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Avoid Headaches -- Understand Relocation Conveyance
By Alton Gary Simpson
DANBURY, CT -- According to Cartus Corporation, a global relocation firm headquartered here, mortgage brokers often don't understand the myriad and ever-changing laws and regulations that come into play when a relocation company becomes involved in the sale of an employee's home. Relocation companies are typically engaged by corporations and government agencies to assist them in moving their employees from one job location to another.
Among other services, the relocation company will often be asked to assist the employee in selling their current home, freeing up the family to move to the new location. In several instances, relocation companies buy employees' homes and then resell them.
When a title search is done on a relocated employee's property for a prospective homebuyer, it shows that the recorded titleholder is not the same party as the seller in the contract. On the local land records title is in the name of the relocated employee; however, the borrower is proposing to buy the home from the XYZ relocation company.
With increased scrutiny on lending practices, a prudent lender might pull the plug on this deal or the lender may rely on the commitment letter's requirement that a buyer convey to the lender a valid first lien on the property. But the borrower cannot deliver a valid first lien because he isn't buying the property from its "true" owner.
Cartus notes that before an originator pulls the plug on what might otherwise be a legitimate, lucrative loan and doing a disservice to the borrower -- possibly even leading to liability for refusal to fund -- it's important to determine whether this is a scam or completely within government guidelines for relocation company operations.
There are many IRS rulings governing the operation of these programs and most employers require their relocation companies to operate their programs in accordance with these IRS guidelines. Under Revenue Ruling 2005-74, the IRS has eliminated any federal requirement that the relocation company record the deed evidencing the relocation company's purchase from the employee. This leads to the circumstance where a title search might find that the employee is still in title, but the contract identifies a relocation company as the seller.
Under this circumstance, investors/lenders can be assured that a valid first lien was obtained at the closing, because when the relocation company purchased the employee's home, it obtained a signed deed from the employee. In that deed, the grantee's name was left blank. When the relocation company prepares for its closing with the borrower, it will insert the borrower's name as the grantee.
Once recorded on the land records, it is a conveyance to the borrower. Once the mortgage is recorded, it creates the required lien. This is known as a deed-in-blank transaction, which is sanctioned by the IRS and has been employed by the relocation industry since 1972. There are several states that require two deeds -- one deed showing transfer from the employee to the relocation company and one deed showing transfer from the relocation company to the borrower. They are no longer required nationally.
Cartus added that most of the larger relocation companies have language in their sales contracts stating: "Buyer acknowledges that Seller may provide a deed from another party at closing." Under this language, the borrower has already contractually agreed that the deed from the relocating employee is adequate. A lender's insistence upon a different arrangement may put the buyer in breach of their obligations or even cause the buyer to quickly secure a mortgage loan from a new lender who is more familiar with relocation transactions.
From a lender's perspective, it is critical not to take any of the above at face value. Someone may unscrupulously attempt to take on the guise of a relocation company in order to avoid having their name in the chain of title, to take advantage of the relocation exemptions to the FHA anti-flipping rules [24 CFR Section 203.37a(c)(2)] or commit some other variety of fraud. The lender or the lender's title representative should obtain information from the relocation provider to ascertain its legitimacy.
As noted above, there are myriad laws and regulations that are in play when a relocation company is utilized to sell a home. A full understanding of the special circumstances and potentially confusing details surrounding these transactions is an important step in completing them in a way that is timely and that avoids unnecessary stress for the individuals relocating under its terms.
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