Overcoming The Rehabber Title Seasoning Problem
Many times rehabbers are “stuck” holding a mortgage or holding onto the property as a rental because the title has not been seasoned long enough for a bank to finance an end Buyer.
Rehabbers can overcome this issue if they are willing to think outside of the box and work with a little creative financing. They can structure their sale to their end buyer as a seller financed transaction (underlying liens, etc., are not a problem). At the closing table, they sell (or assign) that seller financed mortgage to an investor (a note buyer) for the cash. From those funds, all underlying liens (if any) are paid off and the balance is paid directly to the rehabber (the seller). It is a type of simultaneous closing that has become a great tool for the savvy rehabber. The catch is (and yes, of course, there is always a catch) is that all seller financed notes are purchased at a discount depending upon the buyer’s credit, the note structure, etc., so the rehabber must be willing to give up a bit of his profit (usually anywhere from 5-10% of the mortgage balance) in order to cash out of the deal. By finding the right Buyer and structuring the note properly, the discount can be minimized to usually work for the rehabber and not hurt his profit margin too heavily.
This type of deal only works AFTER the rehabber owns the property and the repairs have been done. Investors will not put money into the deal for the repairs. The appraisal must be in as-is condition. Many times a list of the repairs and copies of the receipts are required as well.
However, this can work quite well for a property flip where no repairs are required. In that situation, we can actually work a triple simultaneous closing where 1) property is put under contract between the original seller and the flipper; 2) the property is put under contract (for a higher price) between the flipper and an end Buyer; and 3) the deal is structured as seller financed and the mortgage is purchased at closing to fund the original seller and any underlying liens. The only “catch” here is that the final sales price in the second sale must truly reflect the value of the property. There can be no inflation of prices. We usually ask for a detailed explanation of how and why the property was acquired cheaply and then re-sold so quickly for a higher price. If the deal is just and makes sense and the value is supported, this deal can be done.
Hope that gets the creative juices flowing!
Michele,
Well written, and a tool that I believe more rehabbers will utilize given the right circumstances.
I know of a property in the town next to me that was rehabbed, and a realtor has been trying to sell it for 5 months. Dropped the price 2-3 times.
I am calling the realtor this week to try and structure one of these new note sales for one of my investors to try and faciliate the sale, as the holding costs must be eating these folks up. The kicker is, the house looks great on the outside!
Thanks for the great article. And it confirms for me that the deals involving flippers, or investors assigning or selling their contract to an end buyer, or really a triple close (or a TRUE double close, if you count the purchase of the new note as really an assignment of mortgage/DOT).
But I have a question: can you only do these triple closes when the flipper is flipping to an owner-occupant on a home that at worst needs some cosmetic work, or can you do it with flips to rehabbers on junk properties?
Thanks, Dave Hayes, Real Estate Options, LLC
Dave,
I'm glad you found this article useful! We usually only see these types of deals after the rehab work is completed - BUT if the rehabber had his own money to do repairs and the appraised value in it's AS IS condition supported the sales price to the rehabber.... then, theoretically it could be used to flip to the rehabber. This is usually not done but only because if the rehabber needs financing to buy the property he usually also needs financing to repair the property. Since this type of deal is considered an investment and not a loan.... the funds are only based on the property in it's AS IS condition.... and no funds are given to do the repairs.
Thanks so much for the insight.
Michele
I am curious, I have found title seasoning to be an issue only on FHA/VA loans. With conventional this has not been an issue. Wouldn't it be preferrable to have them seek conventional financing and keep the 5-10% ??
Randall
Randall,
If you can find your end buyer financing... then yes.... by all means do that! This strategy is a tool to use only when traditional financing cannot be obtained or is not desired. Thanks!
Michele
thank you