Flipping and Freddie Mac 2.0

Tuesday, October 27th, 2009 | Uncategorized

Freddie Mac Bulletin No. 2009-24 released on October 9, 2009 to all Freddie Mac sellers and servicers has caused controversy and concern among the short sale investing community. Under the best practices section, on page 1 of the bulletin, it reiterates that Attachment A provides the best practices for transactions involving possible property flips. If you have not yet taken the time to read Attachment A please do so as soon as possible.

According to Attachment A, one of the transactions that Freddie Mac considers to be a property flip is “Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee’s sale, etc.), where any increase in the sales price over the property seller’s acquisition cost can be clearly shown to be a result of the difference (if any) in the market’s reaction to distress sales and typical arms-length market sales.”

It is clear that Freddie Mac understands that a property can be valued at more than one price. What is its distressed sale price v. its non-distressed, arms length transaction price. If a property that is currently the subject matter of a pending foreclosure action, is over-leveraged and occupied by individuals who cannot keep up with the payments it is clearly not worth the same amount as a property that is free and clear and is no longer the subject of any type of foreclosure or other judicial proceeding.

Nevertheless, Freddie Mac encourages proper investigation by all of those lenders who seek to sell loans to Freddie Mac. The purpose of the investigation is to see if the “red flag” issues can be resolved. My good friend Bob, from Old School Title, has often said “red flags only slow the deal down, black flags kill the deal”. Red flags can be removed when proper and adequate documentation is supplied. One type of transaction that will get a red flag (remember this only slows the deal down, it does not kill it) is a transaction “where the property was acquired by the seller as a part of a distressed sale in which the property seller or a related party was a party to an option contract to purchase the property from the prior owner for an option price substantially below actual full market value”. In that type of situation, Freddie Mac urges the sellers of the loan to Freddie Mac to do some of the following things. 1) Obtain a full appraisal with an interior and exterior inspection, 2) ensure that the appraised value is adequately supported by market data and that appropriate comparable sales were utilized in the appraisal report, and 3) ensure that the appraisal sufficiently analyzes all pertinent offerings or listings for the subject property and includes sufficient analysis of the contract of sale for the subject property.

Furthermore, Freddie Mac suggests that additional underwriting and closing issues be addressed through the performance of additional due diligence in reviewing the chain of title of the property including a search of any of the public land records for any recorded option contracts on the subject property and research any recent title transfer activity. They also the suggest the exercise of additional due diligence to reconcile any differences in the owner of record as reported in the appraisal or any of the documentation including the title report.

In summary, Freddie Mac is aware of short sales being bought via the option contract and then being promptly resold to borrowers who then seek to get a traditional loan sold to Freddie Mac. Freddie Mac is not opposed to that idea, Freddie Mac requires additional due diligence and documentation in order to be able to buy those loans. The additional due diligence and documentation are the things that are easy to show when the transaction is fully and adequately disclosed.

For more information on this and other related issues, please take the time to listen to the excellent all content training call done by Bob Mittleman and myself earlier this month.

Join SREC’s Silver Coaching for the absolute best free training anywhere!

2 Comments to Flipping and Freddie Mac 2.0

Bradley Gaskins
October 29, 2009

Watson,

You absolutely rock. You should consider putting on some kind of training program. LOL!

In all seriousness. You should consider some kind of a “certified” program for realtors and investors. It would do the world a great service. Finding a realtor who has been trained by the best would make an investors like so much easier.

Brad

JB Beyer
November 9, 2009

Watson

Great content and you are addressing challenges head on. My question to you is knowing that Freddie Mac’s generally net guidelines are 90 to 92% of banks BPO . There is Not much room there. I have heard on rare occassion they would discount to 88% becuase of severe repairs. Just curious on how many Freddie Mac backed deal are current getting flipped. I would say not many due to the volumes of BPO and appraisals done on them. There are so many short sales out there just run the property address thru the fannie mae loan look up site and the freddie mac loan look up site ( last 4 digits of ssn required). If it shows they own or service then pass on those deals up front…let them go retail short sale.

my 2 cents

JB Beyer
Coastal Mitigation Partners

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