Cash Purchase of a Freddie Mac Foreclosure using 70% ARV

5 Replies

Hey guys I am new to real estate investing. I want to know if I can purchase a foreclosed home with cash using the 70%ARV and subtracting the rehab cost in my offer. The home is a Freddie Mac owned property and it has been on the market for 108 days. Would love to know how you all would approach this deal. Also, I have no money to put down.

Hey @Carl Dunn
It is seems like an impossible equation : You want to purchase with cash but you have no money to put down!

If you don't have any cash yourself, you need to partner with someone who has cash and is willing to put it as down payment. The rest could come come in the form of a loan.

if It's foreclosed and in good condition, you may be able to get a Freddie loan on it at the time of purchase, but they aren't going to use ARV they are going to use purchase price, and you'll need something down for sure. If you use FHA you can do 3.5% but you have to move in for a year.

most likely scenario is the house is not in move-in condition if it's foreclosed and you'll need to purchase it with cash or equivalent. Rehab the place and secure a tenant then look to secure long term financing which would allow you to get all your invested cash back out (assuming you do a deal with enough spread). So if you can find short term financing to get you through that then you might not need any cash, that said, having no skin in the game comes with it's own set of challenges.

Alex thanks for the insight! I am grateful for your tenacity and grit you bring to the Real Estate business. I read your entire link and each scenario. I am currently in the same position as #4. I have a car note, paying to much and now no job. Your post is inspiring. I will continue educating while I am trying to figure this thing out. Still I am set to look at the property tomorrow with a potential partner who is a great contractor. He expressed interest in acquiring homes and flipping/holding them when I worked for him in his construction business. I am not going to let nothing stop me. I will ask myself "how can this be done?" Just to give you an idea on the deal: Freddie Mac or the government is asking for 115,900 the home was built in 1961, it's in a D neighborhood and would need at least 25,000 for repair. 3 bed room 2 bath, split floor plan with the potential of being a 4/2. Comps are around 140-150k. I wanted to see how you would approach this deal? As @PatricePenda said, Freddie Mac doesn't usually do the 70% ARV rule. I was going to offer 74,650 cash. Of course I would have to find that cash,the rehab, and the fixed/closing cost.

Also, thanks to you as well @PatrecePenda for taking the time to respond to my question. The responses alone makes me feel like I’m not doing this on my own. Great insight.

@Carl Dunn So let’s play a game of “simple money”. At the moment you think you need $100K. You’ll see the property soon so hopefully you can estimate if $25K is all you’ll need or if it’s higher. But you do need more because during the rehab timeframe you still insurance holding costs: utilities, property taxes, insurance, etc. There’s no mortgage since I’m (well, “we”) are paying cash. You’ll need to sell quickly so we can use the $140K comp. Call it 10% in selling costs (I assume you’re not a realtor) with commissions, closing costs, continued carrying costs through escrow, etc. So we (our partnership) nets $126K on the deal. But I (as the “money guy”) am probably into the deal for, what, $110K? So we split $16K in profit? Don’t get me wrong, $8K on $110K in 90-120 days is great but there’s massive risk for me as the “money guy”. And if I’m sitting on $110K that I can throw at a deal I’d imagine that I’m in a decently high tax bracket. Out here in Cali (shoot me now) it’s borderline 50% for me. So I get that $8K in ordinary income and only about $4K ends up in my pocket. Other people may disagree but I wouldn’t put $110K at risk for $4K.

That said, I’m not a hypothetical “money guy” but it doesn’t hurt to walk through the simple economic value proposition and ask: “Is this appealing enough for someone else to stomach 100% of the risk?”

Blabbering aside, if your partner is the contractor he might have excess material, can get material at cost, etc. That’s a benefit. If your partner could be a realtor they could sell the property and make some of their spread on the commission. So I’m not saying that it’s an “impossible ask” or a scenario that will never work. But I will posit that the run-of-the-mill “you supply all of the money and make $4K in 120 days” won’t likely stir interest. And that’s assuming you can buy for $75K.

#WPS
#HammerDown

Andrew thanks for taking the time to respond. Your example gives me a lot more clarity on the process. So, I have decided to take a step back and create an action plan to save 20k in the next year and a half, and tidy up my credit. Also, I will be trying out wholesaling to create more income and learning more about real estates in general. In my plan my first action will be to get my real estate license. This way I can learn even more while potentially making money, and share with you guys on how my progress is going during each phase. Your responses make it very clear, I am not quite ready to pull the trigger just yet. I want this to be successful but I need to start with a great foundation in order to make it a reality. Let’s keep the conversation going.

@Alex, my apologies that was you that mentioned FHA does not do ARV based loans.

Thanks!!

WPS! Hogs in the dance I’m calling it now!

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