REO Danger – Avoid Fannie Mae if you want to Wholesale or Fix-and-Flip for a Profit!

19 Mar

For most investors, finding good REO deals is hard enough. It gets abundantly harder when you’re trying to strike a deal with Fannie Mae.  Yes, the same Fannie Mae that is a government-sponsored enterprise that was chartered by Congress.  The same Fannie Mae received a pledge of $200 Billion by the US Dept. of Treasury in Sept. 2008, to provide liquidity to the housing/mortgage markets.  Surely such a government-backed organization will try to encourage properties to be revitalized so the housing market can recover more quickly.  Read on, my investor friends…

If you find a bank-owned property that’s in good condition and at a good price, chances are you won’t get it, because owner occupied buyers get the first crack at them, through Fannie Mae’s First Look program, which gives those buyers a 15 day advantage to lock up those deals.  Fair enough — if a family is willing to buy the property and make it their primary residence, I think they should get a head start over investors to do so.


But if you find a distressed Fannie Mae property at a good price, that maybe has no flooring and no kitchen (cabinets & appliances have been removed), you can avoid the owner occupied buyers, because they generally don’t want to take on such a big project, and a house in such condition won’t qualify for conventional financing anyway.  Such a property would be perfect for you as a Wholesaler or a Fix-and-Flip Investor, wouldn’t it?  Probably not.


Fannie Mae wants to make sure that no one can efficiently flip one of their houses for a profit.  Why?  I don’t know.  I guess they are so afraid that a savvy investor will turn a quick profit — that they would rather have the property just sit there and not get purchased, fixed up, and made into a contributing member of the neighborhood.  So they do the unthinkable in what used to be a free enterprise environment — they require that the lucky buyer of their property accepts a Deed Restriction that expressly limits the sales price the investor can sell the property for, regardless of how much money they invested in the trashed property to fix it up.  What??!!

We first tripped across this a year ago, when we were in contract to buy a newer house from a wholesaler who was completing his purchase from Fannie Mae.  It was a nice house, with some glaring issues; it had no kitchen (previous owner had stripped the kitchen of the cabinets, countertops, and appliances) and both A/C units had been ripped out.  Accordingly, this property would not qualify for conventional financing and it was highly unlikely that any owner occupied buyer would buy it in that condition anyway.  It needed to be sold to an investor that had the crews to efficiently restore the property.  We opened escrow in the normal manner, but when we received our preliminary title reports, we noticed that Fannie Mae’s deed to the wholesaler had a 3-month restriction on it, allowing us to sell it for only $3,784 more than what we were buying it for!  Add closing costs to buy it, roughly $15,000 of repairs needed, and then costs to market and sell the property, and Fannie Mae was making sure that a highly efficient investor couldn’t be rewarded with a profit.   Here’s the excerpt from the actual deed:

Special Warranty Deed

Notice  that the restrictions “run with the land”, meaning that they would transfer from the wholesaler to us and we would be stuck.  We had already sent our contractors into the house to provide quotes to make the repairs, and we had a buyer lined up to buy the property once we fixed it up.  Our plan was to get it remodeled within 2 weeks and have the investor close his purchase 2 weeks after that.  That’s efficient, and that’s how a Fix-and-Flip Investor can make a fair profit while also giving their buyer a good deal.  But to wait another 2 months, just to be able to sell the property for a realistic price, would have added additional cost and risk to our transaction, as our buyer didn’t want to wait that long, and who knows what lending guidelines would have changed by then?  (As it turned out, the HVCC rules went into effect during that timeframe, so we probably would have been victims of the chaos and artificially low appraisals that seemed indicative of that time period of May/June 2009).


We tried to reason with the bank’s agent, reminding them that the repairs needed to make the house inhabitable would far exceed the deed restriction ‘allowance’ that Fannie Mae was allowing us to sell it for, but they indicated that Fannie Mae would not be flexible at all.  So we backed out of the deal and recouped our earnest money.  And vowed to stay the heck away from any Fannie Mae properties.


That strategy worked for nearly a year.  Two days ago, I was driving to a property that we were completing a rehab on and were preparing to sell, and I saw another house in the same neighborhood that was distressed but was available at a good price.  I asked a realtor friend to put in an offer for us to buy it, and as luck would have it, we found that it had just become available again as another investor had just backed out.  You guessed it – this house also happens to be owned by Fannie Mae and they are still insisting on Deed Restrictions — this one is for 20% (or $11,000) more than our purchase price.  Too bad it would cost at least $15,000 in rehab and closing costs to get the house into respectable condition to sell.  No thanks — we really aren’t in business to take losses just for the pleasure of rehabbing a Fannie Mae house that they don’t have the guts to rehab, and that’s in such poor condition that they won’t even give a buyer a loan on the property, even though Fannie already owns it and should want to get it off their books!


Conclusion: If you’re a Wholesaler or a Fix-and-Flip Investor, you should make sure that Fannie didn’t own the house in the recent past, as you’ll be stuck with a nasty, nonsensical deed restriction.  If you’re a Fix-and-Hold Investor, then this probably won’t bother you, but we’re seeing fewer and fewer of those investors these days.  Sure seems like Fannie would get a higher price and would sell their properties faster if they pulled their heads out of the sand and removed these deed restrictions.  Or at least adjust the deed restriction ‘allowance’ to accommodate for reasonable repairs required to rehab the property in conformance with the neighborhood’s standards.  Hopefully the government and Fannie will realize that this policy is creating unintended consequences.  Until then, steer clear of Fannie’s properties!

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17 Responses to “REO Danger – Avoid Fannie Mae if you want to Wholesale or Fix-and-Flip for a Profit!”

  1. Dan Frankum 08. Apr, 2010 at 8:56 am #

    Thank you Sean for that great info. Your article saved me from making 2 wholesale offers I was about to make today. Was it coincidental I read your info today or fate?

  2. Dan 20. Apr, 2010 at 6:46 pm #

    Seen very similar articles to this one. I generally go find the properties myself and avoid any type of government agency at all costs. Seems to be the way to go.

  3. Paul Barrow 24. Apr, 2010 at 4:19 pm #

    Sure would be nice to have investors be “appreciated” for buying and fixing all these deadbeat properties and helping he housing market recover instead of being thrown under the bus by all these stupid rules!

    It is CRAZY that the bureaucrats can’t see that these rules are harming everyone involved! Our company started contracting FMNA properties in single property LLC companies on and then selling the company that owned the property to wholesale buyers to get around the deed restriction. But this only works for double cash deals where buyer is planning to take 90 days or more to resell.

  4. Mike 25. Apr, 2010 at 3:29 pm #

    Thanks to Paul Barrow for a workaround solution. It’s not for everyone, I suspect, but can be a great way to get around these crazy rules. This is probably obvious, but for anyone who wants to do this, be sure to disclose to your investor buyer the 90-day rule, so he/she fully understands the situation.

  5. Danny 03. May, 2010 at 11:23 am #

    If a buyer pays all cash for a unit why can’t he refi right after the closing and get his $ out? I have a buyer that lent his wife $100K (they have seperate accounts and she is taking title as married and seperate) to pay all cash for a unit which was $ out of his credit line. Why does he or she have to wait 6 months to refi?

  6. Douglas Haisten 28. Jun, 2010 at 6:14 pm #

    Great post. I suffered a similiar revalation on a very similar property. It was an reo that needed extensive work including the installing a kitchen (the existing kitchen was stripped of everything except the grease onthe walls). In my case the listing agent wouldn’t even submit the offer. His stated reason was that fannie mae wouldn’t even look at an offer below 85% of the MLS list price (which was about $10K above comps and didn’t care about the needed repairs). Several listing agents have told me the same thing…85% of list or no submit! Anyone else experience this submittal price threshold?


  7. Buying Property 11. Aug, 2010 at 7:43 am #


  8. JB 17. Aug, 2010 at 8:33 pm #

    This is how our government money is being spent. Fannie Mae has over 900,000 properties. They are selling about 3,000 a month, calculate how long that will take to get rid of the inventory. Insane!!!!!

  9. David Wilson 25. Aug, 2010 at 12:55 pm #

    thanks for the post, great info as always.

  10. Otter 18. Nov, 2010 at 6:59 pm #

    Why not rent the property for the time frame based on the selling price giving the buyer credit towards the purchase with a contract stating they buy at the end of two months… makes immediate money and by passes the deed restriction.

  11. Mike 18. Nov, 2010 at 7:07 pm #

    Hello Otter,

    Well, there is risk (a substantial one in my opinion) that once you let the buyer take pre-possession, they cannot get their financing done (happens a lot these days) and now you have to get them out. And clean the place. And sometimes they’re not so happy with the lender and take it out on the house… This could be a good strategy with a HIGHLY qualified buyer, but there is always this risk to consider.

  12. Jennifer 20. Dec, 2010 at 8:00 am #

    You’re right, it is crazy to put all those restrictions on investors. As someone commented above, we are the ones who are trying to help the housing economy by fixing up these distressed properties!

  13. baton rouge short sale 09. Jan, 2011 at 10:45 pm #

    Great article as always, Sean. But the truth is, the government has been intricately involved in the real estate industry for many decades. Social policy implemented by the government has included the mortgage interest deduction and many other rules and tax breaks. I can’t imagine that ending in the near future, nor would I be in favor of it.

  14. Wayne 22. Feb, 2011 at 10:11 pm #

    Thanks for this article,

    I think the government needs to stop restricting investors and wave the 90 day flip rule. You have to remember that no one likes to see you make money. Raising down payment requirements now is like throwing a life preserver to a drowned man. What the housing market needs now is STIMULUS. For some reason, they’ve figured that out as far as the economy is concerned but not regarding the housing market. Underwriting standards need to be raised when values are rising NOT when they are falling! Two more things. 1. Fannie Mae allowed 95% financing back in the 80’s, maybe even before that. FHA was completely self funded for decades while allowing 2.75% down. 2. This really gets my goat – If a PMI company is willing to insure loans to 95%, what right does the government have to not allow that? This government has gotten way out of hand. All they have accomplished with all the new regulations is to have completely eliminated consumer choice. It concerns me that so few people recognize this.

  15. GLenn Kerns 06. Jun, 2011 at 6:46 pm #

    IF we pay cash to buy a Fannie Mae foreclosure and the buyer is also paying cash to me is there still going to be a Deed restriction or can we just flip the home ASAP.

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