Buy a home with cash...BUT HOW??

Question

question for the pros out there....ok once we get some cash in our coffers to play with Id like to know how to properly pay all cash for a home. we all know that all-cash offers will light a fire under the seller's ass to move quickly and accept the lowball offer versus having to close in 30+ days subject to our getting financing. But how do we do this WITHOUT tying up our cash for other use?? If we have friends/family who lend us money and we purchase a 100K home for 85K with all cash and we then decide to hold and rent, how can we go about getting a refi to pay our family lenders back quickly? do we give them official mortgage notes and make the refi pay back the "1st mortgage" (our family) if thats what it would even be considered? do we do a cashout refi where they cut us a check for the amount approved and pay them back with this? please help cuz Ive gotten contradicting answers....

Edwin Brown · Answer

WHen in doubt take the high road. Always do more than you think is necessary to protect yourself and those you do business with.

Tom C · Answer

BTW: "you have to sell quickly in order to raise your cash margin back up or is there some creative way you guys refi your cash purchases right after closing avoiding the seasoning restrictions?"

Many brokers will tell you that seasoning is not required; however you find out very quickly when you tell them to get moving on your cash out, that all of sudden they need seasoning. I have not found a broker/lender that doesn't at least require 90 days seasoning. So many promise things that they can't get done, only to dick around for weeks. So be prepaired to run into some road blocks when you are needing to cash out funds on investment property.

Jon Holdman · Answer

OK, let me walk through it.  I'm going to use "title company" and "deed of trust" since that's how its done here in CO.  In some places, closings are done by a lawyer instead of a title company.  In some places, mortgages are used instead of deeds of trust.  Other local practices may vary from what I describe.

The whole initial purchase transaction gets handled by a title company.

The seller will give you a deed.  Usually either a general warranty deed or a special warranty deed.  The latter is typical for REOs or auction sales, the former typical otherwise.  The seller is the grantor and you (the buyer) is the grantee.  That deed gets recorded.  That gives you title to the property.

You, the buyer, in your capacity as the borrower will in turn give a deed of trust to the lender.  You're the grantor and the lender is the grantee.  That gives the lender an interest in the  property as security for the loan.  That also gets recorded to make public the fact the lender has an interest.

There would typically also be a promissary note that has the details of the loan, rate, terms, payments, etc.  That's just between the borrower and lender and doesn't get recorded.

The title company takes care of getting all this paper work done and recorded.  I don't think they actually create these docs, but I'm not sure.  I work through a broker, and I believe he actually creates the deed of trust and promissory note.  But, these are pretty standard documents.

These documents go to the title company.  The lender sends money to the title company.  As buyer, you would typically have to provide some money to the title company (your down payment.)  The earnest money would also get sent from whoever is holding it to the title company.   The title company will do all the math, account for all the money, and issue checks at the end of the closing.

The other thing the title company does is to search the title on the property.  If there are problems (other liens or judgments against the property) these would get cleared up.  The title company will issue title insurance for both you, the buyer, and the lender. The seller typically pays for this insurance for the buyer, and the buyer pays for it for the lender.  This policy covers the buyer and the lender against any claims that might come up later.

In reality, you could do everything except the title insurance ourself.  I don't really recommend you do that without some experience.

At this point you own the property and the lender, X LLC, has a loan.

Now, you want to refi.

You find a lender who will do the refi at the terms you want.  They, or the broker, sets up the transaction with a title company.   They go through the same process, except there is no deed involved because ownership is not being transfered.  You would tell them about the loan from X LLC.  They would also do the same searching as before and would find the loan if you didn't mention it.  Someone would contact X LLC and request a payoff statement.  The new lender sends the money to the title company.  A new deed of trust is created.  A release of deed of trust is also created.  This release removes the lien that was put in place by the original deed of trust.  The title records the release and the new deed of trust.  The payoff check gets set to X LLC along with copies of the documents. X LLC now has their money and interest back.   You have a new loan with the new lender.

You might be able to use the same title company for both transactions.  If so, you may be able to get a "hold open" on the lenders policy.  That way, when you get the new loan, you can use that same policy for the new loan instead of getting a complete new lender's title policy.  The owner's title policy (the one the seller bought for you) doesn't change since there's no change in ownership.

Jon

Jon Holdman · Answer

The simplest approach is to just have the property in your name and refi.  Then, quit claim it into an LLC.   Both my banker and mortgage broker have told me this is the way to do it.

I've heard its possible to finance directly in to an LLC, and give a personal guarantee on the loan.  But, I've not managed to actually find anyone who would do it this way.

The LLC I'm referring to here is not the one that made the loan.  This is one you own and control that holds the property.  There are other threads on entity choice, so substitute your favorite entity type.

Jon

Jon Holdman · Answer

With real estate, you will never have a margin call.  Think about all these folks who owe more than their house is worth.  If margin calls were allowed, these folks would have already been put on the street.

If you're paying cash, you'll have to do a refi to get your money back out.  Otherwise, the money is stuck as equity in the property.  Or, sell the property with owner financing and take the payments.

If you have documented income, you should be able to find lenders who'll do the refi with minimal seasoning.  Discuss it with brokers in your area.

The lending LLC would be different than your s-corp.  It would be a new entity.  Your lenders would invest in this LLC to give it money.  They would control the LLC.  You would not be involved, other than helping them know what to do.  Once the LLC has the money, it can make a loan to you to buy the property.  When you refi, the LLC sends a payoff statement to the new lender or the new lender's title company.  The LLC then gets a check after closing.  It would distribute that back to the investors (i.e., your friends and family who made the loan.)

If one person has enough money, that's not necessary.  They can just do the loan directly.

Jon

Jon Holdman · Answer

I think you're saying your plan is to have our friends and family lend you money unsecured to purchase the house, then do a cash out refi to pay them back.  Thats entirely possible.  You buy it for cash, then find a lender to do the cash-out refi.  That refi will give you a check you use to repay your friends and family.  Its not necessary for them to have any lien (mortgage or deed of trust) against the property.

However, you may find lenders have fairly low LTVs for cash out refis.  I've been told 70% max.  The lenders may also have seasoning requirements that dictate a certain period of time you must own the property before the refi.  Be sure to discuss this with lenders or mortgage brokers before you buy the property.

You can, however, do the purchase using a loan from your family from the start.  Instead of giving you the money, and then you sending it to the title company, you would have the title company do a deed of trust or mortgage.  Your family would send the money to the title company. The title company handles disbursing the money to all the right people, and recording the various documents.   This would show up on the purchase offer as a loan, and you would have to furnish proof of the funds, but you can still close quickly.

This would allow you to do a "rate and term" refi instead of a cash out.  You may be able to get a higher LTV with that approach.  That also give you family protection if you don't follow through.

If multiple people are contributing money, the easiest thing is to form an LLC, have them put their money into the LLC, and then have the LLC make the loan.

Paying 85% of retail value isn't a good deal.  Be sure whatever you're paying works for your exit strateg.

Jon

Timothy W. · Answer

Honestly, I've found private note holders to be very receptive to being first position.  After all the nonsense private lenders dealt the past 5-7 years with second position and being cut out of their money on the shortsale....this security makes them much more comfortable.

Timothy W. · Answer

Jon,
I've heard of some private lenders creating a trust that holds the property until the investor refi's it out - thus eliminating the need for a foreclosure should the investor fail to perfom.  Can you explain how that works?  I've always been curious about that.

Tim

Jon Holdman · Answer

That's a new one on me, Tim.  Certainly, a property can be put into a land trust, but I'm not sure how that give the investor ownership of the property and protects the lender.  I'm not quite sure I even know enough to ask my broker about that approach.

Jon