Buying from HUD of FNMA? What restrictions are placed on re-sale?

Title Insurance with Key Title Corporation 63078

In light of the thousands of foreclosed properties on the market these days, we find more and more that investors are scooping up on some really good deals to add to their portfolios.

I have received a few contracts lately from investors who want to almost immediately re-sell the property to others. In one case, I had a client who wanted me to do an immediate "flip" into the new buyer.  I remineded him of a particular document that he signed at closing which specifically forbids this immediate "flip" The document was one of several that I am sure he was told were standard seller documents, which is a true, but I am equally sure that the document was not explained to him and that the did not read the document in advance of signing it.   The document, titled Averment to Dual Settlement Transactions and FHA Insurance reads as follows:

The parties to the above referenced real estate settlement with the U.S.Department of Housing and Urban Development, (HUD), as seller, hereby state and affirm that this is not a "dual transaction" settlement where by the property is immediately being re-conveyed on the date hereof to any third party, and that:

  1. The funds being disbursed to HUD for the sale hereof are not dependent on the conveyance to and/or the closing by such a third party; and
  2. There is no such third party to our knowledge attempting to obtain FHA insurance or a HUD guaranteed loan for the subject property from any direct endorsement lender if HUD has made a prior determination that said property was uninsurable.

Basically what they are trying to convey here is the fact that in NO CASE may you purchase a HUD owned home if the funds being used for the purchase are not YOUR funds.  (this does not preclude you from obtaining your own financing if you have disclosed that in your offer)

On more than one occasion I have had clients ask me to conduct the following type closing:

  • Investor purchases the property from HUD
  • Prior to closing investor sells the property to a third party (either an investor or a homeowner)
  • Investor waits until the parties involved in the second transaction are prepared to close.
  • Investor wants me to use the funds provided by the SECOND buyer to fund his purchase from HUD.

This method of "flipping" was very popular in the late 80's early 90's and I had thought that the investors had long forgotten this particular method of acquisition, but it has seemingly reared it ugly head again. 

A very easy way to remember whether or not the transaction you are trying to put together for your resell will "fly" with the title company is to remember this one thing: Each "leg" of the transaction must stand on it's own.  In other words, you MUST personally fund the acquisition of the property and your buyer MUST personally fund their own purchase transaction. 

FANNIE MAE restricts the resale of their properties by adding the following language to their standard Addendum to Purchase (if the buyer is an investor);

  • Page 6 of the FNMA addendum, paragraph 14:

Grantee herein shall be prohibited from conveying captioned property for a sales price of greater than 120% of the sales price (ie: sales price 10K, restricted resale price would be 12K) for a period of 3 months from the date of this Deed. (the settlement date).  Grantee shall also be prohibited from encumbering subject property with a security interest in the principal amount of greater than 120% for a period of 3 months from the date of this deed (settlement date).  This restriction shall run with the land and are not personal to the Grantee.

This restriction shall terminate immediately upon conveyance at any foreclosure sale related to a mortgage/Deed of Trust.

Many investors neglect to read this paragraph of the FNMA addendum and immediately upon their acquisition, or at the time of acquisition, they attempt to take a loan, either from a commercial lender or from a hard money lender for the cost of acquisition as well as rehab costs.  If the loan amount exceeds the 120% we are not able to complete the transaction at that time.  We must wait the 3 months.

It is imperative that when you enter into a contract with HUD, FNMA, etc,. that you are aware of the conditions of re-sale.

Posted by

Charlene Perry
Key Title, Inc. 
35 Fulford Avenue
Bel Air, MD 20104


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