Free Homes For Seniors

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This profitable investment technique also helps senior citizens in need of quality, affordable housing.

In the March 2010 issue, InvestorDirector Magazine published Out of Sight, Out of Mind, an article which unraveled the DNA of a reverse mortgage. Also known as a Home Equity Conversion Mortgage (HECM), a reverse mortgage allows homeowners age 62+, to tap up to roughly 65% of their home’s unused equity. Boiled down further, reverse mortgages are insured by the Federal Housing Administration (FHA) and do not require repayment unless the homeowner sells or moves to another house. While it is true that reverse mortgages are most commonly used by senior citizens who refinance their personal home they’ve owned and lived in for numerous years, there are some very sharp real estate investors who are using reverse mortgages to provide unparalleled service and a myriad of new options for families who think their home finance options have run out.

Transaction overview

Reverse Mortgages can be a viable exit strategy for real estate investors who understand the rules of reverse mortgage financing and creatively market their services to qualifying seniors. The US Department of Housing and Urban Development (HUD) has 2 reverse mortgage programs; one allows a senior citizen to purchase a home using a reverse mortgage. The other more common program involves the refinance of a senior’s personal home. The reverse mortgage purchase program is difficult for investors to profit from because the senior homebuyer has to show potential lenders where their down payment came from; either from the sale of an existing house or from 60 days of “seasoned” down payment money verified through bank statements. The refinance option is easier but has one hitch: the senior citizen has to own the subject home for a minimum of one year prior to refinancing. This means that the real estate investor has to officially transfer ownership to the qualified reverse mortgage candidate and let the property “season” for a year before the reverse mortgage refinance takes place. The senior citizen also needs to be living in the home with intent to stay there long term. When the senior citizen refinances, they are pulling the maximum allowable equity out of the home (roughly 65% of appraised value). The refinance funds pay off the investor who uses a mortgage lien as a mechanism to ensure the mortgage funds are wired properly after the transaction closes.

Investor acquisition

The actual loan size a senior citizen loan candidate will be able to obtain is a function of their age, the home’s appraised value and the zip code the subject property is in. Generally speaking, a reverse mortgage covers about 65% of a home’s appraised value. This means investors looking to flip houses using this exit strategy need to buy really low; preferably in the suburbs or in areas with a low foreclosure rate. An investor’s home purchase plus closing costs, taxes and rehab costs all need to be well below 65% of the home’s final appraised value one year from the date of transferring title to the senior borrower for the transaction to be profitable.  In 2009, the maximum allowable reverse mortgage loan amount was raised from $417,000 to $625,500. Any investors looking to hit a “home run” using this technique should probably not be purchasing homes worth more than $1 million.

Seasoning requirement

Title seasoning is the major drawback to the reverse mortgage exit strategy. In 2008, FHA and its web of reverse mortgage lenders began requiring senior citizens to own the home they wish to refinance for one year prior to refinancing. What this means for investors is that they are required to formally sell their investment house to the senior citizen loan candidate, then wait a year before the senior citizen refinances. The associated paperwork and the closing can easily be done at a title company. No money changes hands with this “sale” (which is really just a title transfer). Having to wait a year to be cashed out can be dangerous for investors in uncertain market conditions as home values may fall during the time the senior lives in the house. When one year has passed and the refinance process begins, the reverse mortgage lender will ask for the HUD-1 Settlement Statement from the original closing and a payoff statement from the senior’s current lender (which is the investor that sold the house to the senior).

Investor Protection

Obviously the senior citizen is protected during this type of transaction as they will literally own the investor’s house for one year prior to refinancing it. For the investor to be financially protected as well during this process, a formal mortgage note needs to be drawn up and signed by the senior citizen during the original title transfer at the title company. The mortgage should be for an amount equal to or slightly less than the loan amount that will cash the investor out at the end of the process. This amount can be calculated online on any simple reverse mortgage calculator or by talking to a reverse mortgage specialist. The signed mortgage is recorded as a lien against the property and is paid to the mortgage holder (the investor) at the time the senior citizen refinances the house. The investor will need to draw up an official payoff based on the mortgage signed by the senior 12 months earlier. Some investors go so far as to form an LLC that sounds like a bank and provide official mortgage payment coupons to the reverse mortgage lender before closing. This maintains a professional image and helps the deal slide through the reverse mortgage underwriting faster. Some investors charge the senior either a full or partial mortgage payment until the deal closes while other investors charge nothing as a gesture of generosity.

Appraisal reviews

Because lenders are currently controlling the appraisal process and chopping final home values down to numbers that protect their best interest, it is advised to utilize the reverse mortgage exit strategy in areas that are low in foreclosures, crime and blight. Lenders are looking for any excuse to back out of creating mortgages right now and a low appraisal is the best justification. Also, because the reverse mortgage investment technique takes over a year to complete, home values may fall further which is a warning for investors who want to jump in and try this. It is wise to make a reputable appraiser your best friend and have them help you search out areas that are more apt to survive a lender appraisal chop before diving in to unknown markets.

Ethics

An investor can’t just coerce a random senior citizen into a home for personal financial gains. The reverse mortgage candidate has to be able to afford property insurance, routine upkeep, and annual taxes. The Federal Bureau of Investigation (FBI) and the Federal Housing Administration (FHA) both recognize straw buyer flipping schemes within this genre of property flipping. A “straw buyer” using this investment technique would be a senior citizen who does not intend to occupy the subject home, one who does not know that their identity was used to complete this type of transaction, one who cannot afford annual property insurance and taxes, or a senior citizen who doesn’t have the mental capacity to make a cognitive reverse mortgage decision. Many investors misuse a reverse mortgage to simply convert a home’s equity to cash; using a reverse mortgage-qualifying senior as their straw buyer scapegoat. This could be why reverse mortgage lenders require each prospective reverse mortgage client to complete an over the phone or in-person counseling session before obtaining a reverse mortgage.

Reverse mortgages are common and thousands of banks offer them. Unlike traditional mortgages which have been slaughtered by the banking system, reverse mortgage lending has remained relatively consistent. With an aging US population, an endless supply of cheap houses and availability of reverse mortgage funds, this investment technique isn’t going anywhere; and the viability of this unique investment strategy may be worth looking into.