Equity – New Work for Equity Requirements

Well, we recently got caught in another regulation change on our way to closing. Are you aware that there are new work for equity requirements? Do you even know what that means?

We do a lot of lease to own contracts for selling. We buy homes and put tenants under lease to own because they’re unable to get traditional financing. We work on their credit and give work for equity credits to help them raise their needed down payment. That’s been working beautifully for years. As with everything else in the 2010 finance regulations, new requirements!

1.  For existing construction, which is generally our area: only repairs or improvements listed on the appraisal are eligible for work for equity. Any work or materials not included on the appraisal are not eligible.                                                         

OK, so here’s the problem. What appraisal? This means that, before I put a tenant in with work for equity opportunities, the lender wants me to get an appraiser to look at the work they will be doing and set a price for it. Ugh.

Then, the appraiser must look at it after the work is done to confirm the work and the value. Ugh.

2.  For any new construction, the sales contract has to list the work for equity work to be performed by the buyer so that a value can be assigned and confirmed.

3.  On the borrower’s side, guidelines state that “the borrower must demonstrate his/her ability to complete the work in a satisfactory manner.”  Um, is that left up to someone’s interpretation? Ugh.

4.  “The lender must document the contributory value of the labor either through the appraiser’s estimate or a cost-estimating service.”  What’s a cost-estimating service? Ugh.

5.  Here is what they list as the things that may not be included in work for equity: delayed work, clean up, debris removal and other “general maintenance”.

OK, a few problems with this sentence. Clean up may not be counted? Have they ever seen the way we buy some of these houses? We recently spent over $3000 at the dump for a house we bought just getting rid of the personal possessions left behind. Not great possessions, mind you, there were 52 tires in the house. But, nevertheless, “clean up”, in my bookkeeping, counts as an expense.

And other “general maintenance”. Someones interpretation?  Ugh.

We spent over $6000 on interior paint. Warning, the lender may not allow it. This fell into a gray area – is it a repair, or is it cosmetic? “You have to be kidding me!” They are not. Beware, paint may not count toward work for equity.  Ugh.

6.  Cash back to borrower is not permitted in work for equity. Fair enough. Thanks for the warning.

7.  Compensation for work performed on other properties may not be allowed toward the property being purchased. I can live with that one.

8.  If the borrower furnishes funds and materials, the borrower must provide evidence of the source of funds and the market value of the materials. They must turn in all receipts to the lender.

9.  One of the things not on the list is monthly credits. We give monthly credits toward purchase when we receive on-time payments. Well, if our rent is not high enough, that is not allowed. For example, the lender determined the average rent in one of the neighborhoods we are in to be $1200. This neighborhood has everything from apartment complexes to $500,000 homes. (That’s the first problem with their chart.)

At any rate, if we want to give $200 per month credit toward purchase, we must charge at least $1400 per month in that particular neighborhood or its disallowed. That works great for the larger homes in the neighborhood;it will not work at all for the small homes. The credit allowed is based on the lender’s charts, not on the individual house value or sales amount. Ugh.

Sellers are doing more and more to help buyers qualify for purchase. It seems the lenders keep fighting us.

I understand the lender’s perspective, they want the buyer to have REAL skin in the game and I agree. However… with all the vacant and, often times, trashed homes on the market, you’d think the lenders would lighten up on the roadblocks.

I still love what I do, but more and more often I hear myself say, “Ugh.”