Posted by John Corey on December 05, 2005 at 10:11:58:
Nice suggestions Patrick (Aegis and local lenders who can take a view on the local market).
John Corey
Seasoning of titles - Posted by Nate-WI
Posted by Nate-WI on December 02, 2005 at 13:02:11:
If I buy a rehab, foreclosed property, or simply from a motivated seller, and use a loan to purchase that property, what happens if I sell that said property in one months time? Is there a seasoning issue? Correct me if I’m wrong but most states want to see…what…6-12 months seasoning on a household before the title company will ok a sale? Am I wrong on this? How do you real estate investors get around seasoning? Owner financed transactions?
Nate-WI
Re: Seasoning of titles - Posted by Patrick S. Lawson
Posted by Patrick S. Lawson on December 02, 2005 at 14:51:06:
Title seasoning is a lender issue. Some lenders want to see 6-12 months title seasoning and others do not care. If you resale and the transaction is arms legenth than a lender should not give the buyer any problems.
Re: Seasoning of titles - Posted by Nate-WI
Posted by Nate-WI on December 02, 2005 at 17:22:52:
I see that phrase all the time…“arms length” What does that mean?
Nate-WI
Re: Seasoning of titles - Posted by John Corey
Posted by John Corey on December 03, 2005 at 06:35:04:
Nate,
Arms length - the length of an arm. Actually the practical meaning means that you are not doing a deal with a related party or are otherwise participating so that the pricing reflects the market price and not an insider price. You will not cook the books with a complete stranger but you might if the other party was actually your partner.
I think Patrick is a bit too broad with is statement that you will not have an issue if the sale is at arms length.
Using your example you find and fix up a place. You turn it around and sell it retail. You are selling it for more than the costs you have into it. Hence the value has jumped and it is not equal to the purchase price plus repairs.
You offer the property to retail buyers and you have a line around the block as the place is really nice. You accept an offer and find that the buyer keeps getting turned down when it comes to underwriting.
This happened for an investor I funded. His buyer has to work their way through 4 lenders before they could find one that was not concerned about the seasoning. As the buyer is a retail buyer steering them to specific lenders can be an issue as they wonder what is wrong with the deal that they have to use specific lenders. Or they wonder why they are not paying the ‘normal’ interest rate. Lenders who do not care about seasoning normally have extra fees, higher qualifications and higher interest rates. There is a perceived risk to the deal and the lender charges more.
So, the bottom line is the market is not black or white. You can find lenders who will work with a title that is not well seasoned. You will need to dance a bit when you explain to the retail buyer why this is an issue. You might need to buy down their interest rate or otherwise make the deal more attractive.
If you want to avoid the issue, consider a rent to own structure where the tenant applies for a loan after 6-12 months. The seasoning will be fine by then. You might focus on buyers who have a specific need for waiting and therefore will pay a bit more for the privilege of waiting. You will have your capital tied up so that is the downside.
If you wait 1 year you can claim capital gains treatment if you rented the place rather than sold on a land contract (Contract For Deed - CFD).
John Corey
Re: Seasoning of titles - Posted by Patrick S. Lawson
Posted by Patrick S. Lawson on December 05, 2005 at 07:26:53:
Nate,
John is right when he said that I was a little to broad. Some lenders will take issue with the seasoning and others will not. Of the lenders that will not take issue with the seasoning many will have higher rates. There are a few wholesale lenders that will not levy a higher rate (Aegis)… you may also want to work with a local lender when it comes to financing your buyers. Local lenders know the local market and if the home is not being sold for more than market value they should have no problem financing the transaction.
Best of Luck.
-Pat Lawson