Did you hear the one about the crooked investor who stole a home from a sweet ole grandma for $40K, spent a few grand on carpet and paint, then sold it 30 days later to a naive first time homebuyer for about $120K?

Oh yeah - the rest of the story - he sends the buyer to his loan broker, who charged him excessive points and loan origination fees. The loan broker uses an appraiser who's his buddy, and gives him the number to bring the appraisal in at. Of course, he neglected to tell the naive buyer that the loan interest rate adjusts upward by 3 points in a year, which puts the new payment out of the buyer's reach. (Hard to believe, but most buyers - particularly those buying for the first time - don't understand their mortgage terms).

Everybody made money! Real estate investor, loan broker, appraiser. Unfortunately, the home goes into foreclosure a year later. The home buyer is forced out of his home, his credit record is shot, and he's unable to buy another home for several years.

You might have seen a story like this. Because it happens over and over again, throughout the US. It's been on the front pages of local newspapers, and national magazines. Quite a few of these crooks are already clocking time in the pokey for mortgage fraud; and the FBI's hot on the trail of others.

Enter title seasoning.

To combat this type of fraud, lenders have created title seasoning requirements. Title seasoning refers to tightening up of lending requirements to reduce abuse and mortgage fraud.

Generally speaking, if you've owned a home for a shorter period than six months, and you want to sell it, you may run up against some of the issues I'm writing about here.

These will bite the fix-n-flip investor right in the tail if they're unaware of these requirements... so I thought i'd review them here.

Check out these two scenarios where you might sell the home:

1. Sale to a retail buyer

The FHA requires that the seller must have held title to the property for 90+ days. There are a few exceptions... but, unfortunately, none that involve a home that has a substantial difference between buy price and sell price.

If you're selling the home within 12 months of purchase, for something greater than 5% more than you paid for it, the FHA may ask for documentation of the improvements you made. Also, they may ask for a second appraisal. Conventional lenders will generally follow the FHA's guidelines on title seasoning. It'll likely depend to a great degree on the buyer's credit score and debt/income ratio.

"A" credit buyers, naturally, pose less of a risk to a lender than subpar buyers... so you can expect more leniency from a lender with an "A" credit buyer. Bear in mind, though, that a good percentage of first-time home buyers are not working with "A" credit scores.

2. Cash-out refinance

Here's where real estate investors are really taking a beating these days.

Let's say you take a hard money loan to buy the property, do a quick rehab, and put it on the market. Hard money interest rates - generally 12-15% - will eat away at your profits, if the home sits on the market for any length of time. So, naturally, many investors have historically preferred to do a "cash-out refinance". They refinance with a conventional loan, and pay off the hard money lender.

If you've been on title for less than six months, you're likely to have a problem. Most lenders these days won't touch it... you'll have to do some real digging to find one who will; and most likely they won't lend you much more than 70% loan to value.

The best bet here is to avoid hard money if you can. If that's the only way you can buy the home, make sure there's enough profitability in the deal to cover holding costs. Ask your Realtor for the average days on market in the area, and add that to your rehab time in order to estimate your holding period.

Here's a few suggestions to keep in mind, to reduce the likelihood that you'll be affected by title seasoning.

1. Keep a running list of all the improvements you make on the house.
   
2. Obtain receipts for all labor and materials. Maintain them in an orderly fashion, so that you can provide them to the lender if necessary.
   
3. Take lots of pictures - before the work you do, and after.

Title seasoning is an important issue for rehabbers.

Don't lose track of these important guidelines. Talk to a good loan officer before you get into a deal, to be sure you don't get caught by this important issue. 

If you are looking for investment property in Cincinnati, the Cincinnati MLS is a great resource.  I offer a free list of Cincinnati foreclosures, freshly emailed once or twice a week.  Most of these are REOs and HUD properties, that I've already pre-screened against neighborhood home values.

And check out more real estate investment tips on my blog.  I think you'll find it a great source of information!