Illegal" Flipping & Lender Seasoning
There has been a lot of negative press and misinformation lately about double-closings. Many people have been indicted recently under what the press has labeled "Property Flipping Scams." Misinformed lenders, real estate agents and title companies will tell you that double-closings are now illegal. In fact, they are nothing of the sort.
A double closing is simply two back-to-back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the "middleman" can buy and resell a property for profit without using any of his own cash. The mihttp://www.blogger.com/img/gl.link.gifddleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years - legally, ethically and PROFITABLY!
The so-called "illegal property-flipping schemes" work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved.
Despite the negative press, neither flipping nor double-closings are illegal. The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal "property flipping," rather than simply "loan fraud." So, whenever you hear a real estate agent or mortgage broker say, "flipping is illegal", you know they are misinformed.
The misunderstanding of the real estate flipping business has not been without consequence. Many title and escrow companies simply will not do a double-closing. Fortunately, there's many that still do double closings, but they are also keeping a close eye on potential fraud (as they should).
Some lenders have placed "seasoning" requirements on the seller's ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer's loan. This may be a problem if you bought real estate cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW - it is simply an underwriting guideline for some lenders. Of course, guidelines are just that - by going up the chain of command, you can generally get approval from loan underwriting by showing the real estate is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender.
If the buyer is getting an FHA insured loan, there is no way around the "seasoning" issue. FHA real estate regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix-and-flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double-closing, the end-buyer CANNOT go with an FHA loan.
A double closing is simply two back-to-back closings wherein the proceeds from the second closing is used to fund the first closing. Both closings are done in escrow so that the "middleman" can buy and resell a property for profit without using any of his own cash. The mihttp://www.blogger.com/img/gl.link.gifddleman profits because he buys the property below market and resells it for market price. This process has been done tens of thousands of times over the last 100 years - legally, ethically and PROFITABLY!
The so-called "illegal property-flipping schemes" work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are insured by the Federal Housing Authority (FHA), the government authorities have investigated this practice and arrested many of the parties involved.
Despite the negative press, neither flipping nor double-closings are illegal. The activities described above simply amount to loan fraud, nothing more. Newspapers have inappropriately reported the activity as illegal "property flipping," rather than simply "loan fraud." So, whenever you hear a real estate agent or mortgage broker say, "flipping is illegal", you know they are misinformed.
The misunderstanding of the real estate flipping business has not been without consequence. Many title and escrow companies simply will not do a double-closing. Fortunately, there's many that still do double closings, but they are also keeping a close eye on potential fraud (as they should).
Some lenders have placed "seasoning" requirements on the seller's ownership. If the seller has not owned the property for at least six months, the lender will assume that the deal is fishy and refuse to fund the buyer's loan. This may be a problem if you bought real estate cheap and are reselling it quickly for a profit (the good, old American way!). This should not be confused with LAW - it is simply an underwriting guideline for some lenders. Of course, guidelines are just that - by going up the chain of command, you can generally get approval from loan underwriting by showing the real estate is being resold for a higher price because either it was purchased in a distress situation (e.g., foreclosure) or that substantial repairs were made. Keep good records of your repairs to show to the lender.
If the buyer is getting an FHA insured loan, there is no way around the "seasoning" issue. FHA real estate regulations prohibit the funding of a purchase where the seller has not owned the property for at least 90 days, NO EXCEPTIONS. This generally should not be a problem in a fix-and-flip situation, since it will likely take you 90 days by the time you acquire, rehab and sell. But, if you are planning on buying the property and reselling it in a double-closing, the end-buyer CANNOT go with an FHA loan.
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