Buying a Fannie or Freddie property can be a great option. It can also be a nightmare. Just like any other purchase, you have to know your market and ensure you are not overpaying. Just because it's a "government owned" property does not automatically mean it's a great value deal. We like to focus in our blog on real life and not theory. Theory is for students who want to study and learn about ideal situations. Practice is for professionals who want to apply real life knowledge to what really works. In real estate, theory is rarely valid. Real life practice is always valid. This blog is not for students but for professionals who are active in the business.
If you've identified a Fannie or Freddie property that makes sense, then bear some things in mind before buying one of these government owned properties:
1) You will almost certainly be subjected to a 90 day deed restriction. You won't be likely told of this restriction up front as it tends to be "assumed" that you should know but it will be in the paperwork eventually. The deed restriction works like this: For 90 days you cannot transfer title to another Buyer unless your gain is no more than 20% of what you originally paid to Fannie or Freddie. In other words, for example, if you buy a Fannie or Freddie property for $50,000, you can only sell it for up to $60,000 (a $10,000 profit...i.e. 20% of $50,000 = $10,000). The actual clause looks like this:
"GRANTEE HEREIN SHALL BE PROHIBITED FROM CONVEYING CAPTIONED PROPERTY FOR A SALES PRICE OF GREATER THAN $_______ FOR A PERIOD OF _____ MONTH(S) 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 $ _________ FOR A PERIOD OF _____ MONTH(S) 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."
Notice the clause states that it "RUNS WITH THE LAND"? That means that it doesn't apply to you personally but applies to anyone attempting to purchase the property from you because it is property based.
2) Using the above example, if you buy a property from someone else who has already purchased it from Fannie or Freddie and has held it less than 90 days, and they've sold it to you for the maximum allowable amount by law as we've explained above, then you cannot sell it at all until that 90 day period has expired from the date of the original deed restriction. Make no mistake...you are bound by the law and have no way around this. How do you think I know this?....the hard way as happens sometimes to the best of us. Learn here and don't get caught. No matter what your Seller is telling you, always check with your Attorney to verify what they are telling you. Get it in writing and make sure it's not just in writing but explicitly in writing.
3) Possible alternatives are to ask to have the deed restriction removed right in the Offer. Put this in the Special Stipulations section of a typical broker Purchase & Sale Agreement. What's the worst that can happen?...they say no. Just write in, "Buyer requests any Deed Restrictions be removed." With this simple statement, you are not demanding, but asking politely. Best case is that they accept and then you have no deed restriction. The odds are slim, but it's worth asking if you're in the deal.
4) If they still refuse to remove the deed restriction, offer to pay a little extra to have it removed if you don't want the restriction.
5) You may get lucky that the "checkbox" that defines whether a deed restriction will be applied is not checked off for your property. I've heard of this happening from an asset manager not checking it off but have not experienced it. You may luck out however as it is possible.
6) If you can't get around the deed restriction, it's best to focus on properties that you can rehab and profit from. You can take the down time and use it constructively to rehab the property and then market it immediately. There is nothing wrong with marketing the property that has the deed restriction. You just can't transfer the deed to someone else until that 90 day period has expired.
For those that want the advice, the above can help you put together an entrance and exit strategy to purchase a Fannie or Freddie owned property if you've never purchased one before. If you have, it's good to brush up on your options for the next one. Again, I want to reiterate that the above is based on our experience only and that we are not attorneys and none of what's in this article should be construed as legal advice. You should always check with your attorney before signing any legal documents to completely understand what you are signing.
Until next time...have a very prosperous week.
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