Okay guys, I have an interesting (and troublesome) topic to discuss today… I know you’ve heard about ‘em: Those nasty Deed Restrictions.
They suck, yes. Can we just ignore them and hope for the best in our avoidance of them, no.
Alas, I’m devoting this post to those little buggers. And let me apologize ahead of time for my tone and behavior in this post, I really just don’t like these and it shows. Just typing about it makes me cranky. But here we go…
The Basic (Crappy) Concept
More and more today, investors just like us are finding that we have to deal with seller Deed Restrictions. Yuck. It stipulates that as a condition of the acquisition that we (as the buyer) can't resell a property too quickly. It’s usually a 30, 60 or 90 day deed restriction.
Look, to put it frankly, this restriction is a pain in the arse. To add insult to injury, it just doesn’t even make any sense either.
Oftentimes, this restriction pops up from banks in short sale approvals or when you’re buying a foreclosure from institutions like Fannie Mae.
Here’s the deal, it does complicate things if you’re in the business of flipping – for the obvious reasons – you need quick turnaround on flips.
I’ll throw in a small olive branch, no, actually, a very tiny olive branch, nope, a twig - it is somewhat understandable why banks prefer not to have investors in the middle, making a profit. There I said it.
BUT…
It’s also extremely short-sighted and ignorant. It feels like banks are trying to stop investors from making a quick profit, as if they feel entitled to your buyer - that you found – and they don’t really seem to understand the value that you bring as the middle man/investor.
You’d think they would welcome any and all reasonable buyers… and when I (as the investor) bring another buyer to the table, there’s no reason for the bank to assume that they would have found that same buyer themselves. We are doing the work for them! Their entitlement issues are the reason why banks put deed restrictions in place.
But this isn’t a brand new issue... deed restrictions have been around for a few years now, but they seem to be popping up more and more these days. And we here at Mogul are still asked about this situation, frequently.
In fact, here’s an example of a discussion we had on Mogul about this very topic; make sure you check it out.
Okay, I’ll hop off my soapbox and get to the nitty gritty…
How It Impacts Us
For rehabbers and fix and flippers, the good news is you probably already have some kind of cash funding in place, either in hard money or private money, and the deed restriction’s 'hold' requirement is just enough time to get the home tricked out and ready for re-sale.
So all your rehabbers and flippers with financing in place, breathe a sigh of relief, this nasty restriction isn’t a huge deal for y’all. Whew! Go ahead and get your reno and updates done, and you can even go to contract, you just can’t close until after the deed restriction requirement has passed.
But what about wholesalers and super quick, ‘lipstick and rouge’ flippers? Unfortunately, yes, it’s a problem. You certainly don’t wanna have to wait 90 days to sell.
WARNING: Don't make the mistake of thinking it’s a non-issue.
This actually is a big deal. Even though it’s idiotic and these deed restrictions may not be cool or fair, they are absolutely enforced.
A title company or attorney could lose their license and bond if they write a clear title policy for a new buyer when there is a deed restriction.
So what that means is if you sell the property to your end-buyer and they get title insurance and it’s in violation of a deed restriction, their license or bond could be revoked. Not cool.
As the saying goes – “He who has the gold makes the rules” – and it’s a major bummer in this situation that the banks are holding the gold.
Be aware folks: If you end up signing a bank affidavit, an addendum to the contract or some kind of arm’s length affidavit that the selling entity (likely a bank) provides, and then you turn around and resell the property before the time limit anyway, the bank could construe that as fraud.
In that case, you’d be violating the terms of the written, legal document and the contract.
Rumor has it that a lot of banks are doing random checks after closing to make sure the house wasn't resold. I haven’t had that happen personally, but I’ve heard it is happening.
If they see it was sold in violation of that deed requirement restriction, they can send the wire back to the title company for those funds and unwind the transaction. Suffice it to say, you do not want to find yourself in that situation.
SIDE NOTE: These ‘anti-flipping’ deed restrictions do nothing to actually prevent an investor from flipping a house. It only increases the cost and the overall hassle factor of the transaction.
It’s a short-sighted solution by a small group of people (banking executives) to a big problem they really just don't understand. It’s another example of the absolute short-sighted solutions that banking executives, and government institutions for that matter, come up with when they do not consult those of us who are actually doing the business – i.e., we the professional investors.
Okay, back to business…
5 Possible Ways to Deal with This (Crappy) Situation
Disclaimer: This is only my personal opinion. I make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information. I am not an attorney nor a legal or tax professional, so check with your professional representatives before you do any of this.
Option 1:
Use extended transactional funding if you have a buyer already in place, under contract, or get a hard money/private lender. Yes, it adds to the total cost and time involved, but you can get your end-buyer to put up some (or maybe all) of their money in an escrow account and just wait it out.
Option 2:
Buy the property in an LLC, then either at closing or right after closing, sell ownership of your LLC to your end-buyer. Technically the LCC still owns the property and is not changing hands again at all. You’re selling ownership in a corporation – so sell your ownership in the corporation for the same price that you would make if you were just wholesaling the deal.
Option 3:
Have your end-buyer act as your “lender” instead, then default on the loan, and do a “cash for keys” deed-in-lieu of foreclosure. It goes like this…
“Hey, end-buyer, rather than you buying the property, technically, you’ll be my lender… you’ll loan me the money for the property and I will put a mortgage or a deed of trust in place and a promissory note – it will all be legit.”
This option will cost you a bit more because you have to have a broker draft all those docs, but it’s worth it.
Structure the deal so your first mortgage payment is due in 7 days, then default on the loan by not making the first payment. (Sounds scary and crazy, but keep reading.) Then, your lender will send you a Notice of Default and they will basically move toward foreclosure.
Next, you’ll negotiate with them to work out a deed-in-lieu of foreclosure, which is a common alternative to foreclosure – so you’ll just transfer the deed to the lender instead of forcing it into foreclosure. That creates a ‘cash for keys’ scenario, which is also common, in which you’ll be compensated the same amount of money that you would have made had you just wholesaled the property.
Now, it’s important to note that this doesn’t go on your credit report, but it does need to be documented appropriately to make it legit. So if you ever get called into question on it… you didn’t sell the property, you defaulted on your loan and had to transfer it as a deed-in-lieu of foreclosure.
This option sounds tricky, but it really isn’t. An attorney named Bill Bronchnick has a great video with more explanation of this concept. Definitely check it out.
Option 4:
This next one is a bit out there, but worth mentioning…
Do a 90-Day Lease Option from your end-buyer, and make their option consideration equal to whatever amount you need to close on your purchase.
Here’s an example:
Let’s say you buy a house for $100k, and you wanna flip it and sell for $110k, so you’d make a $10,000 assignment fee profit. But because of the 90-Day Deed Restriction, you ask your end-buyer to do a 90-Day Lease Option. For consideration of the option agreement, the end-buyer will put up the $100k in escrow and the purchase price will be $110k in 90 days on your option, which means the end-buyer only has to come to the table with $10k more.
Technically, you’re still waiting it out, but you’re nice and secure because your end-buyer put up all of their money on the front end. During the 90-day waiting period, let ‘em take possession of the property; they can rehab it, rent it out, whatever.
Option 5:
Fight them on it! Essentially, you’ll say that your title insurance company won’t insure the title if it has all those deed restrictions in place.
If you have it in writing that the title insurance company says no because of the restrictions, then take that document to the seller and say it won’t even be approved unless the restrictions are removed.
And I know of a guy who actually did fight it, successfully, and he talks all about it in this helpful video, which is certainly worth a look.
The Bottom Line
I personally think that all of these options are doable, but #2 is the easiest – it’s the simplest and most straight forward.
These methods are really all about thinking creatively to find solutions and not getting trapped by these silly restrictions.
Please remember to check with your attorney before you proceed with any of these choices… you need to make sure there aren’t any local (or new national) restrictions or laws that would prevent you from giving one of these options a go.
Good luck!
Do Your Research – First, learn about the 30-60-90 Day Deed Restrictions and figure out how it applies to your deals.
Consult an Attorney – Before you even think about moving forward with one of the options we presented, you MUST speak with your attorney and make sure everything you do is perfectly legal and legit.
Get Creative and Get ‘Er Done– We’ve offered up 5 creative options as a workaround for this silly deed restriction, decide which one will work best for your situation (after you’ve consulted an attorney!), and go for it.