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. Because 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 twelve 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!
The best solution around this is called a "reverse assignment" which allows you to assign your contract back to the owner and collect your money at closing for releasing the contract. This should be documented with a mortgage or deed of trust so the "release fee" is really a payoff of a lien.
WILLIAM BRONCHICK, ESQ.
Reprinted by Permission. Copyright 2000 All Rights Reserved. Visit www.legalwiz.com or call 1-888-587-3253. The author, CEO of Legalwiz Publications, is a nationally known attorney, author, entrepreneur and speaker. He has been practicing law since 1990, and has been involved in over 700 transactions.