How can I best use instant equity?

3 Replies

My wife and I are considering purchasing our first home from a family member in the area (Charlotte, NC). This family member is willing to gift us equity. Their goal is to downsize and walk away with around $10k to transition to a new place. Our goal is to repair and renovate the home within the first couple months of purchasing. We would like to live in the house as a primary residence for at least a couple years, with the potential to rent it out after that until we sell it.

The home had a recent tax assessment of $257k, but recent sales of the exact same model have been in the $290k - $313k range. It's currently in need of a lot of work, we estimate around $30k - $50k of required repairs and my wife wants to do at least $30k of renovations. We haven't had it officially appraised yet, although I'm scheduling an appraisal for next week.

The payoff on the current mortgage is $120k.

I'm having trouble wrapping my head around the best way to structure the purchase to accomplish our goals, or if this is even a good opportunity or not.

Any advice, suggestions, or pointing me in the right direction would be greatly appreciated.



@Matt Weeden Once you get the appraisal, use the 70% rule to determine if it is a good opportunity.  Using your figures $257k x 70% - $50k is $129.9k.  If the seller wants $10k and the mortgage paid off, then this looks like a great opportunity, assuming that your rehab estimate is correct.  Live in it for two years while rehabbing it and then you can sell it for a tax-free gain.

@Bob Norton Thanks for the reply!  I'll keep that 70% rule in mind.

We recently had the home appraised at $210k. We had a GC come out and it looks like the repairs/renovations we want to do will be more in the $115k - $130k range.

We spoke with a mortgage lender and she suggested an interesting option. The current owner (my mother) would add me to the title with a quitclaim deed, then I would get a HELOC to do the repairs/reno. She said they use 85% LTV and could use a drive by appraisal (which she estimated would be around the $290k mark based on Zillow/ estimates). That would give us around $126k.

After the repairs/Reno are done we would roll everything into a single mortgage with my wife and I.

So the important numbers would be:

$120k (current payoff)

$290k (drive by appraisal)

$210k (actual appraisal)

85% LTV for HELOC

$126k HELOC (($290k * 0.85) - $120k)

$15k to my mom

>= $315k (estimated after repair value) 

When I go to apply for mortgage ($120k + $126k + $15k) after repairs are done, would I be able to use the remaining equity as a down payment?  If so, this would put me pretty close to a break-even point ($308k purchase price = $120k+$126k+$15k + ($308k * 0.2))

Any thoughts on whether this seems like a good route to take?

Thank you

@Matt Weeden If your banker can get you a HELOC at 85%, then that is an interesting option. After you renovate the house, you would be doing a refinance into your name and removing your Mother from the title. And since it is a refinance, the lender will lend up to a certain percentage of the appraised value of the home depending upon the loan program. To avoid PMI, that will be 80% of the appraised value. At 80% LTV, you would have to come out of pocket around $15k-$20k, depending upon refi costs, to refinance this home if the ARV is $315k. You could cover these funds by borrowing a higher percentage against the property, such as an 80% first mortgage and 10% HELOC. I recommending checking with a mortgage lender to find out what your refi options would be.