Title Seasoning: 10 Real Estate Investing Tips

If you are planning to buy homes and flip them for profit you will most certainly come up against title seasoning issues. Title seasoning is gaining in importance for real estate investors who wish to make a quick profit from real estate. It will be financial suicide to jump into the real estate investment business without having a thorough knowledge of title seasoning issues. The following are 10 important facts about title seasoning that every real estate investor must be aware of.

  1. During the recent real estate boom everyone seemed to have thrown caution to the wind and there were more scammers than genuine real estate investors operating in the real estate market. This has resulted in the unprecedented number of foreclosures. Gone are the days when you could take a small piece of paper, write a few words and some monetary value, hand it to the person behind the counter and walk away with huge amounts without having to show even your driver’s license.


  1. During the real estate boom it was possible for an unscrupulous investor to cheat a gullible home owner into agreeing to sell the home cheap and find a naive buyer to buy the home at a hefty premium. The buyer would be sent to an unscrupulous loan officer and appraiser who will validate the hefty premium price. The buyer would be sold a mortgage he could ill afford and the investor, loan officer and appraiser would make good money. Not surprisingly a year later the home would go into foreclosure. This became the norm during the real estate boom. Now the FHA and the lending institutions have become wiser and have brought in the title seasoning requirement.


  1. Mortgage insurance is provided throughout the United States by HUD, which is part of The Federal Housing Administration (FHA), on loans provided by FHA approved lenders. Alarmed by the spate of foreclosures in the recent past FHA and most of the lending institutions have enforced title seasoning requirements on real estate properties in whose mortgage they are involved.


  1. The FHA requires that a seller of a home must have been the owner of record of that home for more than 90 days. Even though there are some exceptions they do not apply to fixed-and-flipped homes.


  1. Further if you are selling a home to a retail buyer within a period of 12 months of purchasing it and the selling price is more than your purchase price then FHA may ask you to substantiate the increase in price through documentation like list of improvements made, receipts, before and after photos, etc. Additionally, if you are selling the property within 12 months for more than 100% of your purchase price the FHA may ask for a second appraisal.


  1. Other conventional lenders also have similar title seasoning rules. The title seasoning requirements however would mostly depend on the buyer’s debt service history and credit score. Therefore if you are selling within 180 days of purchasing a real estate property you should check with the buyer’s lender to find out about their stipulations regarding title seasoning. If you go ahead without checking it out you may end up with the house off the market for 30 days unnecessarily.


  1. Another scenario where you can land in deep trouble is when you take a hard money loan to buy a property, do a quick rehab and put it back on the market but find no takers. As they interest on a hard money loan is very high it would be better if you can avail a conventional refinancing of the home and pay off the hard money lender so that your interest burden can become manageable. However it will be very difficult to find a lender for the refinancing if you have held the title for less than six months because of most lenders’ title seasoning rules.


  1. It is not necessary that you have to deal with title seasoning issues in all cases where FHA is involved. Take the case where you are working on a foreclosure short sale involving a property having a FHA insured loan. As the FHA has insured the loan it must approve the short sale. Once the short sale is approved by the FHA you can buy the property with the FHA loan, flip it and sell it to a buyer who is not getting a new FHA loan. Here the title seasoning rule does not come into play.


  1. The above does not mean that you cannot use some creative financing to overcome traditional lending institutional guidelines regarding title seasoning issues. If you find yourself stuck then you can use the strategy of creating a seller financed note for structuring a deal. You can sell this note at the closing to a note investor for financing the deal. If you want to know more about note funding then look for note funding investor forums in Google or Yahoo and learn about it there. You can also visit www.notefunding.com and look under the title Creative Strategy to Buy/Sell Property.


  1. Another way a real estate investor can overcome title seasoning is through land trust. In essence land trust involves a bunch of papers but it is highly effective. Land trust involves three important things – land, beneficiary and trustee. The advantage of this is that conveying real estate property into a land trust will not break the chain of title. For example if a property has been owned for 5 years by the previous owner and after that you have owned the property for 3 months then title seasoning will show 5 years 3 month when the new lender requests a title binder from the closing attorney. Even though the fact of the conveyance of the property to the land trust will show it will not break the chain of title.


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