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Dealing with the Fannie Mae Deed Restrictions
by Alex Everest
If you make offers on Fannie Mae owned properties, you should know that the contracts they require buyers to use when purchasing their properties will contain a clause in which the buyer agrees to receive a deed containing a deed restriction. The deed restriction can affect how you are able to do your deals.
This is the clause from an actual Fannie Mae contract which describes the deed restriction:
"Grantee herein shall be prohibited from conveying captioned property to a bona-fide purchaser for value for a sales price of greater than 120% of the purchase price for a period of 3 months from the date of this deed.
Grantee shall also be prohibited from encumbering subject property with a security interest in the principal amount of greater than 120% of the purchase price 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. This restriction shall terminate immediately upon conveyance at any foreclosure sale related to a mortgage or deed of trust."
As you can see, the clause restricts the buyer’s ability to sell and refinance the property. If you intend to flip the property rather quickly, then this provision would not allow a sale for more than 20% of what you paid for it within the 90 day timeframe.
If you intend to get a rehab loan for 20% more than the purchase price of the property, title cannot be fully insured. If title cannot be fully insured, then the lender will not fund the loan amount necessary to complete the project.
There are a few ways to deal with the restriction. They include:
Applies to the wholesaler (or whichever party is making the acquisition):
1) Request that the provision be excluded from the contract. This can be done but your success will depend on the asset manager.
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2) If your request to remove the provision is denied, offer to pay to remove it from the contract.
3) Set up an agreement with your rehab lender in which they agree to modify your loan once the 90 days expires. This will allow you to increase the loan amount since title insurance can be modified to reflect the higher loan amount after 90 days. Just keep in mind that you will incur additional closing and recording costs.
4) Ignore it temporarily. Simply hold on to the property for 90 days before either getting a rehab loan on it or selling it. In this case, simply build in the cost for holding the property into your offer. In addition to actual holding costs, don't forget to also build in an opportunity cost...time is money.
5) Ignore it entirely. Simply finance all (or part) of the deal with cash or a line of credit.
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