Lender Seasoning Leaves A Bad Taste
BATTLECALL GUEST EXPERT: Attorney William
Bronchick Of LegalWiz.com
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 at
closing.
For more information, please visit LegalWiz.com.
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