Home Selling in Dearborn>Question Details

Emad Hassoun…, Both Buyer and Seller in Texas

I'm purcasing a bank owned home in Dearborn that I'm planning to flip. I heard I cant sell the property to

Asked by Emad Hassouneh, Texas Tue Feb 19, 2008

buyer with a FHA loan. Apparently I have to wait 6mos to a year before I can sell to a FHA buyer. Is this true?

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0 votes Thank Flag Link Tue May 13, 2008
What you're concerned about is called "seasoning." Lenders have gotten stricter with this because they've become (understandably) more concerned about inflated prices. Let's say you buy a bank owned property for $200,000. You put $25,000 of work into it, and so 3 months after you bought it, it's now worth $300,000. You get a contract to buy at $300,000. A lender might get nervous seeing that their applicant (your buyer) is buying a $300,000 property that 3 months before sold for $200,000. Even if you supply information (pictures, copies of receipts for the work), many lenders will still be skittish.

So, what do you do? Obviously, you can hold for a year or longer. But then you lose the quick return that a flip provides. So...

Search out a good mortgage broker. Find one who works with lenders who will lend to a buyer of a rehabbed property. You want to do that for several reasons. First, you want to know what's out there and what's available. You'll also want to tell your buyer that. And, really most important, you want to remain in control. You don't want to buy a property, rehab it, market it, and then have the buyer botch the transaction because he/she has gone to his/her local bank, and that local bank is afraid to do the loan. Stay in control.

Second technique (though I'd really stick with the first one, above; I just present this to show that there are a couple of different ways to make this work): Buy the property. Then create an Illinois-style land trust. It can be called whatever you like, though it's nice if you identify it by the address--i.e., 123 Main Street Land Trust. Move the property into the trust. The mortgage will still be in your name, and there's no due on sale clause applicable (it's an exemption in the Garn St. Germain Act). So, the mortgage is in your name, but ownership of the actual property is now vested with the trust's trustee. And the real estate--the property--is now within an item of personal property (personalty)--the trust.

You sell a portion (up to 90%...you must retain some ownership of the trust in order to avoid triggering the due on sale clause) to the property's buyer. The property's buyer also signs a residency agreement--somewhat similar to a lease--with the trust, thereby leasing the property from the trust. And another document specifies that, after a specified period of time, the property will be brought out of the trust and the "buyer" will have first rights to purchase the property. Every month, the "buyer," the resident beneficiary of the trust, makes his monthly payments to the Trustee, who then pays the mortgage. At some point, a year or two later depending on what you've agreed to, the property is brought out of the trust, the buyer buys the property, and the deal is concluded.

Using a land trust seasons your mortgage. It's remained in your name for the year or two until property is brought out of the trust and sold to him. You won't be able to get all of your money out at inception, but--somewhat similar to a lease-option--the buyer will provide an option fee at inception. The option fee is negotiable, but you might make it similar to what a person would provide as a down payment, if he were purchasing the property--i.e., 5% or 10%, or even more.

I've also heard of people putting the property into an LLC to address the seasoning issue and for asset protection. However, I'm more familiar and comfortable with land trusts. Still, that's another option to consider.

But my first recommendation would be to find lenders with programs that will allow a buyer to purchase your property without worrying about seasoning. And stay in control of the process.

Hope that helps.
0 votes Thank Flag Link Wed Feb 20, 2008
Don Tepper, Real Estate Pro in Fairfax, VA
Emad - You have some great suggestions. To answer Gary's question ~ yes a lender can find out if it is a flip. A lot of lenders are requiring a 2 year "chain of title". That means they want the ownership history and copies of deeds for the last 2 years to see who owned the property and how much they paid. It doesn't mean they will deny the property. It may require more legwork (like additional comps, detailed explanations, etc.) to get the deal done. Good luck. Your buyer may not even need that type of loan.

Nicole Sleeva
Web Reference: http://www.NicoleSleeva.com
0 votes Thank Flag Link Wed Feb 20, 2008
Certain lenders don't have an appetite for flips. I would contact a loan officer to have them look up the guidelines for you.
Web Reference: http://getprequalified.com
0 votes Thank Flag Link Tue Feb 19, 2008
Emad, Buyers must perform their own due diligence in any purchase. If this is a flip, does the lender know that? They should be able to provide you with answers before you purchase.

Good luck, I hope you net a profit.
Web Reference: http://mi-living.com
0 votes Thank Flag Link Tue Feb 19, 2008
Hi Emad - It is true with some loan programs. As a former mortgage underwriter, the lender I worked for required proof that efforts were made to improve the property, i.e. receipts for repairs/updates. With Michigan having the highest foreclosure rate, many lenders are requiring more and more checks and balances. Good luck with your business venture!

Nicole Sleeva
Web Reference: http://www.NicoleSleeva.com
0 votes Thank Flag Link Tue Feb 19, 2008
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