Title Seasoning - Potential Real Estate Pitfall for Property Wholesalers or Investment Property Flips
Title seasoning is a strange phenomenon that was created by mortgage companies to stop illegal flipping. I’m not sure where the term came from but it is still a term all good investors should be aware of. So what is title seasoning and why do you care. Well, title seasoning is where a mortgage company places a restriction on the time frame on which you can re-title a property.
This is no joke; they can actually require that you hold a property for a certain amount of time. The idea was put in place to stem the tide of buying a house, getting an inflated appraisal and then re-selling the property for an instant profit. The idea is that the willful misleading of a buyer as to the condition or value of a property is illegal. It’s referred to as disclosure. So, mortgage companies started including clauses and underwriting guidelines to help stop this practice.
This can affect a buyer and a seller. For instance, if you buy a property at a discount and hope to get a new appraisal quickly so you can refinance to have funds for a remodel, you might find that your current mortgage has a clause that states you cannot re-asses another instrument on the property for 60 days. This would keep you from refinancing for at least 60 days. On the sellers end and where this affects investors the most is when you buy a house and try to re-sell. Even after paying for repairs and changes. You can find that if you purchase a house, renovate and try to resell, some mortgage companies will require that you retain title for 90-120 days before they will write a new mortgage on that property. You will have to verify with your buyers lender to see if they have any underwriting guidelines that call for title seasoning.
Not all companies have these types of clauses or guidelines and sometimes you can ask for an exemption buy showing before and after photos or buy getting a second appraisal. There is no guarantee but sometimes this can help. Otherwise, you have to wait or you have to find another buyer with a lender that does not have title seasoning requirements. I have even tried timing the renovations and the closing period so that between them both they would cover any seasoning issues.
Like I said, this is not always an issue but something to be looking out for. If you think you found a great deal and you want to paint, mow and clean in three weeks and re-sell. You might find yourself with a timing issue or a limited buying pool. You might have to cover three months of carrying costs instead of turning a quick sale into cash. While every investor understands that the quicker they can rehab and get on to the next one the better but you always have to be intelligent about the potential pitfalls of investing.
This can be especially pesky if you are trying to fund a wholesale deal with a double close. You will have to work with your title company to make sure they correctly record the deal. Some companies feel like they have to record both deeds before they can fund the end deal but if it done properly they can have both deeds prepared and after the second deal is closed they only record the last deal with the county. This is perfectly legal but the disclosure laws say that both parties have to be aware of what is happening. They don’t have to be privy to the cost and profit of each deal but they have to know that the initial buyer is not the actual end buyer. Just be careful and do your homework on each and every deal.