Delayed Financing W/ Rehab Cost in Closing Escorw still allowed?

Question

Hey BP,

I have read and heard mixed things on Delayed Financing. Initially I was told that when using delayed financing that you were only able to pull back out the original PP amount; obviously not the goal when using the BRRRR strategy. I than spoke to someone (@House_Hustle) who was using Delayed Financing but was able to not only pull their original purchase amount out but also their rehab costs all before the standard 6 month seasoning period. They did this by adding the Rehab cost amount into their escrow closing statement.

I was planning to use this financing strategy on my next deal I am currently negotiating however the lender I spoke to today told me this is no longer possible as of a few months ago. He mentioned he has done this strategy a lot in the past with multiple investor but as of late he has had to let them know a new rule has passed that no longer allows us to add rehab costs to the escrow closing statement.

Has anyone else heard this? Or is anyone else still using this method of financing with no issues or change?

Thanks a lot!

Colin

Denver J Lobo · Answer

Hi @Colin Newton & @Ashraf Syed, not sure if you gents connected already but 3 follow up questions to your comment above:

1) Lets say I put $30k into the Rehab Line on the HUD - Do I then have to wire the 30k at closing to the title company that will then allocate it to the GC that gave me the $30k bid?
2) Can I control the payments of the 30k based on job completion?
3) If the rehab magically costs $20k, can I do anything to recoup the $10k from the GC, or not pay them that amount?

Hsiang Lo · Answer

Ah okay. That makes sense. Thanks Colin!

Colin Newton · Answer

Hey Hsiang,

I have not seen it where the title company is not able to handle this. They just need to be directed on how to properly do so and you will need to see the final HUD statement before moving forward to make sure it was done properly. In the past, our lender reviews the final HUD to make sure everything looks good for them to handle the refi in the future prior to us moving forward with closing.

Hsiang Lo · Answer

Hey! Thanks for your response! Since the sellers or wholesalers usually choose the title company, would I need to reach out to the seller's or wholesaler's title company asap before or while putting an offer out on a property to see if they are even able to add the rehab cost into the settlement statement and specifically disburse it back to myself? Is it safe to assume that there are title companies that don't do this, so best to check before putting an offer on a property?

Matt M. · Answer

You can also do a rate and term refi without the seasoning. Your lender might tell you that you can't, so find another lender that will. It would be a rate and term based on appraised value.

Colin Newton · Answer

Feel free to reach out to me directly if you have any more questions.

Colin Newton · Answer

Hey Denver & Haiang,

see my responses below based on our experience with this.

1) Yes, have to wire entirety at closing. You need to have clear communication for them to send you the 30k check & not the GC. If you don’t say anything they will likely send the full amount to the GC, which is obviously not good. If it is a non trust worthy GC you may never see that money again & in less drastic terms you simply want to pay for work as it is finished like you mentioned.

2) You can control them because the 30k will be returned to you & then you will disbursement Payment to the GC in standard fashion.

3) If the rehab costs less you do not have to pay the overage to the GC & do not loose this money. You normally want to aim high on the rehab hab estimate in general but even more so here as the total you put on the final HUD (PP + rehab) will be the Max you can cash out when you refi in the future. Only negative of over estimating is having to have more capital to put down at closing.

Hope this helps!

What market are yall in/investing in?

Hsiang Lo · Answer

these are great questions that I'm trying to figure out too. But my guess would be that it depends on the escrow and/or title company?

Colin Newton · Answer

Hey @Ashraf Syed,

You need to let them know to add a rehab cost line under the Misc section on the final HUD statement. This line should include the total amount of rehab you are budgeting for. The final HUD statement will then show a total including both PP & Rehab costs thus allowing you to pull that total out at the Refi stage. I would definitely connect with your refi lender prior to closing to make sure they understand the process and will be able to help complete it when it comes time. They need to understand the process as well so there aren't any surprises when you go to refi. If you want to you can shoot me a DM and we can connect over the phone to clarify further if needed. Security National is who I use.

Ashraf Syed · Answer

Hey @Colin Newton so what exactly should I communicate to my title company in order to get the rehab costs add to the final escrow statement. I would love to connect so I can get a little more insight on this if you don’t mind.

Delayed Financing W/ Rehab Cost in Closing Escorw still allowed?

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