Deed Restriction?

Question

Up until this point, my company has only dealt with Short Sales. I have a really good connection with one of the largest REO Brokers in my area. My question is this, I know alot of people saying they are flipping REO's with transactional funding. The Broker is somewhat of an investor as well, but he say's the bank always comes back with a 3 month deed restriction. If people are flipping REO's, how would I get around this? Thanks in advance for any reponses.

Steve Babiak · Answer

I'll bet that the deed restriction on REO that you are mentioning is from FNMA (Fannie Mae). REO that did not have one of those loans won't necessarily have this same restriction. Here is a link to google search results for similar threads: http://www.google.com/search?q=site%3Abiggerpockets.com+Fannie+Mae+REO+deed+restriction&ie=utf-8&oe=utf-8&aq=t

Bill Gulley · Answer

Hi, if I had a strong buyer who was qualified, I might do a sale contract and give possession prior to closing, with payments. After the 90 days either close on that contract or enter into a new contract allowing immdeiate possession. This is close to another forum post up now concerning SS restrictions for the seller. Personally, I view the banks position as being nothing less than vendictive. All that really matters is that the bank gets the amount of money they are willing to accept on any deal, no one is twisting their arm. Bill

Steve L. · Answer

I don't think so. I've been buying a lot of Fannie's lately and it has nothing to do with profit. Here is the exact terminology I get.

J Scott · Answer

Steve is correct -- the 90 day deed restriction on resale is only with FNMA. That said, the specific restriction is that you can't sell the property for more than 20% above what you purchased it for within that 90 day time-frame. So, if you're planning to resell a house your purchased for $50K to an end-buyer for $60K, there shouldn't be any issue doing it within 90 days. In other words, the restriction only comes into play if the sale price is more than 20% above the purchase price.

Bill Gulley · Answer

Ted, that reminds me of a REO years ago whee I just felt that the bank was trying to cut a deal with a favored buyer. I collected the listing information, I made an offer and put a courtesy copy of my offer to the "Examiner In Charge" at the local FDIC office. The listing agent asked why I had that on there and I told them that I thought that the seller wouldn't forget what was in the best interest of the bank! I bought it. While you may represent the bank many times, have you ever had anyone attempt to hold a bank to a better offer without giving in to these bank demands? The last REO I bought I spoke to the asset manager, they wanted to know how I was funding my deal. Bascially, I said I made the offer with an 80% LTV loan, how I actually funded my del was not known, that it was my option, but that I would have funds to close. None of their business where or from whom I get my funding! I bought that one too. Do you think buyers are agreeing to things that they don't need to agree to?

Ted Akers · Answer

I am not extremely familiar but we entertain providing transactional funding for bulk REO flips. More banks are requiring that you seperately fund your purchase, and maybe you close the sell escrow the next day or a few days later. Transactional funding is an option if your buyer funds into escrow. I have yet to hear of situations requiring a 90 day hold (maybe it is just for a particular bank).

J Scott · Answer

My closing attorney has missed adding the deed restriction twice (both times it was in the contract addendum). When I asked if that meant the restriction was not in force, he basically told me that I'd probably be able to get away with selling, but that if the original seller (FNMA) would likely be able to sue for any unauthorized amount. In other words, let's say I bought for $50K, the restriction would only allow me to sell for up to $60K for 90 days. Let's also say that the closing attorney misread the contract, didn't put in the restriction and then I sold it for $80K within the 90 days. If FNMA realizes the attorney's error, finds out I sold the place for $80K, they could sue me for the difference above the restricted amount ($20K), and likely win. This was my closing attorney's interpretation... Btw, there's another risk if the deed doesn't accurately represent the contract. Let's say I sell that same property above for $60K (perfectly legal within the contract/restriction). In theory, the restriction (which is on the deed) passes to the new buyer, who now can't resell until that initial 90 days is up. But, since the deed doesn't represent the restriction, the new buyer can probably get away with reselling, and if FNMA were to catch the mistake/fraud, I'd be on the hook! So, if you plan to abide by the restriction, you should probably make sure it actually gets on the deed, so that it doesn't come back to bite you later. If it makes it onto the deed, I would think the title search on the sale side would catch it. And I see no reason why it wouldn't be enforceable (it's on the deed).

Steve L. · Answer

Keep in mind a couple thinks. Fannie Mae rates every part of the transaction. Agents get rated on if they closed early, on-time, late. If they close under, at or above asking price. What % of transaction went cash, what % went to financing. I'm not sure if Buyer's get rated, but my guess would be they do. The agents build the contracts, so J Scott, it would be the agent "forgetting" to put in the deed restriction and the asset manager not catching it. My experience is not the same as J Scott's on getting it removed. I have asked the agents to counter the bank and they said no (about 4-5 times). They have also offered to not put it in the contract but the asset manager has asked them to put it in every time. I would imagine if you had an in with the title company AKA a big client, you could convince them to ignore it. I wonder how enforceable it is? Or what re-course they have if title doesn't follow it.

J Scott · Answer

My experience is the same as Steve's. I've purchased about a dozen FNMA properties the past two years, and every time the asset manager remembered to include the deed restriction in the addenda (about 75% of the time), it read that the sale price could not be more than 20% above the purchase price, without any regard to "rehab costs," "profits," etc... The closing attorney is going to use the exact verbiage from the addenda on the deed, so whatever the addenda says (and in my experience it says exactly what Steve wrote), will go on the deed. Also keep in mind that if you wholesale it to another investor, they are unable to resell it for that same 90 days (the restriction is part of the deed and conveys with the property), so keep that in mind as well. For reference, I always ask the asset manager to remove the restriction as part of the sale, and in my experience they'll agree about 1/3 of the time. So, between forgetting to put the deed restriction in the contract and agreeing to remove it, I've only been subject to the FNMA deed restriction on about half the properties I've purchased from them.

Bill Gulley · Answer

Hi, the directive issued provided the reimbursement for costs of improvements and a profit of no more than 20%. It also made reference to the appraised value with the implication that 20% was the ceiling on the costs of improvements. I am wonder who really wrote that, sounds to me like it's the assey manager/bank and they used 20%. If you pose that to them and hold their feet to the fire, I'm confident you'll get it. Good luck, Bill