delayed financing, including rehab costs in escrow

16 Replies

In earlier discussions, I read about an obscure provision that makes it possible to do a full cash-out refinance immediately after purchase and rehab, without waiting the seasoning period and including the rehab costs in the acquisition cost, but I can't find the discussion.

Background:

1. In a BRRRR, if you purchase with a mortgage, you need to wait a seasoning period, typically 6 months, before you can do a cash-out refi.

2. The "delayed financing exception" allows you to obtain a cash-out mortgage immediately after rehab if you initially buy with cash. But this loan cannot be greater than the acquisition cost of the property (purchase price + closing costs), even if the ARV is large. This means you cannot get the rehab costs out for 6 months.

3. I have read in BP conversations that there is a way around that... If you buy with cash and put the rehab funds in escrow at the time of purchase, that amount can be included in the acquisition cost, and therefore it's possible to get a mortgage right after rehab for an amount equal to the full investment (assuming the ARV is big enough that the LTV is at least equal to that total acquisition cost).

Is anyone familiar with this approach? I'm certain I read it, but can't find it and need to validate its veracity... 

Thanks.

Sounds kinda smoke and mirrors.  If you get a commercial loan, you'll need an appraisal.

You'll get 70% of that appraisal as a loan, prob less as cash-out re-fi.  So if you paid $500K ($450K + $50K rehab) and it appraises at $500K, then you can prob borrow $350K +/-.

Originally posted by @Steve Morris :

Sounds kinda smoke and mirrors.  If you get a commercial loan, you'll need an appraisal.

You'll get 70% of that appraisal as a loan, prob less as cash-out re-fi.  So if you paid $500K ($450K + $50K rehab) and it appraises at $500K, then you can prob borrow $350K +/-.

There's no smoke and mirrors here. This is a typical BRRRR. The situation I'm describing is with numbers like the following. These are hypothetical.

Purchase $110k

Rehab $40k

Total acquisition cost $150k

Appraised at $215k after rehab

70% of $215k is $150k

I'd want a $50k mortgage, which would return 100% of my cash. I can certainly do that after 6 months, but the goal is to have it appraised and do that immediately after rehab. If purchased with cash, the delayed financing exception permits getting a mortgage right away, but the maximum loan amount (without waiting the seasoning period) is the purchase price. So I could only borrow $110k, and would have to leave $40k in... And then maybe refi for the whole $150k after seasoning.

I'm asking about a workaround to be able to borrow the $150k right away, by putting the $40k in escrow at the time of purchase.

@Gary Parilis I am not sure if it is available in all markets. I invest in two markets, and in one my lender had said they can't do the delay financing but in the other I do it all the time. The rub is you can get the lower of whatever is on the HUD or 70% of the ARV. Also, the loan rate may be a bit higher because it is considered a refinance from the perspective of the lender, so you may pay a little more for the financing. Other than that, works like a charm and a good way to recycle your capital quickly.

@Matthew M. My question isn't about delayed financing itself, but about the ability to include the rehab costs on the HUD, in order to count it as part of the acquisition cost. Are you saying you've done that?

@Matthew M. One more... How exactly do you do this? Do you need to place the funds in escrow or something? How do you determine the amount? Do you just estimate it? What happens if you estimate high? Thanks!

@Gary Parilis some things aren’t perfect and you hit on some common problems. You need to pay for the rehab in advance through the escrow so you need a contractor who you trust because the funds are being disbursed at close, so for instance I never do a delayed draw based on milestones but it goes to what you mentioned that I am doing it for small rehabs. I could see this being problematic for large rehabs because you may want a draw schedule. Also, if you over pay you can have the remainder refunded back to you after the fact by the contractor, this happens occasionally.

@Gary Parilis I would check out Alexander Felice's website brokeisachoice.com He outlines each deal he's used delayed financing on. Also have you listened to the podcast he was on? I haven't used this strategy yet but it is my gameplan for my next purchase.

@Gary Parilis - great post and appreciate you sharing the link once you dug it up. Super interested in delayed financing and that article is very helpful. Now time to find some brokers in my area that are familiar with it!

Let’s keep this post going!  I feel like delayed financing is an under rated method and has huge potential!  I have looked into a few markets but finding knowledgeable people on the subject is very hard.  Even finding a lender is difficult with this strategy.