Posted by Nate(DC) on July 15, 2002 at 15:44:42:
I don’t see lien seasoning as an issue when the property is being SOLD. More if it were a refinance. I don’t think any lender would refuse to issue a loan on a property where the seller took out a second less than a year ago, as long as the title seasoning requirements are met.
If you’ve seen this on a purchase, let me know, I’d be surprised.
NT
Flip Profit shown as 2nd mtg on HUD-1? - Posted by Ron (MD)
Posted by Ron (MD) on July 14, 2002 at 18:39:06:
I was told that I could avoid the seasoning issue and disguise my flip profit by simply recording a 2nd mortgage just prior to my buyer’s settlement.
Here’s a hypothetical example: A pre-foreclosure seller deeds me his house, prior to its’ auction. I bring the loan current and find a qualified retail buyer. I have two problems, both related to the buyer’s lender. First is the seasoning issue, second is my $20k profit. The recommended solution is: 1.) When I get the deed from the original seller, have him sign a blank deed (which you and I wouldn’t do, but a “highly motivated” seller might). When you find your retail buyer, you simply fill his name in on the signed deed, which leaves you out of the chain of title, eliminating the seasoning issue. This seems like it would work, if your seller will sign a blank deed.
2.) Then, immediately prior to sale, record a 2nd mortgage (or, don’t even record it…just present it to the title company) for the amount of your profit in the deal. Your profit shows up on the HUD-1 as a second mortgage, which doesn’t spook the buyer’s lender or the buyer (and the seller is long gone). This sounds like a great solution, but the 2nd mortgage loan docs would have to have been signed by the original seller. I can see a pre-foreclosure seller signing a blank deed (because he figures he’s going to lose the home anyway), but I can’t imagine him also signing a blank note.
So, are the two approaches feasible (i.e., legal and practical): 1.) investor stays out of chain of title by seller signing a blank deed, and 2.) investor gets his flip profit as a 2nd mortgage on the HUD-1?
Thanks,
Ron Guy
Re: Flip Profit shown as 2nd mtg on HUD-1? - Posted by SCook85
Posted by SCook85 on July 15, 2002 at 16:21:52:
Ron,
I don’t have a solid answer for your questions, but I would imagine that in the eyes of the IRS, somehow, somewhere that $20k has to show up as income on someones tax return. No matter what we can come up with, they will see it as income, and will find fraudulent intent on your part if they were to investigate it.
Happy Investing,
Steve
Re: Flip Profit shown as 2nd mtg on HUD-1? - Posted by Jack
Posted by Jack on July 14, 2002 at 19:40:31:
The blank deed is OK…but how do you have a purchase agreement between the old seller and the new buyer when the old seller is long gone? How do you sign the HUD1 at the closing using the old sellers name?
And while we are on the subject…if you sold the house in the old sellers name…wouldn’t the profit check be made out to the old seller? And the resulting tax reporting required by law? How would you cash the check?
Many would answer “Power of Attorney.”
Don’t say “Power of Attorney”…it is my opinion the PA by its very nature infers a fiduciary responsibility. The seller could come back and say that all the profit should be his.
I guess that you could have a separate, written contract that allows you to make money at the expense of the seller…
Additionally, there is now (in may many cases) lien seasoning. Lenders today are asking that the 2nd mortgage (or for that matter, all liens) be seasoned sometimes 12 months… so that won’t work.
This is a BIG problem that I brought up at the convention in the Lobby at 2 in the morning. Most of the people in the room at the tiem did not see this as a real issue.(Of course, most were in no condition to talk about it anyway.)
Regardless, now, several months later, a great many of us have posted the same or similar problems.
I am working on answers. I have been for quite some while. I have some real life, practical solutions, but would first like to get some feedback from the board.
Sounds like a car deal… - Posted by JT-IN
Posted by JT-IN on July 14, 2002 at 19:18:41:
Where a guy leaves the Buyers name blank on a car title, with the intention of skipping paying the sales tax, while finding the ultimate buyer. This of course is illegal to do, because of the sales tax issue. I wonder if the transfer tax issue may raise the same concerns. Surely, if you called the County Auditor and told them exactly what you were doing, and asked if it was legal, they would tell you that you were defrauding the county out of tax dollars…
Ron, I would (and I’m sure you will too) run this by a competent Attorney. Let us know what you find out.
JT-IN
Re: Flip Profit shown as 2nd mtg on HUD-1? - Posted by Ron (MD)
Posted by Ron (MD) on July 15, 2002 at 16:53:46:
Steve,
I’m not trying to avoid the taxes. I’m not wild about dealing with buyers and contractors, but I know for sure that I don’t want to deal with correctional officers.
I would like to avoid making my buyers’ lenders nervous if they see that I’ve been on title just a short time and/or that I’m getting paid well in the deal.
Regards,
Ron