Let’s run through a typical legal short sale flip (yes, we said the word) scenario:

• You’ve got a short sale approval letter
• Your end buyer mortgage has been approved and the lender is about to issue loan docs, and they request a Prelim Title Report
• Prelim Title Report shows the current home owner (Party A) on Title, while B-C contract shows YOU, the Investor (Party B), as the seller – RED FLAG – you’ve just encountered Title Seasoning problem, or a sub-problem known as a break in the Title chain.

While there are a few end buyer (Party C) lenders  who do not care about the issue and understand what the investor (party B) will be on title before their borrowers’ closing is completed, MANY lenders do.   Most will require the Seller on the contract (for the B-C transaction) to be the owner of record on the Title before they will issue loan documents – the precursor to actually sending the money to the closing agent.   Some lenders will issue the loan docs, but won’t fund until they see a fresh prelim showing Party B on Title.

Now you’ve got a problem – you need to close A-B transaction first before B-C lender will fund or even issue loan docs.

If you get hit with this problem, the options that run through your mind generally end with, where do I get the money to buy this thing first so that I can close it in my name?

If you have a decent spread, you can take the risk and close A-B with Extended Funding, a form of hard money designed to fund these specific scenarios.  The problem with extended funding is that it is very risky to the lender, which also means it comes at a higher cost.

Statistically 1/3 of the Extended deals will run into a problem

Here are some of the likely problems that these transactions encounter:

• Party C lender will sometimes back out
• Party C lender might say that they want party B be on Title for 30 days or longer and delay the deal
• C buyer might change his mind
• C buyer might decide to re-negotiate
• Other events might happen that will kill B-C deal

NOTE:    Closing A-B before B-C funds is very risky and should be done with great care and only with deals where you have enough spread to make money even if B-C deal is delayed or falls apart completely.

Title Seasoning, a.k.a. the requirement to have the seller of record be on title for certain amount of time, could be anywhere from 1 day to 90 days, depending on the lender.

Title Seasoning requirements are very common and always have been, but the particular economic climate has lent itself to creating more buying opportunities – as such, this has rapidly become the number one cause of serious problems in a deal, and as such, it needs to be planned for early in the deal flow.

If you have a narrow spread deal, e.g. you are buying for 125K and selling for 135K or 140K, Title Seasoning problem will very likely kill the deal.   Closing A-B ahead of B-C funding is incredibly risky with such a small spread.

So, what type of solutions have people tried out there?

1.  Taking the Title via Quit Claim Deed or other non-insured Deed (varies by state)

• This works sometimes, but could badly back-fire
• Taxes could become due upon recording of this deed
• Title under-writer may not want to ensure B-C transaction as they’ll consider A-B an invalid transfer of title creating a cloud on the title

2. Try to convince Party C lender that party B has equitable title via a recorded a recorded Option (or similar):

• This used to work and still works sometimes, but reliability is low – C lenders just don’t accept a Recorded Option as an equivalent of Title Transfer.

3.  Add Party B to the title in addition to Party A

• This works sometimes, but usually it runs into a problem with Title insurance on B-C leg because party B is the seller, but party A is still on Title.

4.  Avoid working with buyers needing conventional financing in the first place and only sell to cash buyers, who don’t really have any title seasoning requirements (so long as they get a clean, free and clear title, they are happy)

5. The Answer…Use a Trust (using the “Dovetail” method, for example)

• Using Trusts properly, regardless of which method (and there are several that are currently being used successfully) can help you conform to any title seasoning requirements.
• This method is quite successful as Title Seasoning/Chain issue is solved instantly, having Trust as the seller on the B-C leg.
• On occasion, there are complexities and the method may not work in every state.  There are certainly legalities associated with any method of closing and you should be familiar with what they are and what disclosures you may need.  Consulting with a knowledgeable attorney is highly recommended.

LESSON LEARNED: Before you sign B-C contract, have a plan how are you going to deal with Title Seasoning/Title Chain issue – don’t waste time and effort getting the deal near closing, just to find out that C lender has a major problem with party B not being on Title before they fund party C loan.

Learning how to use a Trust properly,  may help you prepare and solve the issue entirely by conforming to all requirements and still closing a property transactionally.  Look forward to upcoming posts and webinars where we will go into how to use Trusts method in greater depth.

The topic of why deals fail is one that we make a serious study of and as we are coming to a close for the year, we wanted to share our insights with you so that you can avoid these problems in the future.

Many of the deals we see make a lot of sense when you run the numbers, but for one reason or another, they just do not come together or fall apart at the last minute.  In reviewing all of the transactions over the last year (literally hundreds), we’ve narrowed down the top reasons for why deals failed up to December 2010.  In virtually all of these cases, these problems could have been headed off very easily, if they were setup right from the start.

So, The number 1 reason of why deals failed in 2010 – poor or no planning on how to run the deal.

The specific issues themselves are varied and we’ll outlined them below, but all of them could have been headed off with prior planning.  Let’s take a few typical issues that arose:

1) Narrow spread & the need to carry the property(from 2 to 31+ days) – this happens and can be caused by a variety of factors.  Imagine you have a property under contract for $85,000 and have a an end buyer for $100,000.  Seems like an easy 15k spread right?  Unfortunately, that typically not the case since there are typically real estate commission costs (if you have a real estate agent involved to help find the end buyer) and closing costs. So if we assume $8,000.00 in additional expenses to cover real estate commission and closing costs, that leave about $7,000 of profit, right?  Well, not comes in the costs of borrowing funds.  Every lender provides funds at a slightly higher rate that needed to offset their risk.  If this particular property were to close using transaction funds, then you as the investor can still walk about with $5,000 or more.  However, if this were to become anything other than a pure transactional loan, where you might need to hold the property for an extra day or more, the risks are much higher and as such the fee’s go up very quickly leaving the investor with no profit in what initially looked like a good deal.

Typical issues that prevent deals from proceeding with transactional funding that we see often are:

- BofA 30 day anti-flip language

- Exit buyer lender’s title seasoning

- FHA exit buyers

2) Got Short Sale approved, but cannot find solid Exit buyer – this happens often and in most cases means:

- BPO came in too high meaning the A-B approved price is just too high, leading you to try and resell the property above market value

- The end buyer dropped out, and no acceptable offers from new buyers – again, this generally means that the price you are trying to get for the property is too high.

3) Have an exit buyer, but cannot seem to negotiate a suitable deal with 1st and 2nd (or more) lien holders – this happens often:

- 2nd lien holder is holding you hostage (asking for a much larger amount than they would otherwise get if the house were to be foreclosed on)

- BPO is too high and lender keeps asking for what they think is the Fair Market Value, but is really just way to high a price for the property in the market.

…

How do you prepare for all these potential problems?  How do you prepare for the unexpected, something you haven’t thought about?

The answer is remarkably simple – Plan your deals, expect the unexpected, and experience helps .  In all seriousness though, if think you have the makings of a good deal, find someone who has seen a lot of transactions and can help you head off some potential problems.  Our clients know they can come to us for advise and that we will always give them our honest feedback based on the experience of having funded and closed hundreds of the these transactions.

Most of the above mentioned problems could be solved if you addressed them early, structuring your deal the right way.   For example:

- Use the Dove Tail (Trust) method to solve BofA and Title Seasoning issues.  While this method does not work in every state, we have by far more experience than any other lender with it. We know the “in’s and out’s” and while it has its limits, it is by far the best method to conform to most requirements.  That being said, there is a right way and a wrong way of leveraging it.

- Go A-C if A-B-C is very difficult.  When it’s the right thing to do, get a deal closed even if you do not get paid on it. If you are a real estate agent or serving in a valid capacity, you can potentially get paid a commission or fee.

- Create a bigger spread by influencing BPO the right way.  Many BPO agents are completely unfamiliar with the area so providing them with a realistic understanding of the local market place may be worthwhile (including the trend of the local area).

- Plan the deal for cash exit buyer (price must be right)

- Move the deal to the right closer.  Not everyone knows and understands how to close back to back transactions.

- Work with a mentor/partner to help you solve problems proactively

Good planning takes experience, but having a plan is better than having no plan at all.

Your plan should address some very basic, but critical questions:

1) Is my A-B Price Cheap enough to make money in the most conservative scenario?

2) If my spread is small, what do I need to do to close back-to-back?

3) If the deal has to go into extended (hard money) funding for more than 2 days, can I make money even in the worst case scenario?

4) What problems do I expect to have with my short selling lender(s)?

5) What problems do I expect with my exit buyer/lender?

6) Do I have the right closer for this deal?

7) Who’s going to fund the deal?  Is the deal fundable and what are the requirements?

Planning exercise will become easier and easier with experience, and you’ll be ready to face whatever problems that might come up.

What problems have you been facing, please let us know by placing a comment.  We’ll be addressing specific issues in the near future and would like to hear back from you on what you would fine helpful!

Moving forward, we’ll be able to continue to share the amazing wealth of information that we have been providing over the phone and e-mail, right here on our blog. That will not only give you timely access to the latest developments in the real estate world, but also real world usable tactics to use in your business.

We continue to look forward to ways that we can make your experience in working with us easier, faster, and more profitable for you than ever before. We welcome any ideas on making your experience a better one, so let us know your needs!