Wednesday, January 30, 2013

Are Deed Restrictions Going To Be Customary in Every Bank Owned Property and Short Sale?

     As most know, Bank of America has placed a 60 day deed restriction on the sale of any inventory in their REO department as well as on any short sales they approve as the mortgagor.  This restriction prohibits the deed from being transferred into another name or entity for a period of 60 days.  This constraint seems to be taking hold in the defaulted asset arena as other banks and GSE's seem to be placing the same restrictions on their foreclosures and short sales.

     Below is an example of the addendum that Wells Fargo is now requiring with the approval of their short sales:


      This basically states that you are not allowed to transfer title even if it was being sold for a loss.  It also states that after the 30 day deed restriction, you may not sell this property for more than 120% of what it was purchased at for a period of 90 days.  Unfortunately, this is going to take place on nearly every foreclosure and short sale. Fannie Mae is the one behind this change to short sales.

     In a recent press release on January 18th, Fannie Mae announced that all mortgage backed securities owned by this GSE will be sold with a 30 day deed restriction if they are sold as a short sale.  Since Fannie Mae purchases nearly 70% of all mortgages, this will have a dramatic effect on how investors purchase these transactions.  Investors who are in the transactional business will be forced to hold properties longer instead of quickly reselling them.  

     If Fannie Mae continues to follow the path of Bank of America, this will lead to a 60 day deed restriction. This deed restriction will not only be limited to short sales, but will also be placed on REOs as well.  For many investors, this will end the way they do business.  Many will change careers, leaving the few who can adapt privy to more inventory with less competition.

     


7 comments:

  1. Good article Mike. Looks like a lot more LLC's are about to formed to buy these, which is just going to make things more expensive...

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  2. I've been told differing opinions of advice from separate legal council as to rather forming an LLC and selling it within the restricted time is still considered a violation. If all REO property goes to this, I advise just holding them and flipping after the restriction period is over.

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  3. Few issues here to discuss, let's start with Deed Restrictions.

    Applies to the wholesaler (or whichever party is making the acquisition):

    1) Request that the provision be excluded from the contract. This can be done but your success will depend on the asset manager.
    2) If your request to remove the provision is denied, offer to pay to remove it from the contract.

    Applies to the rehabber:

    3) Set up an agreement with your rehab lender in which they agree to modify your loan once the 90 days expires. This will allow you to increase the loan amount since title insurance can be modified to reflect the higher loan amount after 90 days. Just keep in mind that you will incur additional closing and recording costs.
    4) Ignore it temporarily. Simply hold on to the property for 90 days before either getting a rehab loan on it or selling it. In this case, simply build in the cost for holding the property into your offer. In addition to actual holding costs, don't forget to also build in an opportunity cost...time is money.
    5) Ignore it entirely. Simply finance all (or part) of the deal with cash or a line of credit.

    Second issue is setting up LLC's to put the property under them as assets... in TX, it's $300 a shot, plus you half to find someone as a Registered Agent. Can be done, and sell the LLC entirely (name-lic-tax ID...) But that also takes time, close to the timeframe of the deed restrictions.

    Or

    You can be a Foreign Entity purchasing the transaction. Texas Business Organizations Code, under Title 1, Chapter 9, Subchapter F, Sec 9.251, (7) & (8) plus (12) & (15) covers the purchase of real property and notes as activities that do NOT constitute transactions of business in the state of Texas. Which means that you do not have to register as a "Foreign Entity" with the state, which means no fees apply.
    Why is that important? Because those LLC's that are registered in places like Delaware will NOT release the identity of the owners of LLC's that are registered there. - Kenneth

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  4. First off, why reply under anonymous? That was an absolutely well thought out (and well researched) reply. My experience with requesting the removal of the deed restriction has been at a success rate of zero.

    The LLC formation can be done of the corporation is formed prior to the close and that same LLC is the offering party on the transaction. However, selling the corporation which owns the property to another investor within the limitations of the deed restrictions is a grey area. My motto is "if it is grey, then treat it as if it's black."

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  5. I always backed ou tthe contract with the seller and had my buyer close instead. One closing. Buyer pays me a cashiers check at closing. Nothing more than a A TO C. B gets paid at closing outside escrow. Done it many times and never had a problem. Always had sellers sign addendums in beginning to disclose everything.

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  6. That is interesting Sean. What state allows that to be done? What you are describing appears to be 100% illegal to me.

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  7. The rules that govern about buying and selling in every country varies. Your article was very interesting. I like the points and ideas yo have about it as well as the comments. I was in Singapore condo preview and I've also encountered almost the issues but on different approach. Keep posting!

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