Delayed financing, how to not get caught with your pants down?

1 Reply

In case you don't know what delayed financing is, here are a few links:

https://www.quickenloans.com/blog/delayed-financin...

https://www.fanniemae.com/content/guide/selling/b2...

I'm about to have enough HELOC buying power to buy 2-4 units that I'm interested in "cash". Delayed financing allows HELOCs to be used, you just have to pay them off first after you refinance. (correct me anywhere I'm wrong!).

As I understand it, delayed financing will reimburse a buyer the entire purchase price AND closing costs OR 70% of the appraised value (75% for SFR), whichever is less. It's the whichever is less that scares me.

I see HELOCs as cheap hard money.  The interest rates are low, they're 10 years interest only, but I don't want to get stuck paying them for more than a few months.  Let's say I find a duplex that's listed for $65,000, and I get it with a cash offer for $55,000.  If it appraises for $70,000, I can only get $49,000 back plus closing costs.  Getting a duplex for 6k is a great deal, but will really slow down or even prevent any momentum.

Is there anyway I can figure out how a bank is going to appraise a property?  I talked to a particular lender, they do a real, full blown appraisal.  I know I can pay for one up front, but the bank won't use mine (my ~$500 is sort of lost), and the new appraisal may come back way different (higher or lower).  I don't see anyway to mitigate or lessen this risk.  

The best I can come up with is:

  1. Get the best deal I can, ensuring I'm well below the appraised value.  I'm using the BP buy and hold caluculator ensuring these still cash flow with 100% financing, 10% property management, 10% vacancy, 10% repairs, and 5% capex.
  2. Have more than enough cash on hand, in case the appraisal is rough, and I want to pay off my HELOC asap.
  3. Potentially have a private lender on hand that offers a mortgage that will still cash flow.  I haven't explored this option much.

Any other thoughts would be much appreciated!

@Pat Jackson

While you occasionally find a deal with pent-up equity -  we bought a triplex earlier this year for $75K which appraised at $145K on day one - the more reliable approach is to find a property that is tired and mismanaged; buy it shrewdly; then improve the business and force equity.  For a quick refinance, you would look for the ones which require predominately cosmetic improvement and better management.   

On the other end of the spectrum, you find the {near}vacant building, buy it for nearly nothing, and give it a deep retrofit (energy efficiency improvements, layout improvements, update core systems, and refinish throughout).   This approach is capital intensive, but you can end-up with a property worth far more than your capital injection.

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