Dealing with the Fannie Mae Deed Restrictions

August 18, 2009

Comparing to the number of bank-owned properties on the market today, Fannie Mae owned properties are somewhat uncommon.  However, it is important to know that if you come across these properties, the contracts that they require buyers to use when purchasing them 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:

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“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.”

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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:

1) Request that the provision be excluded from the contract.  This can be done but your success will depend on the motivation and flexibility of the asset manager.

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.  Most rehabs usually take more than a few months anyway.  When you include time to sell, this can easily exceed the 90 day period.  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 and finance all or part of the deal with cash or a line of credit.

About the Author

Alex Everest, President of Deal Maker Library, is a real estate investor, author, speaker, and advisor from Minneapolis, Minnesota.  He has been involved in hundreds of real estate deals since 2004.  Alex is frequently relied upon for real estate investing advice by novice and veteran investors alike.

Entry Filed under: Laws and Regulations. Tags: deed restriction, fannie mae, fannie mae deed restriction, fannie mae rules, fix and flip, flipping homes, flipping houses, flipping properties, rehabbing.