Relocation conveyanceBruce M. Perlmantax considerations, variations in implementation, precautions, benefits of awareness
A special case driven by tax considerations
What's wrong with this picture?
Until now, the transaction looked like every other deal. The
borrowers had satisfactory credit and a reasonable downpayment. The
property was a single-family home in a nice residential section of
town, and the mortgage appraisals were more than adequate to
support the requested loan amount and completely in line with the
proposed sales price. The buyer's inspections didn't yield anything
unusual, and the file was proceeding toward closing without a
glitch.
However, you've just gotten an urgent phone call. It seems that
the title search shows that the record title holder is not the same
party as the seller in the contract. The title is in the name of
Mr. and Mrs. Smith on the local land records; however, your
borrower is proposing to buy the home from the XYZ Relocation
Company.
Clearly this is a scam ... or is it? With increased scrutiny on
lending practices by government regulators and the press, a prudent
lender would pull the plug on this deal, right? Most likely, the
lender would rely on the commitment letter's requirement that a
buyer convey to the lender a valid first lien on the property.
Logically, how can the borrower deliver a valid first lien when
he's not buying the property from its "true" owner? Before
reflexively pulling the plug on what might otherwise be a
legitimate, lucrative loan for you and your investor, and doing a
disservice to your borrower (possibly even leading to liability for
refusal to fund), it's important to determine whether this is a
scam or completely in line with government guidelines for
relocation company operations.
Conveyance in the relocation arena
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 his
current home, freeing up the family to move to the new location.
There are numerous IRS rulings that govern the operation of these
programs, and most employers require their relocation companies to
operate their programs in accordance with these IRS guidelines.
In many cases, a relocation company actually buys the employee's
home from the employee. It then resells the home to a buyer (your
borrower). 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 your title searcher might find
that the employee is still in title, but the contract identifies a
relocation company as the seller.
Under this circumstance, how can you assure your investor that
you have obtained a valid first lien at the closing? When the
relocation company has purchased the employee's home, it obtains a
signed deed from the employee. In that deed, the grantee's name is
left blank. When the relocation company is preparing for its
closing with your borrower, it will insert your borrower's name as
the grantee. Once recorded on the land records, it is a conveyance
to your borrower. Once your mortgage is recorded, it creates the
required lien.
Most of the larger relocation companies have language in their
sales contracts that states, "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 transferring employee is adequate. A lender's insistence upon a
different arrangement may put the buyer in breach of his
obligations or even cause the buyer to quickly secure a mortgage
loan from a new lender who is more familiar with relocation
transactions.
Variations in implementation
Even though two deeds are no longer required nationally, there are
several states that have laws requiring their use in certain
states. The Washington, D.C.-based Worldwide Employee Relocation
Council is the industry trade group for the relocation industry. It
has established a list of the states where two deeds continue to be
required. All of the major relocation providers adhere to this
list. If your primary lending territory is in one of these states,
you may never encounter the situation described above.
Additionally, several large employers continue to utilize two
deeds in all transactions, even though there is no longer any
requirement to do so.
Finally, even employers with programs that rely on one deed may
elect to use two deeds in special circumstances. They may direct
the relocation company to use two deeds where the employee is
leaving the company or the country or in other unusual
circumstances.
Important precautions
From a lender's perspective, it is critical not to take any of the
above at face value. There are those who will unscrupulously
attempt to take on the guise of a relocation company in order to
avoid having their names in the chain of title or even take
advantage of the relocation exemptions to the Federal Housing
Administration 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 prudently
obtain information from the relocation provider to ascertain its
legitimacy; it may even want to get an advance photocopy of the
proposed deed or other representations from the relocation company
to assure itself and the investor that the transaction is going to
follow the template described in this article. If the seller is not
one of the nationally known relocation companies, it would even be
wise to get some form of proof from the seller.
The benefits of awareness
The deed-in-blank transaction sanctioned by the IRS has been
employed by the relocation industry since 1972. Literally millions
of homes have changed hands using this form of conveyance. 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 avoids
unnecessary stress for the individuals relocating under its
terms.
Bruce M. Perlman is senior vice president and general
counsel of Danbury, Conn.-based Cartus Corporation. He may be
reached at (203) 205-6550 or e-mail
[email protected].
