Sandwich Leases And Seasoning
When a T/B exercises his option to buy a property that you have L/O from a seller, are there concerns about illegal "flipping" or violation of seasoning laws, especially if a simultaneous close is involved?
If so, how can you avoid triggering possible legal action and/or problems with lenders?
A way to avoid title seasoning is to put a clause in your contract so that you can assign the contract to your tenant buyer. That way, you are in a sense selling the contract to the tenant/buyer and they'll close on the property with the original sellers.
Hope this helps,
Joe
You run into problems with seasoning with Freddy Mac and Sally Mae. If a lender sells their loans to these companies you will run into seasoning problems. Granted, your TB should be able to find a local bank (which sometimes fund their own loans).
The only problem you run into on Assigning your contract is that the TB may not have $15K-$30K to buy out your interest in the property. Also, if you Assign to the TB, they see how much you make. Hope this helps![ Edited by Corey_Osborn on Date 01/16/2004 ]
How about this...
I know that most seasoning laws state that, if the "flip" results in a benefit to the buyer, then it's OK.
I haven't done the numbers yet, but it seems to me that it's likely that the buyer would end up with lower payments and interest after exercising their option than what they were effectively paying prior to the exercise.
Can you convince a regulator or mortgagor of that though? Seems unlikely given typical mentalities.
I'm trying to justify using sandwich L/O in my bag of tricks but I remain unconvinced. Seems like sticking with subject to and OWC may be preferable.
Great responses so far. Thanks much and looking forward to more.
Maybe I'm missing something here, but in a L/O you're not taking the deed. Hence I fail to see where you're running into the seasoning problem. Even if you do take the deed, as far as I'm aware you're only going to run into a problem if you sell the property on something less than a 1 year option. I also fail to see why anyone would do a L/O for a 1 year term, but that's just me.
Ryan J. Schnabel
On occasion I call Lawyers and talk to them. I admit it is rather dull work but it is a learning process.
A week ago I talked to an Attorney newly returned from Washington and I asked him the following question.
You buy a house and Country Wide or some other mortgage lender finances the purchase. Everything closes, you move in all is right with the world.
30 days thereafter Countrywide decides to pick up a point or so and discounts the note secured by mortgage to another lender and in the process the FHA step in and to make the portfolio palatable they insure the note.
Now you decide to transfer title, or lease it out or whatever. My question can the FHA enforce its rules and regulations as to you inasmuch as your transaction was prior to their assignment of interest.
Yes or No will do.
The Answer: well, I don't know, er maybe not. After all original contractual arrangements take priority over any assigned interests of assignees.
Interesting. Sure would shoot FHA in the foot. Due on sales clauses etc. worth a little research. I do not have the time my steel boxes insist that I weld them all shut. Anybody want to stick their nose in on behalf of TCI and run with it? Might make a difference in how you do business.
Course I would like to get old man Christopher off his a$$ and let him run with it. God knows they love him all over the world. I can see him now asking the Atty Gen. A simple Yes or No. Oh what fun. I'd even buy the old duffer lunch at the Original Pantry for that one.
Thoughtfully Lucius
Quote:I know that most seasoning laws state that, if the "flip" results in a benefit to the buyer, then it's OK.perfecto,
I know about the HUD regulation that requires at least 90 days of title seasoning for FHA loans, but I am unfamiliar with any laws on seasoning.
Could you point me to the laws?
Quote: Maybe I'm missing something here, but in a L/O you're not taking the deed. Hence I fail to see where you're running into the seasoning problem. Even if you do take the deed, as far as I'm aware you're only going to run into a problem if you sell the property on something less than a 1 year option. I also fail to see why anyone would do a L/O for a 1 year term, but that's just me.
The are actually going to be on the deed for like 5 minutes during a double closing. the lender doesn't like that part. What if your tenant decides to excersize his option a month into a 3 year option???
There is obviously alot of confusion going on in this thread.
An illegal "flip" occurs when the middle buyer of a flip, ie the investor/scammer, artificially inflates the price, usually thru the help of a crooked lender or apraiser, in order to make a large shortterm profit.
I believe that any quick flips or double closings will get a thorough review by the regulating powers simply because there have been a number of these type scams caught in the past year or two. So if you want to try them, have your i's dotted and your t's crossed.
There are no such things as "seasoning laws." Title seasoning simply refers to how long the seller has actually owned, or been on title, the property which they are selling. In today's market, most lenders require a minimum of 6 months, and usually 12 months of title seasoning before they will lend against the property. Hopefully, you can see why it could be a problem for the end buyer in a double close transaction to get financing.
You can find financing that requires little to no seasoning, but there are trade-offs. Most lenders willing to do this require/do some or all of the following: They will want the seller/investor to provide a list of repairs made and their costs. They will want to know how much the seller paid for the property and possibly if it was deemed a "discounted" sell. They might charge higher fees. It will also surely have a higher than average interest rate. Finally, your end buyer will likely not find these on their own, nor would they usually be willing to search too hard. They also may not like the higher fees and interest rates charged.
Roger