The first violation of the SAFE Act can result in a civil fine of $5,000.00.  Repeat violations can result in civil penalties of up to $10,000.00 plus restitution.  These penalties may tip the balance in favor of buyers under these types of arrangements.  It is not difficult to imagine plaintiff’s lawyers using the requirements of the SAFE Act to generate significant damages or get out of a contract completely in the event that a buyer simply got cold feet, was unable to pay the installments, or otherwise didn’t intend to honor its obligations under the agreement. 

The upshot is that owning, renting, and selling investment properties is not nearly as simple as it used to be.  An example might be a good way to demonstrate some of the risks:

Jim owns an old two bedroom house in Broad Ripple.  He purchased the home for $100,000.00 in cash, and plans on holding on to it to generate some income before selling it.  Tina comes along and rents it for $1000.00/month for one year.  During year two, Tina mentions that she wants to buy it, but she can’t get a mortgage because her credit is bad and she doesn’t have enough money for a down payment.  Jim and Tina enter into an installment land contract which provides that Tina will pay Jim $160,000.00 plus 5% interest for a total price of $168,000.00, payable in equal $2000.00 monthly installments for 84 months.  During the installment contract, Tina puts a lot of money in the house, including fixing the foundation, building a new garage, paying all the taxes, and repairing everything that needed fixing.  With 14 months remaining on the installment contract, Tina runs out of money and can’t meet her monthly payment obligations.  Jim tries to evict her, claiming that she doesn’t own the house.  Tina claims that title transferred to her because she paid the majority of the payments, the work and money she invested in the house, and the relative length of time left on the contract.  Tina also claims that since Jim transferred title to her prior to the end of the contract, he was acting as a holder of a note without the requisite mortgage loan originator license.  At this point Tina can pick her remedy.  She could seek to recover all the money she paid to Jim and walk away from the house OR she could seek to enforce the contract and get title.  Both approaches cut against Jim. 

See how this new law could really screw sellers?  Be sure you understand installment contracts and their unique problems.  They are very popular right now because of the number of investment properties out there coupled with the cash crunch for many would-be borrowers.   As a seller, don’t give your buyer so many “outs.”

Come to a great Network of Women in Business event next week!  Hannah will be speaking to a group of like-minded women about her career and experiences as an attorney and small business owner.

For more information: http://www.nowib.com/index.php?cid=121910&src=events&srctype=detail&refno=365&category=Lunch-N-Learn%20SIG&curlid=231

Please see the following article that I wrote for this week’s IBJ. 

JOSEPH: Is working for yourself or for others riskier?

Hannah Kaufman Joseph

June 25, 2011

As an attorney working with people starting small businesses, and as an entrepreneur myself, I frequently ask my clients why they are becoming entrepreneurs.

The conventional wisdom that owning your own business is a high-risk proposition is not just rhetoric—the U.S. Small Business Administration estimates that only two-thirds of small businesses survive at least two years, and that rate falls to 44 percent at four years and 31 percent at seven years. In the face of those long odds, I press my clients on their reasons. More and more, I am hearing a variation on the refrain of “Owning my own business may be risky, but at least it is a risk over which I have some degree of control.”

Many new business owners are what have come to be known as “accidental” or “forced” entrepreneurs. They have been laid off, pushed into early retirement, or simply fired unceremoniously, often after years of dedicated service to their employer. They have watched their benefits diminish to dust, accepted longer hours for less money, and faced the outcome they had dreaded—the loss of their job during the longest and deepest recession most people can remember.

After going through that traumatic experience, many people have explained to me that they simply refuse to get on the roller coaster again. Some did attempt to find other corporate jobs, but some felt liberated from their cubicles. In either case, they arrived at the conclusion that business ownership, with its attendant risks, was simply less risky than being at the whims of a faceless, nameless executive who decided to “downsize” a department in the name of efficiency, yet still received his bloated bonus.

People are mad. They are tired of being jerked around, overworked, underpaid and expected to just take what they can get, including no retirement, crappy health care and no job security.

What I find exciting is that people are channeling that anger into ambition. Many are realizing that pursuing their dream of making money from their hobby of cooking, making cute jewelry, organizing closets or writing software code can become a reality, once they are freed from the notion that it is too risky to give up a salary. The hard part has often been done for them, and now they don’t want to go through the pain, humiliation or fear ever again.

The risks of entrepreneurship are quite different from the risks of unemployment. These are risks that can be mitigated, with the right planning, guidance and discipline. Traditional employees of this decade are too familiar with the unfairness of a system in which performance may have nothing to do with job retention. But in business ownership, individual performance is the key indicator of success. You depend on yourself and yourself alone to do the things it takes to be profitable and successful, such as keeping overhead low, growing organically and strategically, and hitting the pavement to look for business the good old-fashioned way.

That is what makes being an entrepreneur both scary and exhilarating. You will never have to clock in again and fear that HR will terminate you for another doctor’s appointment for your kid. It is true that when you own your own business, you are never off the clock. But it is your clock.

__________

Joseph is partner at Joseph and Turow PC, a local firm specializing in small-business law and entrepreneurial services. She also is an adjunct professor at the Indiana University School of Law in Indianapolis. For more information, visit www.josephturow.com.

The law is full of old wives tales.  One of my favorites is that a penny will throw off a breathalyzer.  Last time I checked, the technology was a bit more sophisticated than that, but you would be surprised at how persistently these types of stories can linger.  Another one that I hear quite regularly is that letters of intent are not enforceable.  However, a recent case decided by the Indiana Court of Appeals demonstrates that quite clearly is a myth. 

In Block v. Magura, the Court held that a letter of intent is enforceable if the substance of the agreement demonstrates that it is a contract under Indiana law.  To be a contract, an agreement must contain the essential terms of the deal.  If the essential terms, such as the subject matter of the agreement, price, method of payment, conditions to the agreement and the parties are specified, there is a likelihood that a contract may be found to exist.  The Court was not persuaded that the document was entitled a “Letter of Intent” and it did not consider the items left out of the LOI (type of financing, date of closing, method of transfer) as essential to the agreement.  The upshot of this holding is that the Court is not making a bright line rule for LOIs.  It will depend on the facts and circumstances of each agreement whether the essential terms of the deal are captured by an LOI.

Secondly, LOIs frequently contain language that makes the deal contingent upon the execution of a fully negotiated agreement.  However, in this instance, the LOI was missing magic language that the subsequent formal agreement would contain additional material terms.  Instead the LOI simply stated that the formal agreement would incorporate the terms of the LOI.  The Court found that this language demonstrated the parties intent to be bound by the LOI and enforced the agreement. 

The takeaway here is that LOIs are not the safety net everyone thinks they are.  When clients end up spending significant time negotiating and drafting LOIs, I wonder why we aren’t simply getting to the agreement.  There are limited circumstances in which LOIs serve their purpose, particularly in transactions involving significant due diligence.  However, businesses should be cautious to understand that LOIs can be far more binding than widely understood, and that like any other written agreement, they should be treated with seriousness and reviewed carefully.

For the text of the full Court of Appeals opinion, click here: http://www.ai.org/judiciary/opinions/pdf/05311102mgr.pdf

NY Congressman Anthony Weiner is under fire for a tweet.  The missive in question involves a photo of men’s underpants and a college student.  It is really not even newsworthy when someone is the center of a controversy involving questionable social media choices (Gilbert Gottfried – I am talking to you).   But what makes this situation unusual, AND newsworthy is that Representative Weiner claims that he was hacked and that he had nothing to do with the dirty tweet.  Nonetheless, he has lawyered up, presumably as a PR tactic to demonstrate that he is “taking the incident seriously” and exploring whether he should seek criminal or civil remedies.

Just when we thought it was getting safe to go back online, that we understood the rules of the game, that most people knew the basic do’s and don’ts of using social media, situations like this one arise.  We should all remember that social media is simply another format of expression – a medium.  People will use it – for good or evil- in the same manner they can use any other tool.  The difference with social media tools such as Twitter is that the damage can often be further reaching, more permanent, and much more challenging to control.  If Representative Weiner was not responsible for the tweet, and given recent scandals in BOTH parties, that is still an if, then we can be sure that his hacker certainly understood the power and influence of Twitter.  Do you?  And is your account and mobile device secure?  What kind of Tweet would be damning to you or your business?

Here is more information about the news story: http://www.cbsnews.com/8301-503544_162-20067501-503544.html

http://mashable.com/2011/05/25/entrepreneur-brand-building/

 There are two very important things for business owners to remember when making comparisons to their competition:

1. The possibility of an unintended negative public relations effect.

2. If the comparisons you are making are not true, or not well substantiated, you are taking on a legal risk for claims of defamation. 

Even Facebook can screw this up: http://tinyurl.com/3llrlzn

The Business Ownership Initiative of Indianapolis is hosting a workshop on the Basics of Commercial Lease Negotiations. Hannah will be speaking on how to better understand the language of commercial leases, common provisions and what to look for when reviewing a lease agreement.  Learn how to best negotiate terms and what to consider before you sign.

Tuesday, April 12, 6 – 8 pm

Cost: $10  

Class is held at BOI’s office at 4755 Kingsway Drive, Suite 314.  Call BOI at (317) 917-3266 ext. 100 to register.

http://www.businessownership.org/courseDetail.php?workshopID=41