delayed financing, including rehab costs in escrow
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.
And here's the answer!
@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?
@Gary Parilis yes that is what I am talking about. I include the rehab + any inspections on the hud and get the lower of 70% of the arv or whatever is on the hud.
@Matthew M. Thanks for the clarification! Have you done this with a fairly large rehab cost? The lender I'm talking about it with says the underwriter would balk if it's too big.
@Gary Parilis nothing too large, I usually deal with below 120k all in costs on the hud. I don’t see why it would be any different but I have never tried.
@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!
@Matthew M. Super helpful. Thank you.
@Megan Brooks, yup... I included the link to that article somewhere above. :-)
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.
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Hey all. I wanted to give my input here as I've recently gone through this process both successfully and unsuccessfully/ I purchased two properties using this method i.e. including rehab costs on the closing statement and recouping them using delayed financing. This first property went through underwriting fine. The second one didn't and my lender is now saying that we can't use this method. He says that the first time it worked it must've been missed by the company purchasing the loan (Mr Cooper). It definitely seems like a bit of a grey area though and slightly open to interpretation. I've included a screenshot from the lenders to give a bit more info.
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@Justin Pumpr yeah, the technique referenced in this post is pretty difficult to pull off. You actually have to pay, in full, for all of the associated expenses. So if your rehab is $40k...you would have to give $40k to a contractor...before any work is done. You would have to have an ENORMOUS amount of trust to prepay an expense like that. It has to be a "closing cost"...so you have to pay it on the HUD. That's the rub. So the method that we have been using with great success you can find HERE. Feel free to ask any additional questions. Thanks!
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@Andrew Postell I actually managed to set it up, so that my contractor was cut multiple checks that my property manager then held onto, so that part of it worked out. It's getting those costs included in the refinance that has become the issue, as my lender can't find anybody to purchase the loan with the rehab costs included. The method you linked is likely what I'm going to have to do. As a CA resident this isn't ideal though, as I have to pay an $800 annual fee for the "privilege". I'm also not looking forward to the added paperwork!
Quote from @Justin Pumpr:
@Andrew Postell I actually managed to set it up, so that my contractor was cut multiple checks that my property manager then held onto, so that part of it worked out. It's getting those costs included in the refinance that has become the issue, as my lender can't find anybody to purchase the loan with the rehab costs included. The method you linked is likely what I'm going to have to do. As a CA resident this isn't ideal though, as I have to pay an $800 annual fee for the "privilege". I'm also not looking forward to the added paperwork!
Can you elaborate on how your "contractor was cut multiple checks that your property manager then held onto"?
Quote from @Hsiang Lo:
Quote from @Justin Pumpr:
@Andrew Postell I actually managed to set it up, so that my contractor was cut multiple checks that my property manager then held onto, so that part of it worked out. It's getting those costs included in the refinance that has become the issue, as my lender can't find anybody to purchase the loan with the rehab costs included. The method you linked is likely what I'm going to have to do. As a CA resident this isn't ideal though, as I have to pay an $800 annual fee for the "privilege". I'm also not looking forward to the added paperwork!
Can you elaborate on how your "contractor was cut multiple checks that your property manager then held onto"?
I split the total rehab budget into multiple line items on the settlement statement. Then at closing Title sent those checks to my property manager. As the work was completed I told my PM to release the check to my contractor, similar to doing draws from a hard money lender
Quote from @Justin Pumpr:
Quote from @Hsiang Lo:
Quote from @Justin Pumpr:
@Andrew Postell I actually managed to set it up, so that my contractor was cut multiple checks that my property manager then held onto, so that part of it worked out. It's getting those costs included in the refinance that has become the issue, as my lender can't find anybody to purchase the loan with the rehab costs included. The method you linked is likely what I'm going to have to do. As a CA resident this isn't ideal though, as I have to pay an $800 annual fee for the "privilege". I'm also not looking forward to the added paperwork!
Can you elaborate on how your "contractor was cut multiple checks that your property manager then held onto"?
I split the total rehab budget into multiple line items on the settlement statement. Then at closing Title sent those checks to my property manager. As the work was completed I told my PM to release the check to my contractor, similar to doing draws from a hard money lender
wow thank you, Justin! That was really helpful.