This month we’ll take a look at a new law in Texas that hamstrings investors who want to resell a property on a lease option or land contract, and pending legislation in North Carolina that essentially prevents an investor from taking title subject to an existing deed of trust and then reselling it to a third party on a lease option or land contract.

Texas Senate Bill 629

This law amends Texas law to define lease/option contracts as “executory contracts”. This means that if an investor contracts with a tenant to occupy a property with an option to purchase it later, a sale has actually occurred.

Therefore, the investor loses any ownership tax benefits until the tenant exercises his option to purchase it. He cannot use a 1031 exchange, or get the capital gains tax rate when the tenant does exercise his option. In other words, according to Texas SB 629, the investor who leases a property to a tenant, and offers the tenant an option to buy it at a later date, has sold the property even though he hasn’t.

In addition SB 629 says that you cannot transfer a property unless you have title to it. This absolutely eliminates the possibility of doing a wraparound lease option deal.

Sale Leaseback limitations are not new to us. Although many Gurus recommend them, we here at Foreclosures.com have been warning you of their potential lawsuit liability for a long time – just read our prior Legal Corner column “The Sale-Leaseback Scheme”.

North Carolina House Bill 725

In North Carolina, legislation has been proposed that would prevent anyone from taking title to a property “subject to” existing loans and liens. (Read more about “Subject to” financing HERE). The North Carolina state attorney general’s office has, according to Bill Bronchick of Legalwiz.com been the driving force behind this legislation.

Bronchick says that the North Carolina AG’s office claims to have received “hundreds” of complaints from people who were damaged by defaulting investors who purchased properties “subject to” existing deeds of trust, and then did not keep their loans current after the sale. He goes on to say that, while this occasionally happens he finds it very hard to believe that more than a few complaints have been filed.

Fortunately, the proposed bill died in committee during the last session of the legislature, but we’ve been advised that it will be brought up again, so we’ll discuss it here.

This bill is targeted at the investor who would buy a property from a troubled homeowner “subject to” the existing loan. It would also require that the investor get express written permission from the lender to acquire the property subject to. This is not likely to happen.

If an investor can take title to a property subject to the existing loans, cures the default, and gets the troubled seller some cash – that’s a win-win proposition. If that option is shut off, investors will now need to pay less for the house and finance 100% of their purchase with a hard money loan. So in the end, it is the poor homeowner in default who takes the hit, not the investor.

An odd point is that licensed real estate agents would be exempt from this law. In other words, such agents could act as principals and take title to foreclosure properties subject to, and resell them. They could also force investors to employ them to carry out such transactions.

Hmmm! Do you smell something funny in the air? We do.

The fundamental problem here is that we have state governments interfering with free markets. There is no doubt that financial predators have been violating existing laws as they take advantage of people in financial distress. They use deception, forgery, and outright fraud to carry out their schemes.

Once again, these are criminal practices, and there are already laws on the books to deal with them. We do not need state governments to abrogate or limit the rights of property owners and investors to develop solutions that best suit the objectives of each.

We do not want to see honest and ethical foreclosure property investors, or the people they seek to help, trampled in a stampede of self-righteous politicians.