Deed Restrictions and Short Sales: Can You Still Profit?

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In the Investor community, garnering an edge in your marketplace and being “legally creative” can pay the bills. Such has been the case, and subject of much debate, around short sales and quick re-sales.

As a disclaimer, none of the information posted in this article is to be construed as legal advice, and is posted for informational purposes only. Any insight or suggestions therein are merely a matter of opinion and you are expected to do your own due diligence and abide by all applicable laws.

Let’s cover some of the topics that have investors wondering, how do I buy a short sale and sell it for a profit in a short amount of time when the banks restrict my re-sale?

1) Disclose, Disclose, Disclose

Much is tied back to, do the lien holders know what you’re intent is, as the buyer, with this property? It must be disclosed in such a way the bank/lenders/servicers are able to reference what your plan truly is. “It’s none of their business” and trying to pull a fast one will land you in hot water, or worse. If you’re not doing anything fraudulent, then there’s no need to hide what you’re doing.

To that end, make sure to include some sort of disclosure/addendum in your paperwork to the bank that states in some way “I am buying this property with the intent to sell it for a profit.” Now, that may be a 7 page disclosure, but it is a requirement that arguably makes it plain and clear you’re not an owner occupant. It is in your best interest and is highly recommended you have a local and well-versed real estate attorney review this paperwork before you begin to send it in with your contracts.

Can this get your contract declined? Absolutely, but you should have an arsenal of short sale transactions being processed, knowing only some of your deals will work on all ends.

2) Arms Length’s Affidavits

The Affidavits lenders are marrying to their approvals have gotten more and more technical and specific to what is allowed, what is strictly prohibited, and what survives closing. Now, this is when responsibility gets interesting, meaning, enforceability.

Any attorney I’ve spoken to shakes their head, laughs, and starts cursing these sorts of flailing attempts to control a deed of trust and underlying note which has met the legal standards of a payoff. Once a Deed of Reconveyance and Release has been received it seems rather grey area for a bank to rely on agents, seller, buyer, and closing agents to bring it to the banks attention should the property be sold at an earlier date than what’s agreed upon in the closing documents. However, if you have agreed to it and have not negotiated the language out of the Approval letter and/or included addendums and disclosures that are agreed to by all parties, you may just have to play the waiting game, as the title company will not go against recorded restrictions.

Beyond that, you may have local laws that require you to hold the property for a certain amount of time before you are able to re-sell it, it any case.

But, depending on the amount of rehab or updating you are doing, a 60-90 day holding period may not be too far out from what it takes to close, fix up, and market your property. Keep in mind, nothing restricts you from actually marketing the property at an earlier date (once it’s paid off) than when you can convey the deed, it simply can’t be recorded until the 91st day(or 1st day after the holding period, in this example, 90 days).

So, it may be the case to where you can market, find a buyer, get the contract in place and set the Close of Escrow to be the 91st day you hold title. This of course will increase your holding costs, but perhaps the Buyers want to take early possession and pay a per diem?

If they are financed buyers, make darn sure their lender knows the title has only been held for less than 90 days, and see what, if any, restrictions they may run into long before you agree on their contract or allow them to take pre-possession of the home. If you find that they have additional requirements, or are not familiar with underwriting loans on deals of this nature, I suggest you call around to other brokers in your area and find one or two who are and have the buyers switch over to them if at all feasible.

3) How Much is Enough?

Well, according to our now profitable quazi-governmental siblings Freddie Mac and Fannie Mae, 20% profit (above what you paid for the property) is their threshold of tolerable difference and without additional requirements. If you’re eking out a 20%+ profit margin, you’ll have to substantiate the increase in value with an additional appraisal and potentially, with supporting documentation of the improvements you have made.

Much of this was brought about by opportunistic investors (yes, the type that give us all a bad name). They were colluding with other industry affiliates, purchasing the short sale, not improving anything, not disclosing their intention, and selling it at a highly inflated value. Rightfully, FHA reacted by not agreeing to insure anything that had not been held for at least 90 days. However, this damned the buyer pool of FHA qualified buyers who wished to purchase an improved house and wanted to close in a timely manner. So, the FHA anti flipping rule has since been relaxed to allow purchase and quick re-sales, binding only that the Seller (you, the investor) are actually improving the properties, there is no collusion with any other involved party and you can substantiate anything above a 20% profit.

Feel like any of this isn’t fair to the lenders? As a not so side note, let’s review some statistics of our friends Fannie and Freddie. These are not political opinions, but tips for enlightenment.

• Freddie Mac and Fannie Mae have lost over $30 Billion dollars by misuse of the governments support to “enrich shareholders and executives” by backing millions of bad loans. Guess who funded most of these losses. (Think of the Uncle Sam poster pointing directly at YOU.)
• The accounting department at both companies miscounted their profits after the boon in the 90’s, and disclosed in 2004 that their profits since 1998 had been overstated by a mere $6.3Billion dollars.
• When the financial meltdown came, it only strengthened the “Siblings”; in fact, the government allowed another $200B to be invested into mortgages, even though it was clear that they didn’t have the minimum 30% cash reserves/holding requirements to support their portfolio. No matter. Let’s move on.
• In February of 2012, taxpayers have footed $50M dollars in legal payments to defend the former executives at Freddie and Fannie, who have civil actions cited against them for non-disclosure, false proclamations about risk of certain loans, and misleading investors about their ownership of subprime loans & mortgages.
• Freddie and Fannie now hold about 90 percent of all new mortgages, and have a portfolio worth approximately 1.5Trillion.
• Starting Q1 of 2012, Fannie Mae realized $2.7Billion dollars in net income

The short selling lenders do have rights to add on deed restrictions, additional clauses and affidavits. But, you as an investor also have the right to purchase a home, disclose your intention, and profit by selling it to a secondary and ready, willing, and able buyer.

Given that if you fully disclosing, setting up your transactions correctly, and selling strategically, deed restrictions with short sales can be minor bumps, not stop gaps to your income streams. Being a real estate investor is partly being able to be creative with technical structure, understanding the laws, and changing your docs, disclosures, and evolving your strategies with the market and governmental changes, not bowing down and giving up when the powers that be try to inhibit your modalities to profits.

What do you think?

Moyan_Brenn

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.