My current challenge is whether I can buy REOs, HUDs, VA properties and flip them within a few months. The first one I tried (from Wells) had an addendum that I could not sell for more than 20% within 6 months after closing. I walked away from that. I fix and flip in 3 months. Some people say all REOs, HUDs and VA have this problem. Others say only a few. Others say it is unenforceable.
What has been your experience recently with this?

 Lionel

Reply from Donna Robinson:

I have been hearing some rumblings about laws that would limit the selling profits or the time frame in which you sell, etc.
At present this is being done primarily at the lender level, as lenders seek to control and put a damper on high investor profits. They are not ignorant of the fact that investors have been making lots of money at their expense, via short sales, REO's , etc. And they don't like it. Also, you'll note that HUD, VA and FHA are government related. HUD is responsible for handling properties with federal loan programs. Any property with a federal government related loan program can be more difficult to deal with, due to their objective of recovering tax payer funds associated with these properties. However, this trend is also beginning to show up in non-government related loans too.

I understand that a few states are discussing passing laws to limit profits on the sale of investment property (that is not owner occupied).

There are several issues getting thrown into the mix:

HUD, VA, FHA and any other government guaranteed loan programs have been implementing rules regarding seasoning of title since 2004. They are requiring borrowers who are buying a house under a HUD program to buy houses that have been owned by the seller for at least one year. This is primarily first time buyers using low downpayment government insured funding. I have had this problem myself, so it is harder to sell quickly to a first time buyer who is using HUD funding sources. The lender will not allow the borrower to close until seasoning requirements are met. This is not a legal issue, it is just the lenders imposing rules to prevent quick flips to first time buyers using these particular loans.

The other issue is companies like Wells Fargo using addendums to limit your options. This is difficult to enforce I would imagine, but still, as an investor, I would not want to take the chance. I think you did the right thing to walk away. But this particular method is handled individually by each lender, and is primarily affecting REO properties being sold by some lenders.

If states do decide to pass laws limiting profit margins or restricting title seasoning to a minimum number of months, there could be a backlash that they can't predict now, that could affect the housing market as a whole and drive prices down.

The law of unintended consquences could make for a real economic downturn if they make a big effort to drive investors out of the market. They do not realize how much investor activity has been helping drive the economy the past few years. In essence this would be "price fixing" and like all such attempts the result would be bad economically.

Just as with the state of GA a couple of years ago, when some well meaning representative in the state house wrote a law making buyers of mortgage backed securities liable for predatory lending that might have ocurred on a mortgage being sold as a security.

This had the unintended affect of downgrading GA mortgage notes, and for a short time, the funding for mortgages in GA almost collapsed. The law was quickly revised, after Standard and Poors downgraded GA mortgage notes to near junk bond status in response to this liability threat. This would have meant no funding for mortgage notes created in GA, if no outside investors would buy the notes. That is how mortgage money is raised...by investors who buy the mortgages that are created. These are usually investment companies, pension funds, etc. very big buyers spending tens of millions of dollars. Without them, there is no mortgage money to loan out to borrowers.

The law of unintended consequences kicked in here, and came close to damaging the GA economy. Governments can't regulate free markets without causing other bad things to happen. Since they do not understand the economic fundamentals driving the market, they try to fix one problem only to create one that is even worse. They need to stay out of it, but investor related fraud is such an issue that they can't keep their hands off of it. If only they would ask some investors how to fix this problem. It might help them do a better job of regulating an industry that they do not understand.

On the other hand, all investing clubs and "Gurus" should be calling for investors to act with integrity and honesty. If all investors acted with integrity, and if fraud were not so rampant, this would not be happening. They are trying to stop the fraud, but they don't know how to do it without endangering the whole housing market. I believe that real estate seminars are responsible for a lot of this problem, by encouraging and teaching practices that lead to fraud and irresponsibility, which causes most of the stories we hear in the media about little old ladies getting ripped off my some idiot investor. I have dealt with many such incidents. Something does need to be done to stop fraud, but price fixing, profit limitations and title seasoning simply do not address the root problems.

You should continue to shop for houses and make offers, but avoid any addendums as with Wells Fargo, or anyone else. I can assure you that with foreclosures at all time high rates, the banks will be giving them away as they did back in 1989, if investor buyers stop doing business with them due to price fixing or restrictions on profits. Trying to stop investor activity will be a very bad choice for them in the long run, with foreclosure inventories growing daily. Once again it is a fundamental issue...if you are foreclosing at a record rate, you will need to unload them any way you can, or as a bank you could face insolvency. They can't control this like they think they can. Too much tunnel vision and too little understanding of market fundamentals.

 Donna Robinson, TREA Training Director