Can a seller really prevent you from selling or refinancing a property you buy from them?

Filed in Fix and Flip, Market Information by on February 8, 2011 0 Comments

The title says it all.  That is exactly what is happening and it is becoming even more common.  This is all part of the banks fighting back against illegal flipping.  A client of ours just closed a hard money deal with Freddie Mac as last week.  The closing almost fell apart at the closing table.  Here is what happened.  Freddie Mac puts a restriction right on the deed saying the buyer cannot resale the property OR encumber the property over a certain amount.  Our client was buying this house for about $126,000 and the restriction was for anything above $148,800.  The actual verbiage on the deed is as follows:

“Grantee herein shall be prohibited from conveying captioned property to a bonafide purchaser for value for a sales price of $148,800.00, for a period 3months of this deed. Grantee shall also be prohibited from encumbering subject property with a security interest in the amount greater than $148,800.00, for a period of 3 months from the date of this deed. These restrictions shall run with the land and are not personal to grantee”

Our problem was that our loan amount was about $20,000 higher than the restriction of $148,800.   Here is where it got really interesting.  We thought that the restriction might go away if our client sold the property to someone else so if he closed on the house and resold it for less than $148,800 the “new” owner can take out a loan for any amount.   Because we thought the solution was this simple we set up a double close and had another entity owned by our client buy the property.

After setting up the double closing we received the new title commitment and read through it.  The restriction did not appear so we thought we were in the clear.  Literally at the closing table the title company decided to not allow it to close because of this restriction.  I asked them why it did not show up on the title commitment.  Come on!   It was not a big secrete that this restriction was there as it was on the deed AND the title commitment from the other title company.  After our title company attempted to defend themselves it really came down to them just over looking it and catching it at the last minute.

The key to our flawed response was the last sentence in the restriction “These restrictions shall run with the land and are not personal to grantee”.  This means that the restriction will be in affect no matter who owns the property.

I obviously have a huge problem with this for several reasons.  I don’t want to go into all of that here but the bottom line is that the seller really can control what you do with a property once you buy it so it is very important to read your title commitment and contract so you know what you are agreeing to.   This is especially true if you are using Colorado hard money.

Our solution to our problem was to do two loans.  One for $148,800 that was recorded the day of closing and one for the other $20,000 that we will record in three months.

Leave a Reply

Your email address will not be published. Required fields are marked *