Will LLC Eliminate Problem With New Flipping Laws?
I currently have a REO property. I purchased it for 25K. I have someone who wants to buy it from me for 50K. With 8K in repiars done the FMV of the house is 70K. The person buying the house's mortgage company has a problem with the house changing hands in such a short time, I have only had the house for two months. My guess is that the mortgage company is going by the new anti-flipping laws. My question is, if I form a LLC, and purchase my propertys in the LLC's name, when I find a buyer, can I ad them to the LLC so that when they go to aquire financing, the house is not legally changing hands?. The buyer's only interest in the LLC would be that particular property. All financing and financial responsibility would be on the buyer. From what I understand about LLC's this will work. If i'm wrong let me know and give me A better way to do this. To make a long story short, this is what I want to do. I want to get purchase agreements on propertys, and then flip them to my investors. I want to make my investors part of my LLC so that that after I lock down a property with the purchase agreement, the investor can finish the transaction.
[ Edited by CGOODEN on Date 07/10/2003 ][ Edited by CGOODEN on Date 07/10/2003 ]
GGOODEN,
I'm surprised there hasn't been more of a response to this post earlier than now. I am responding only because your post popped up in my research of the new laws. I am in the loan business as well as foreclosure acquisition and "quick turn" of properties, but believe me I have been running into the same problem.
The Fed anti-flipping regs, to my knowledge are limited to HUD mandates on FHA insured properties. They do not apply, nor were they intended to penalize loan companies funding non-FHA insured loans. However, uninformed lenders have developed the misinformed mind-set that "flipping" is illegal and properties need to be seasoned by 90+ day ownership with deed acquisition proven through recording. AGAIN, THIS APPLIES TO END BUYER LOANS THROUGH END_LENDERS BACKED BY FHA INSURED LOANS ONLY.
What you need to do is verify that the lender understands this and that you are not making the egregious 50-150% profit that the law was designed to protect against. Nor are they developing the loan for the outrageously high interest rate and victimizing the borrower through predatory lending practices, nor are they insuring against default with FHA insurance.
Hope this answer helps and stimulates response from others who will soon realize that this misinterpretation of the FHA guidelines will be affecting the entire investor industry of quick turns, unless we educate the conventional, nonconforming lenders out there.
OMI Steve
I think this topic would have been better addressed as one dealing with ANTI-Flipping Laws.
If you read the Fed definition of "flipping" it states:
"This final rule addresses property ``flipping,'' the practice
whereby a property recently acquired is resold for a considerable
profit with an artificially inflated value, often abetted by a lender's
collusion with the appraiser. "
"Re-sales occurring 90 days or less following acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within days. Thus, the "quick flips" will be eliminated. "
HUD believes that "short re-sales executed within 90 days imply pre-
arranged transactions that often prove to be among the most egregious
examples of predatory lending practices and, thus, will not insure
mortgages on these ``flipped'' properties. Ninety days is also not an
unreasonable waiting period if actual rehabilitation and repairs of a
property occur before the property is re-sold. "
Hope this helps supplement my response above. It would be nice to see some comments by the subject to and foreclosure guru's affiliated with this site.
OMISteve
I'd be in heaven if I only had to wait 90 days.
I can't find a loan for my buyers because all the loan officers say I need to own the property for 1 to 2 years!
Mrs. Meltzer
time to find new lenders. There are lenders that allow "no seasoning" "low seasoning" and/or double closes. Find them and you'll be in business.
Look in the "lender" section and on google and you'll be in business.
FHA insured loans will not approve buyers for the purchase of property not owned for a minimum of 90 days
In Illinois, actually they will not lend unless it is for 180 days, unless the lender can convince FHA to make an acception.
Bring in conventional loans w/ your buyers or hold the property longer.
Realistically a property ownership period of 3 months is fairly common when dealing with rehabs and some flips.
good luck
joe
Tannis
Realistically, I try to find a buyer for the property while I am negotiating with the bank for short purchase. i.e buyer wants to buy at or below market and I am accessing at well below market and prior mortgage. If I am buying at 120 and market is 150, the buyer's lender, even if not FHA insured says Whoa-a-a this is a flip and we will not fund to payoff a short at 120, give REI 30 minus costs. Only way I see around is pay cash payoff, and resell when title recorded and double closing costs, (or) have side deal with buyer to enter carry-back second mortgage dated and recorded after closing, and transact deal as if assigning short purchase to your buyer for price negotiated.
Any other comments or suggestions???
I have found 2 lenders that will finance w/ no seasoning issues. However they are subprime lenders. Downside is if your end buyer has good credit and use a subprime lender, they will only qualify for subprime rates which at this time the best rates are around 8%. Also these subprime lenders have prepays for 2yrs, so your end buyer would be stuck w/ the high interest for 2yrs unless they are willing to pay the prepay. On the other hand, if your end buyer has not so good credit and is planning on living at the property forever, than this would work out perfect. I have not found a prime lender who will do a purchase under 6mo or a refi under 3mo. for more than what the property was originally bought for.
Just search your areas for subprime lenders and you should be able to find some that don't have seasoning issues.
Is it true that subprime do not require PMI insurance? If so that makes up for the 8% interest.
I have done two rehabs/slow flips on two houses in the last eight months. One was a fire rehab that took 6 months. We did have some resistence on that one - but my partner (1/2 owner) was also the mortgage broker and the realtor. I feel that there would have been less resistence if she did not have so many fingers in the pie. Tthey forced us to take a more conservative appraised price as the selling price. We lost 5k. The second one I purchased for 85k and sold in 3 months (on Halloween) for 136k and Chase was the lender. I was asked for zero receipts and there were no problems.
Brenda
in response to CGooden's original question, Why not sell the LLC to your end buyer to get around the non-assignment clause normally imposed by the bank that is selling the REO? You could even create a note secured by a deed of trust (for the amount that the LLC was worth) for your end buyer to further maximize your profits and appeal to a broader base of buyers. Just be sure to record after they close on the first.
Have your buyer get a hard-money loan or private money. Switch lenders and
go conventional.
Jeffrey Adam
[addsig]
OmniSteve:
Have your buyer go conventional or you
buy it, get some cash up front and do a
lease option until you have seasoning
required.
Jeffrey Adam
[ Edited by JeffreyAdam on Date 01/22/2004 ][ Edited by JeffreyAdam on Date 01/22/2004 ]
Given that the average lenght of time it takes to rehab a house and find a qualified buyer is between 4-6 months. Why are you having problems with mortgage brokers?While you are arguing with the mortgage brokers/bankers and banks the seasoning problem is curing itself.
I have to comment that I think we have gotten off track from what the original post on this was. To me, it looks like DGooden was trying to wholesale this property, not rehanb it and retail it.
In this case, he would certainly run into the new anti-flipping laws. I did like the suggestion to simply do a Lease Option with the investor until they can qualify for the title seasoning requirement. What about a contract for deed? I admit I don't know much about contracts for deed, but seems like that might work here as well??
I think it has been established that the anti-flipping rule is an FHA mandate and the other non-FHA lenders can follow or not follow based on their own lending policies.
The appraiser is required in their appraisal report to address and discuss the history of the property for the past three (use to be one) years. This sometimes will send up red flairs and these nonFHA lenders may then be more cautious in their LTV or qualification requirements for the loan. This applies to all appraisals-FHA,Conventional&VA.
Reading CGoodens original post, it appears that he thinks he can just give the purchaser a "piece of the LLC" which applies to that specific property but not to the rest of the assets of the LLC. No, I think that he would have to form a seperated and distinct LLC for each property. I think you can see the problem with EIN, filing, records, reporting, etc,etc,
The solution is quite simple. Put the house entrust in the first name of the previous owner, the bank will assume that the house has been placed entrust by the owner and is "seasoned" like a good NY Strip Steak. :-o
1) There i not a flipping law. Many BC (sub-prime) lenders and FHA have seasoning requirements. FHA's minimum is 90 days from purchase to contract effective. There is no seasoning requirements with conventional (prime) lenders or VA.
2) When you purchased the house either in personal name or in LLC name, it changed title. So the seasoning requirements are in effect when you purchase. The LLC switchero will not help.
3) It is very difficult to get financing for an LLC. So once the "owner" is in control of the LLC, he will have to quick claim out of the LLC into his personal name to get funding.
So your options are to only sell to people that are using conventional lending. this is what I do. Prior to signing a P&S I get a pre-approval letter and have their lender identified. You can do a very short term lease option. Sell only to cash buyers. Wait 90 days for FHA or however long for the other sub-prime lenders seasonging requirements.
If you are not buying REO, say you are buying directly from the seller, you could buy into land trust, "SMITH FAMILY TRUST" and it will more likely appear that the smith family still owns it but you are the trustee. this helps seasoning issues. Of course then you will have to be a cash buy from johnny smith.
Brenda