Cash offer and Refinancing after

9 Replies

Hey!

I am looking to pick up a property that was under contract as a two year lease to own.  The current tenant will not be able to purchase the house by the required date and can not sell the contract.  If he can not purchase it defaults back to the original owner.  He has offered it to me for the contract price plus a 5% fee.  It's a great deal because the contract was set two years ago and the price of the house has increased 40K.  It's going to have to be a cash offer because of the deadline so what I want to know is if I buy it for cash can I refinance/finance the house and pull that money back out.  It is going to appraise for more than I paid so will I end up getting more money?  I guess I don't understand financing a house I already own outright?  Do they finance the entire amount of the appraised value or a certain percent?  I am thinking I might be able to pick this house up with technically no money out of my pocket.

Can I refinance right away or do I need to wait a certain amount of time.

Thanks,

Devon

Most lenders will stick very closely to these guidelines on cash out refinance, so look here for your answers:  https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html

Originally posted by @Devon Craychee :

Hey!

I am looking to pick up a property that was under contract as a two year lease to own.  The current tenant will not be able to purchase the house by the required date and can not sell the contract.  If he can not purchase it defaults back to the original owner.  He has offered it to me for the contract price plus a 5% fee.  It's a great deal because the contract was set two years ago and the price of the house has increased 40K.  It's going to have to be a cash offer because of the deadline so what I want to know is if I buy it for cash can I refinance/finance the house and pull that money back out.  It is going to appraise for more than I paid so will I end up getting more money?  I guess I don't understand financing a house I already own outright?  Do they finance the entire amount of the appraised value or a certain percent?  I am thinking I might be able to pick this house up with technically no money out of my pocket.

Can I refinance right away or do I need to wait a certain amount of time.

Thanks,

Devon

 Hi Devon,

You need to get really tight with a lender local to the state the property is in, to line up preapproval for delayed financing. 

Hey Devon- Yes, I agree with what Chris says above, however, the rules for delayed financing are specific and it's really tough to find lenders who will do them and understand the rules. It's best if you know them inside and out so that you can give direction to your lender, or at the very least, make sure that they know what they are doing so that things go the way you need them to go. It's possible to get all of your money back, but you have to get a GREAT deal and a generous appraisal. I have a guy who just did one for me here in Boise- feel free to PM me and I will connect you. Good luck!

@Devon Craychee  

Here is something I found from a guy name @Andrew Postell that has been really helpful. You especially want to pay attention to #2. Here goes:

1. The Conventional Rules For a Cash Out Loan

Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).

  • Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
  • If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
  • This rule does not apply if you purchased the home with CASH (more on that in section 2).

Let’s explore some examples here:

If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.

If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.

So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….

You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.

2. Buying a home with Cash

Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:

If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.

There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC

BUT you will be limited to the amount of….

Your purchase price + closing costs (costs when you purchased the home)

OR

75% of the “After Repair Value”…

WHICHEVER IS THE LOWER AMOUNT (super important)

These rules are important to understand so here are two examples:

Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.

Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.

When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.

3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH

With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:

Create an LLC and have the LLC lend you a mortgage on the property you are receiving.

The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.

Here’s how it works:

You create an LLC

You buy a home

Your LLC gives you a loan for the home

You file the deed for that loan at the county courthouse

You use the money from the LLC to buy and fix up the property

Once the property is completed, your conventional lender comes to refinance the loan

Your conventional lender runs title and sees there is a loan.

Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.

Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.

Some things to think of:

To file a deed at the county courthouse is $100-$150 in cost (depending on which county)

And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

@Jorge Ruiz , sorry, you lost me at "LLC". (But yes, I know what an LLC is). I didn't see how that whole spiel puts you in any better position to get a "Delayed Financing Exception" (DFE), than just: paying for the property with your cash! (Remember, your premise was "How to properly structure buying a home with cash", which presumes you already had the funds, right?)

ie. What am I missing in your explanation?

My own understanding of the "DFE" goes like this: The Lender shouldn't care if you've (just a day earlier) paid for the the home with all borrowed money, so long as none of that borrowed money is secured against the same property (ie. mortgaged) as the DFE is for!

Get what I mean? Does your LLC idea get you around that? If so, how? Cheers...

@Brent Coombs I have never executed that strategy. Like I said in my previous post I got this from a guy named Andrew Postell who is another BP member. He might be able to explain that to you.

Originally posted by @Jorge Ruiz :

Brent Coombs I have never executed that strategy. Like I said in my previous post I got this from a guy named Andrew Postell who is another BP member. He might be able to explain that to you.

 Hopefully my question will get you curious enough to go back and ask him. You need to understand any strategy* that you're recommending. Cheers...

* [Note: On the surface, it seems to me that the LLC idea is geared to disguise the Owner's mortgage, which, if discovered by the "DFE" Lender, could lead to proceedings! (Spooky)...]

@Brent Coombs I wasn't recommending that option. If you take a look I mentioned that he should look at #2. Since I don't plan on using that particular strategy I don't see myself going back to ask him. Perhaps I should only mention that one particular option in the future. 

Originally posted by @Jorge Ruiz :

@Brent Coombs I wasn't recommending that option. If you take a look I mentioned that he should look at #2. Since I don't plan on using that particular strategy I don't see myself going back to ask him. Perhaps I should only mention that one particular option in the future. 

Quote from #2: ..."an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3)".

See? Hence my question. [But sure, I'm happy to pretend no-one mentioned LLC in this context].

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Get the Ultimate Beginner's Guide

Sign up today to receive the popular eBook for free!