Posted by James Buster on July 16, 2002 at 20:11:52:
I find it odd to penalize somebody for acquiring equity by negotiation rather than cash. If an investor negotiates to purchase a property for 80% FMV and sell for 100% FMV, in what sense have they not earned that 20%? Would it be different if the investor put cash up front for 80% FMV into escrow? The lender is funding 100% of the investor’s purchase price either way. In point of fact, why does the lender care about the middleman at all? The middleman is not the borrower, the middleman’s buyer is. How is the borrower’s equity position and psychological attachment to the property different from what it would be had they negotiated a 100% FMV deal directly with the current property owner? More to the point, how is the lender’s position different? The gross speciousness of this reasoning makes it seem like it’s really about something entirely different. For example, a cover-your-ass policy in case seller’s remorse kicks in and they sue the lender and middleman alleging a conspiracy to defraud the seller.
The seasoning issue is not a matter of an illegal flip. It’s a matter of fact that the lender doesn’t consider the equity to be yours because you haven’t owned the property long enough to earn the equity.
Lenders feel that for a buyer to buy a property and then capitalize on equity that truly isn’t theirs is not the lenders intention. When the lender makes a loan and takes your equity position into consideration, they want that equity to be one of the reasons the borrower will pay. If the borrower just accumulated the property and has not earned the equity, the borrower will not feel a loss.
A years worth of seasoning and the buyer making monthly payments on the property. Demonstrates to the lender, that the buyer is involved and committed to maintaining the property.
There can be exceptions to this rule, depending on the property, borrower, and lender. As investors, once we know about this policy, and it is a policy not a law, we can buy and sell taking the time frame into consideration.
It’s not because they think there might be a title problem, it’s because they think there might be a valuation problem. Houses that haven’t been owned for long were the subject of many loan fraud schemes over the past several years involving inflated appraisals and unqualified buyers.