|Lender Seasoning Leaves a Bad Taste
There has been a lot of negative press and misinformation lately about double-closings. Many people
have been indicted recently under what the press has called "Property Flipping Scams."
Uninformed lenders, real estate agents and title companies will tell you that double-closings are now
illegal. In fact, they are nothing of the sort.
The so-called property-flipping schemes work as follows: unscrupulous investors buy cheap, run-down
properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell
them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage
broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a
buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured
by the Federal Housing Authority (FHA), the Senate has held hearings to investigate this practice.
Despite the negative press, neither flipping nor double-closings is illegal. The activities described
above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity
as illegal "property flipping," rather than simply "loan fraud." As a result of
this mislabel, some lenders have placed "seasoning" requirements on the seller's ownership.
If the seller has not owned the property for at least twelve months, the lender will assume that the
deal is fishy and refuse to fund the retailer's loan. If you stay in control of the loan process and
steer your buyers to a mortgage company that doesn't have a hang-up with double-closings, then seasoning
isn't an issue.
At a recent seminar, a couple of experienced investors shared a great solution to the title
"seasoning" issue. Some lenders don't like double closings because if the seller hasn't owned
the property for 12 months, the lender funding the new loan assumes that the price is inflated (actually,
they trained to be a lender in Russia, where it is unconscionable for an investor to make a profit in a
short time period).
When the END-buyer applies for a loan, the underwriting department looks at the chain of title to see
how long the seller has owned it. In the case of a double closing, the investor is not even on title at
this point, so the lender has a cow!
SOLUTION: Create a land trust with the seller's name on it (e.g., if the seller is John Smith, call
it the "Smith Family Trust."). Seller deeds the property to the trust before closing. If the
lender checks the chain of title, they will see that the seller has been on title for years and recently
transferred title to a trust.
At closing, the seller assigns his beneficial interest in the trust to the investor and resigns as
trustee, making the investor the successor trustee (an assignment of beneficial interest in a land trust
is a sale for tax purposes). The new trustee (investor) signs a deed from the Smith Trust to the buyer
Copyright 2000 All Rights Reserved. No part of this publication may be copied
or reprinted without the express written permission of the Author.
William Bronchick, Esq.
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