I've heard it said here and elsewhere that banks sometimes have deed restrictions that in addition prohibiting resale, also prohibit refinancing for a period of a couple months after the purchase of an REO. Does anybody have an example the deed language used?
Specifically, I’m wondering what happens if a property is refinanced within that time period, does the owner take the hit or the lender? Could an unsuspecting private lender somehow lose the property as collateral for the loan?
I'm not sure on a couple of your questions, but I think what you are referring to is a deed encumbrance. It does not state that you can or cannot refinance an REO purchase with this particular restriction. It states that you cannot encumber the deed with a lien greater than 120% of purchase price (i think this is the usual amount and it is usually the same as the 90 day sale restriction). As far as what does it mean if a title company misses this restriction and allows an investor to encumber the deed for more...? I'm not real sure and I don;t think they are yet either. I think a lot of it is going to be determined by the investors intent (did they borrow borrow profits?, did they resell?, did they also violate the 90 day restriction?) We've been trying to get opinions on this from different title companies and attorneys and many were not aware of the encumbrance restriction and none thought it would affect the investor depending on the intent. They all felt like any questions would fall back on the title company or attorney for missing it.
So I do not think the property can be lost, but again, these rules exist to prevent fraud so a lot of the outcome will be determined by what the investor is doing.
I meant refinance in the general sense of any encumbrance post transfer deed. I'm thinking of the private lender that, to save money, just reviews the preliminary title report and skips title insurance. If lender gets a title policy, any claims should be covered by the policy.
Interesting, Chris, thanks for your response. I can see now there isn't a easy answer, except to get a title policy and keep an eye out for fraud.
I wanted to add something. Hopefully, I didn't make it sound like no big deal that a title policy can cover. IF you buy a property from FNMA and several large banks are doing the same as FNMA, you must make sure of the language in the deed restriction. The encumbrance is in addition to the 90 day deed restriction that many of us have become accustomed to dealing with. This encumbrance is also not on every home purchased from FNMA. IT appears to be a random thing (as of right now). AND, investors cannot ignore this and rely on title policies.
Chris is right, the restriction is for financing the property for More Than 120% of purchase price within 90 days. For the exact language, you can go to homepath.com and look at the Offer documents and addendums.
Wayne Brooks - Any idea how long FNMA has been putting this additional restriction on some deeds? We know it is not on all of them and have no idea when they started.
Honestly no. I don't deal with a lot of REO's. I recently was tracking one down for a buyer that was FNMA. Most of my personal investments are buy/fix/flip, or buy/flip. I have bid on some lower end REO's, but haven't bought any.
But, for a fix/flip I don't see the 90 days as much of an issue. You'll usually have 90 days in rehabbing, marketing and getting to a close. And I'm not positive, but I think the 120% rule within 90 days applies only "without substantial improvements". I'm sure others here know this area better than me.
I took a look at homepath.com. The addendum seems to have the exact deed language but leaves the dollar amounts and time limits as a blank, presumably they will only accept exactly what they want in those blanks.
So, the way I read it, if, for example, a flipper bought a property with this deed restriction for all cash then the day after closing got a private loan in an amount not to exceed 120% of the purchase price, there would be no violation. Is that how you see it Wayne Brooks?
Wayne Brooks - That is the way i read it as well and I too have no idea when it first was added to the addendum. We have seen some with the blanks left exactly that...blank! J Scott is probably one of the smartest guys I know in this industry and he really helped me get my arms around this last week when i was first informed about these encumbrance restrictions placed on the loans.
We have since talked to multiple different closing attorneys and title companies in 4 states and all seem to be confused about the intent and purpose when it comes to an investor who is rehabbing to flip. In fact, none of the attorneys or title companies had ever actually advised a client that they could not borrow at the closing table. None could recall seeing it filled in. I think it is going to be a mess as it is ensnaring companies and buyers and tying them up when that was not what it was intended to do.
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