The Georgia SAFE Act and What It Means to Investors Using Owner Financing

Congress has reacted to the financial meltdown in the housing sector in a number of interesting ways. Very few of them, I feel, are likely to actually deal with the root issues of why the bubble grew so much in the first place. In 2008, the US Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Also called SAFE Mortgage Licensing Act or simply the SAFE Act).  The main purpose of the act was to restrict the ability to make mortgages to those that are licensed by the state. Georgia incorporated the SAFE act into law in 2010 with an update to the Georgia Residential Mortgage Act (Called GRMA) that can be found in O.C.G.A. 7-1-1000 and following to about 7-1-1018. The changes to the law have significant impact on investors who buy real property in Georgia and sell it using owner financing.

The first and easiest thing to note is that there are no changes when the purchaser is an investor. The law does not attempt to restrict buyers who are also investors. If you are an investor-to-investor seller of property, you need read no further and be glad that this is the case.

If the purchaser is intending to live in the house, then you have to be aware of the new changes. The code requires anyone owner financing to be licensed by the state unless the purchase falls under one of seventeen exceptions found in O.C.G.A. 7-1-1001(a).  Most of these exceptions will not apply to an investor seller. I will speak to the two that do, and encourage you to read the act yourself if you think you may have another exception.

The biggest exception that I see applying to an investor selling his house to an owner occupant is exception number 8 which states that “Any natural person or the estate of or trust created by a natural person making a mortgage loan with his or her own funds for his or her own investment, including those natural persons or the estates of or trusts created by such natural persons who make a purchase money mortgage for financing sales of their own property.”  This seems pretty good but does have some important caveats. Firstly, the lender must be a natural person. This means no corporation or LLC can lend without being licensed. Second, the lender must cover any funds using their own money and not the money of others. This is usually not a big deal. Often when a lender owner finances, they will only cover the purchase price, and so the owner/lender does not have to put any money down.  If the lender plans to zero out the borrower, the lender will have to cover closing costs, tax prorations, and other charges that would require them to bring money to the closing. That money must come from the owner/lender’s funds.

There is an exception that allows the owner/lender to use other people’s money. Its exception number 16. Unfortunately, that also restricts the number of closings done that way to five a year. This may be sufficient for the smaller investors.

It has been pointed out that this exception may be removed in O.C.G.A. 7-1-1001(b) and so there is some concern in this regard. Most lawyers on the Georgia Real Property Listserve agree that this law is very poorly written and difficult to understand. The Georgia Bar is working on refining the law and making the exceptions more clear.

Assuming the above is correct, what is the Investor who wishes to sell property to owner occupants using owner-financed mortgages to do?  It looks like there are three options. The first is to ignore the law. It was enacted very recently and has admittedly several problems with it. There are attempts already being made to help refine the law and resolve several of the more glaring issues.  The downside to ignoring the law is that there are felony charges applied to violating the law.  No one looks good in orange. The upside is that the law specifically allows for a judge or jury to drop the charge to a misdemeanor if it appears the violations were not flagrant or malicious. If no one complains about the way the loan was done and doesn’t feel cheated, it is unlikely a violator will be charged with a felony.  That said, this is a very serious risk and not recommended.

The second option is to lend only in the name of the actual investor and not a corporation or LLC and to use only the actual investor’s own money. This seems much more safe with regard to the statute. There is an issue of O.C.G.A. 7-1-1001(b) causing the investor to still be at risk, but it seems far less likely to run afoul of the law. The downside is that the investor would lose the liability protection of a corporation and possibly there would be some tax consequences. This seems to be the easiest  way to simply continue business as usual.

The third option is to get a lender’s license. O.C.G.A 7-1-1003 covers the process to get a license and it is actually not that difficult. There is an application and generally about $1000 a year in fees. If an investor wishes to make a habit out of lender financing, and wishes to fully comply with the law without fear of any issues, this may be the way to go.

As usual, feel free to contact John Maurer Law if you found this article raises more questions than it answers for you. I look forward to hearing from you.

About the Author: John Maurer has been practicing law since 1996 and specializing in real estate law since 1998. John opened his own law firm in 2004 and specializes in residential real estate transactions for real estate investor clients. John Maurer’s law firm can be reached at (678) 443-9622. Click here for other Articles by John Maurer.