When do you record the deed restriction (resale restricted single-family)?

My client (NSP grantee) has is assisting LMMI families to purchase homes using NSP. Its acq/rehab/resale. The properties will be resale restricted by recorded covenant. The developer is buying and holding title, The grantee is recording a Deed of Trust at acquisition to secure the NSP investment. When the property sells, the original DOT is reconveyed and the property becomes resale restricted. If the buyer requires direct assistance, there may be a DOT to secure a silent second.

If you have a similar program, when do you establish the resale restriction? At the point the developer acquires the unit and you provide assistance or when it sells to the homeowner?

Thank you for your replies.

- Rob

Tags: NSP, Resale Restrictions

Replies to This Discussion

Permalink Reply by Rick Jacobus on March 11, 2011 at 12:07pm

Robert,

I have seen it done both ways. There are probably many pros and cons to each approach (hopefully others will weigh in) but my impression is that recording the restrictions at the time that the Developer purchases is stronger (ie. safer) while waiting to record until the sale to the homeowner is simpler. If you record a deed restriction when the developer purchases the document has to contain specific language relevant to that context - which is different from the language that applies to homeowners (ie. where you might require homeowners to occupy the unit you won't require the developer to do that, you might require the developer to do marketing and screening for buyers that wouldn't be appropriate for individual homeowners, etc.). All of this one-time language ends up in the deed restriction that buyers are then signing and makes it that much longer and harder to understand.

The reason to do that is to be sure that you have a strong mechanism to ensure that the developer complies with the NSP requirements. Clearly you need some enforceable legal document requiring the developer to sell only to an income eligible buyer, etc. You can do that through a loan agreement/Deed of Trust with the developer but the question to ask your lawyer is what rights you will have to ensure that you continue to comply with HUD's NSP requirements if the developer goes bankrupt or otherwise defaults on your loan. If your attorney feels that you need a deed restriction in place during construction to adequately protect your interest, I would recommend considering removing that restriction and recording a new cleaner and simpler version when you sell the home to a real person. It will add a step to the process but will make the deal that much easier for buyers to understand.

We have a library of deed restrictions from affordable homeownership programs (including both those that contain developer specific provisions and those that don't) online at www.affordableownership.org. There is no one best model for you to simply copy but you should be able to get some ideas.