How to Overcome the Seasoning Issue in Real Estate Investing

FNMA and Freddie Mac and other mortgage guarantors have, or will be, dropping the seasoning requirement that an investor who buys a property and resells it must hold it for ninety days. If the profit on the transaction is less than 20%, the requirement may be waived. Seems like good news but all that could change by the time I finish writing this article. More importantly, local and national banks and mortgage lenders do not have to abide by these guidelines and are requiring seasoning of 90 days to six months.

Seasoning is becoming an ugly issue for many local rehabbers usually because of the market exposure the property takes in the market’s gyrations (more downs than ups). Rehabbers are usually finished in 2 – 4 weeks for a light rehab and two to three times as long for contractor work. Obviously some work can take many months and for them seasoning issue is not an issue – just carrying costs and cost overruns.

So let’s assume you finished your rehab and you call your friendly realtor to sell it or you decide to sell it yourself as a FSBO (For Sale By Owner). I looked at a property locally where the expected time-on-the market for a realtor’s listing was 48 months! Most places in our tri-county area are estimated at 9 – 24 months based on the median price home value.

Historically, I overcame this seasoning issue by using land trusts and transferring the beneficial ownership from the original seller into the trust and then onto the retail buyer. By including the name of the seller in the trust and having them have a beneficial interest in the trust, I legally avoided the “due on sale clause” and to the end-buyer’s lender it never seemed to matter because the trust was owned by the original seller until the time of closing.

What has changed is that as the lenders see a land trust or living trust as a buyer, they ask the closing agent if an Assignment of Beneficial Interest exists. Your closing agent shouldn’t lie and when he says “yes”, the buyer’s lender almost always will not fund the purchase because of the seasoning issue – not for any other reason. As smart as the lenders think they have gotten, there are a few good men out there completely avoiding the seasoning issue by using a unique title transfer process and the lenders see it and just don’t do anything about it.

However, for the 99.9% of the other investors trying to avoid the seasoning issue, one way is to first find your buyer, next do a pre-qualification to determine that they can get a mortgage and then lease option them the property for 60+ days. I suggest you offer the buyer a 1/2 credit for their lease payments at the closing and you not accept any Option Consideration amount less than the down payment they will need to close.

Remember the money they put down is an Option Consideration and not a deposit. Therefore, it is not refundable if the buyer gets buyer’s remorse and changes his mind about buying your house.

In summary, this option consideration secures the purchase for the buyer, gets the property sold and over-comes the lender’s silliness about seasoning for 90 days or longer. The key here is not to sign a Purchase and Sale Agreement until 91 days after your original closing date on the HUD-1 or the lender will probably not fund the buyer’s loan because of the seasoning issue! Always pass this or any ideas by a local real estate attorney before you try something new where legal issues and possible state or Federal laws may be violated.

How to Overcome the Seasoning Issue in Real Estate Investing