Rehabbers – Creative strategy to overcome title seasoning problems
Many times rehabbers are “stuck” holding a mortgage or holding onto the property as a rental because the title has not been seasoned long enough for a bank to finance an end Buyer.
Rehabbers can overcome this issue if they are willing to think outside of the box and work with a little creative financing. They can structure their sale to their end buyer as a seller financed transaction (underlying liens, etc., are not a problem). At the closing table, they sell (or assign) that seller financed mortgage to an investor (a note buyer) for the cash. From those funds, all underlying liens (if any) are paid off and the balance is paid directly to the rehabber (the seller). It is a type of simultaneous closing that has become a great tool for the savvy rehabber. The catch is (and yes, of course, there is always a catch) is that all seller financed notes are purchased at a discount depending upon the buyer’s credit, the note structure, etc., so the rehabber must be willing to give up a bit of his profit (usually anywhere from 5-10% of the mortgage balance) in order to cash out of the deal. By finding the right Buyer and structuring the note properly, the discount can be minimized to usually work for the rehabber and not hurt his profit margin too heavily.
This type of deal only works AFTER the rehabber owns the property and the repairs have been done. Investors will not put money into the deal for the repairs. The appraisal must be in as-is condition. Many times a list of the repairs and copies of the receipts are required as well.
However, this can work quite well for a property flip where no repairs are required. In that situation, we can actually work a triple simultaneous closing where 1) property is put under contract between the original seller and the flipper; 2) the property is put under contract (for a higher price) between the flipper and an end Buyer; and 3) the deal is structured as seller financed and the mortgage is purchased at closing to fund the original seller and any underlying liens. The only “catch” here is that the final sales price in the second sale must truly reflect the value of the property. There can be no inflation of prices. We usually ask for a detailed explanation of how and why the property was acquired cheaply and then re-sold so quickly for a higher price. If the deal is just and makes sense and the value is supported, this deal can be done.
Hope that gets the creative juices flowing!
Michele Robbins, CPA