12 Month Rule

[exec927]

Hi everybody,

Ok,now there is talk and I see that lenders and bankers have a new rule.That is,you cannot flip a property right out,you have to wait 12 months to beable to flip.I think it is called seasoning issues also.

1.Is this true?

2.How can you get around it?

3.Is it being enforced?Strictly?

4.Does this affect wholesalers that really do not take title to the property?My guess is that it doesnt???

I would appreciate comments from you all,especially Dan and John Michael

Thanks and May God bless all of you.

[Dan Auito]

Exec, I have wiated it out and closed on the 366th day when holding title. The tax man will see it and be able to enforce the rule. Now if you never take title (double close) Then it makes sense that it could work! You'll still get caught for the short term capital gains, but that is a cost of doing business.

John may add to this topics reply!

[exec927]

Dan,

Now is it just a mortgage,lenders,and bankers rule or law?Or is it an actual new law or tax law?Please let me know

I ask this question because,I heard its just a lender and banker rule or law and if your buyer has cash then you can do a flip way before the 12 months.But the banks or lenders will not qualify a buyer if they see that title hasnt been takin for 12 months???Please correct me if im wrong.

Thanks

[brianb_cobbres]

Is it possible Exec is talking about Title Seasoning? If so, that only means some lendors will not finance the buyers if the title is less that X months since the last filing (when you bought it to rehab/flip). You just have to find the right lenders and/or work with real estate agents that are familiar with this type of transaction.

I think Dan is referring to short term vs. long term capitol gains in that the rate is much higher if you hold a property or stock for less than a year. As he stated that is just the cost of doing business and in my opinion the increase tax rate would still cost you less than the carrying costs of holding the house for a year.

I may actually be starting to understand this stuff :clap:

[exec927]

Dan????



So is the 12 month rule not really applicable to all deals?

[Dan Auito]

It's a federal law as I understand it. Thus the lenders are bound to uphold it if they are using federally backed loan programs, fannie, freddie etc... I'm sure there are ways to get around it creatively but it would depend on what, who, where and when of your certain deal at hand. A good CPA in your area who deals in real estate should be able to definitively answer this question to a more conclusive end.

I'm sounding like a politician over here, Maybe we could use a few more insights here :SM032:

[cfc]

I posted a thread asking about this as well. All this is from what two of my mortgage brokers told me who deal with alot of rehab/flips. This is a new requirement for mortgage companies because of their fear that the buyer is getting something that is way overpriced. I guess the thought is that if the title has been held by the seller for more than a year, then whatever price is on the contract might be reasonable based upon appreciation, but if it's less than a year, then how can a property appreciate much?

In any case, my broker told me that MOST companies will now require the seller to have had title to the property for at least one year before writing a loan to the buyer. However, there are still plenty of lenders out there that will wave this requirment on a case by case basis. Some lenders (very few) will actually give a mortgage to a buyer on a property that has been flipped, but only if that buyer has great credit, full documentation, etc. Otherwise, it's a case-by-case basis. some companies will do it with 85% LTV after 3 months on title (I found one for my buyer on my rehab that will do this), while other will do 90% after six months.

As far as I know, it is not a LAW that federally insured mortgages require the seller to have held title for one year. My broker told me he could get a GMAC subsidiary loan (I think that's Ginnie Mae, but I really am just guessing) with no seasoning if the buyer had a credit score over 640 or so and full doc/assets.

Bottom line: it's not law, but it's going to be really hard to find lenders to do this for buyers who do not have A+ credit. (I'm finding this out the hard way.)

Hope this helped.
CFC

[David Whisnant]

Hi Everyone,

Dan asked if I could weigh in on this one.

It has been the case for some time that many lenders want to see seasoning if they are going to refi a loan. However, that has never been a problem to get around as numerous lenders will allow you to refi with no or very limited seasoning.

I have heard from some of my students that some lenders are taking that tact with sales as well in areas where there has been heavy fraudulent activity. However, again there is not a fatal problem here for us if you just inform the buyer that you have owned it for less than a year and that they need to tell their mortgage broker that info. The mortgage broker can then get them into a loan that works for this situation, where seasoning is not required.

As we all know, you can't sell to an FHA buyer without seasoning, so I just tell my buyers that this property is not eligible for FHA financing.

Note that investors have ALWAYS had this problem. Anytime you buy for low dollars and turn around and try to sell for high dollars, lenders are not too happy. We have had to pay out of pocket for additional appraisals on some properties to make the lender comfortable.

And of course, if you are rehabbing and dropped 35k into the property in repairs, the lender is going to work with you where you can show the expenses and invoices. That's what we've always done with properties bought for supercheap that we rehabbed.

What they don't like is increased value with no underlying reason.

There is nothing illegal about owning a property for a short amount of time and selling it. If so, I'd love to see the statute.

All the best!

Dave Whisnant, JD

(We have more info on this kind of stuff in my full course at:
http://www.4-real-estate-investing.com)

[brianb_cobbres]

Wow, I was actually right... Was that a pig that just flew by my window.

[exec927]

Great.Thanks fellaz.

I actually know somebody that knows some lenders that will loan to any type of buyer.No credit,bruised credit,bankrupcy,foreclosure,and much more.So i guess im not to worried.I was just checking if it was an actual LAW...
Thanks again

Godbless

[Dan Auito]

Everyone was right to some degree, but I think Dave had the most right answers so let's go with his insights! Thanks for weighing in David. That really helps clear the way towards doing another deal or two! :praise:

[David Leach]

As has already been stated on this post, the one year rule is a guidleline that many more agressive lenders are "waiving."

With the right mortgage broker, you will be able to find the money you are looking for. I'm a broker and I get flyers from wholesale lenders all the time that are not requiring this.

It can depend on the LTV. The closer you come to maximum financing (100% LTV), the more likely it will be that you will have to have the seasoning. Lower LTVs (85% or less) can be done without it.

Best wishes,

David

[sdr2887]

Another tool that's relevant to this discussion is option contracts.

If you knew ahead of time (as you should) that you were going to flip the property then you could take control of it with an option and not have any title issues at all. You could then flip it with a double closing or by on-selling your option!

[Jim FL]

sdr2887?,
Well, not really.

You said:
"You could then flip it with a double closing or by on-selling your option!"

Now, the issue being discussed in this thread is title seasoning.
This means the seller, when a buyer is using a lender who requires title seasoning, must be on title for a certain period of time.
I've found this thru my own business dealings selling houses.......
90 days for FHA, IF the sale price is below value, and 12 months most other times is what lenders are requiring...some lenders, not all.

So, if your buyer has a lender with title seasoning issues, then double close won't work, because title passes from the seller, to you, and then to the end buyer.
5 minutes is not enough title seasoning for this type of lender.
Selling the option, or assigning, usually does not fly with underwriters either.
So, I'd have to disagree with you.

If you know you are going to immediately resell a property, it would be wise to steer your buyers toward lenders who don't require title seasoning, which can be done easily by working with a competent local mortgage broker.

Aside from that, should a buyer step in who has funding, a GREAT offer, BUT requires title seasoning, as long as you have not closed with your seller yet, perhaps using your option technique, there are ways to close and get paid.

Here is how......
You record something to protect your position with the seller.
Then, have your closing attorney draft a new agreement to sell, between your buyers, and your sellers, for the price the buyers agreed to pay.
The closing attorney also prepares a 'release' for you to sign at close, in exchange for payment of course, from the sellers, to let them out of your agreement with them, and sell to the end buyers.
Your release fee is equal to the difference in the purchase price with your sellers and you, and the purchase price your buyers agreed to pay.
This way, title passes directly from your sellers, to your buyers, and you get paid to basically go away.

Just wanted to clear that up, so folks can understand fully what title seasoning is, and perhaps how to deal with it.

Take care,
Jim FL

[Dan Auito]

Indeed big Jim has stepped in to do a masterful job of keeping all the points in line while adding further insight to the overall lay of the land on this one. Thank you everyone for contributing to a clearer definition on many points of consideration! Outstanding discussion! :thumbsup:

[exec927]

Thanks Jim.

OK So lets say that I have a property that I bought for 80,000 dollars,I have a buyer that is willing to pay 100,000dollars.I assign and do as you say and I get $20,000???Is that correct because you say its the difference between what i payed the seller and what the buyer pays me??/Correct me if I m wrong.

Thanks and Godbless

[Jasonrei]

QUOTE "Ok,now there is talk and I see that lenders and bankers have a new rule.That is,you cannot flip a property right out,you have to wait 12 months to beable to flip.I think it is called seasoning issues also."

1.Is this true?
Yes, many lenders have that rule.

2.How can you get around it?
Don't use those lenders.

3.Is it being enforced?Strictly?
Usually. Sometimes the underwriter overlooks it, or they allow exceptions. Exceptions I have seen are things like: it's okay so long as the seller is an individual and not a company, or it's okay if the seller can document repairs, or it's okay if the difference in price is not too high, or if the buyer is putting up 10%+ down or has a really good FICO.

4.Does this affect wholesalers that really do not take title to the property?My guess is that it doesnt???
It affects wholesalers who flip to retailers because those retailers may want better deals if they're gonna have to jump through hoops.

[exec927]

Hey thanks alot jasonrei.I appreciate your answers.

What do you mean it affects wholesalers who flip to retailers???To owner occupied or investors...Please explain.

Thanks and Godbless

[Terry (Houston)]

Those great seasoning issues.

Here is what has worked on some of my deals.

1. Pictures. Lots of pictures. Before and After
2. Receipts of all material, labor, anything you do.
3. Good comps. From an appraiser and a realtor.
4. List with a realtor when selling. UGH for some people. Mine works for me as a buyer so no biggie.
5. I am a member of the BBB. Some underwriters like this, shows you are not a flake.
6. Show you are a business. No an individual. I know, like a company has never ripped somone off. And here I am in Houston as in Enron. It does help though.
7. Have your lender as a back up. These days there are as many conventional loans that are as good if not better than FHA loans. My wife is a loan officer, she deals with that.

This is if you have done a rehab on a house. But the main thing is get Your Team in line and control the sale of the house from the beginning.

[Dan Auito]

Beautiful Terry. Rock solid advice! Those are some of the softer issues that take beginners years to realize. I love the foundation you have laid down for others to begin to follow! :praise:

[sdr2887]

Jim FL,

My mistake on the double close... my excuse is that it was late at night :wink:

But your explanation cleared up what I was thinking with regards to options. By selling your option you never take title and so long as the seller has had title for 12 months there is no problem.

Thanks for picking that up.
Scott R.