Pay cash, then refi?

Question

Hi, I'm looking to purchase a SFR as a rental.  My last few I've always just put 20% down, but was wondering about paying cash for them.  I'm looking at a 200k home.  I can pay cash for it, but would then like to refi and pull the money back out.  Besides buying power, and being able to close quickly/painlessly, what are other pros/cons about doing this?

Account Closed · Answer

Cash buyers should get a better deal in terms of price. A lower price means more profit.

Many lenders will then assume that the discounted price is the real market value. They will not let you refi and pull out 100% and they likely will only use the purchase price until the time has passed. The term used is seasoning. There are lenders who are not concerned but those lenders will charge higher rates, have poor terms and pre-payment penalties in many cases. 6 or 12 months seasoning will open up all the normal lending options.

As Scott mentioned you really need to understand the refinance assumptions before heading down this path.

If you want to pay commercial rates and terms many commercial programs will let you use the appraised value. It will mean a bit higher interest rate and a shorter term. Likely lower transaction costs and potentially the ability to use the commercial loan facility from day 1 (either a working line of credit or a blanket facility that is already up and running).

Being a cash buyer is a great way to go. Just know the exit strategy before leaping.

John Corey

N/A N/A · Answer

Thanks for the reply, these arent necessarly rehabs that I'm looking at, but need freshened up.  They would remain rentals for me. So I would be looking to do a cashout refi soon after I paid cash.

N/A N/A · Answer

Dal1,

As an appraiser I have seen many houses that have been improved beyond what the neighborhood calls for and it is unfortunate..

When an appraiser adjusts the comparables to the subject to arrive at a market value your improvements are adjusted to what the market is
willing to pay for those improvements.   These adjustments are based on the theory of contribution.

It is not usually the same dollar amount as what was spent to do the improvements.

As an example, dual pane windows may cost $12,000 to have installed
but if you have two identical houses except for those dual pane windows
the average buyer will not pay an additional $12,000 for the house that
has them.  The average buyer may only see added value of $3000 to $5000 for this improvement.

The appraiser looks at comps similar to the subject and isolates two that are similar -- one with an improvement, or extra bedroom or garage stall and one without.  The difference in price between the two is generally thought to be the market value of that improvement.

I am confused...you said a certified appraiser came out to the house but then you were told that a full appraisal was not done?  Was it a drive by appraisal?  Just curious.

Either way, if it is a full appraisal or a drive-by you are entitled to a copy of the appraisal if you paid for it.  I wonder if they used an AVM?  Seems doubtful if  you met an appraiser at your property.

I would definitely push for a copy of the appraisal for future reference at the least.

Alisa

Lynn Z · Answer

Bought a house for $160K.  It sat for a long time.  It had been sold the year earlier in a family sale for $212K.   I made improvements over the next 8 months.  The county appraiser showed up one afternoon while the kitchen was being torn out.  He's called twice since then because he can't sit by with this lowered value.  Because it was a commercial bank loan no appraisal was done.  we just closed on the house.  I found out later that all the agents are doing is lifting the sq. footage from the county tax records and not taping houses anymore.  This year they changed the standard contract to state the buyer is responsible to verify sq. footage.  The county used a general footprint to calculate the house square footage.  Therefore, it's a good bit smaller than what I thought.  I needed an appraisal.

When I refinanced I had a 47% LTV  I couldn't wait for my 30 year conventional loan since they're a large bank and sent a certified appraiser over.  He pulled out his tape and I left him there with the house.

After the closing you can write for the appraisal.  Wrote twice with no response.  When pressing the loan officer's assistant she stated "Oh, a full appraisal wasn't done and said she could tell me what the house appraised at ..$179,000.  Now this house has new windows, roof, new kitchen with granite and stainless appliances and new bathroom added.  He gives me $19,000 for all of those improvements?

They offered  a home equity line at closing which, of course, wasn't ready until the day of closing.  It was prime plus 1.99% which translates these days into 10.25.  This rate is due to this low appraisal which was set to just
cover the bank's interest in the loan of $115.  The ltv would have been very high with regard to that loan.

Now I read the appraisers want to look at permits for the work done on the house.  It's going to get ugly out there you know.  You can't trust the lender's appraisal to give you the information you need.

John Worley · Answer

John Corey brings up what I think is the heart of the problem when refinancing any rehab project, regardless of how you purchased the property. The key issue is establishing what is the FMV for that property and why you were able to buy it below FMV in the first place. Underwriters are picky creatures. The big thing to remember in an underwriter's world is that if it isn't documented, then it doesn't exist. For example, say you pick up a bank REO for cash on the court house steps for $50K, but the FMV on the property is actually $125K. If you go refinance the property after you rehab it, then the underwriter (9 times out of 10) is not going to see anything about a foreclosure sale; they're just going to see on the HUD-1 that you bought the property for $50K and as such will assume that was the FMV.

Getting around this issue is usually pretty easy, believe or not (although from time to time I'll come across an underwriter determined to prove me wrong :D ).

***Have a subject to appraisal done when you purchase the home. Make sure that the appraiser lists your intented repairs and makes note of how you are purchasing the property.

***Keep track of ALL of your invoices and rehab budget. Once you are finished with the rehab, put together a simple itemized final report of everything done to the property and what it costs. Even if you don't refinance, this can make a good selling point.

***If you refinance, put together an exective summary of the rehab project. Explain how you purchased it, what it appraised for when you purchased, a brief history of the property, a breakdown of everything you did to the property, your future plans for the property, etc. Include a copy of the original subject to appraisal, so that it may be compared to the new appraisal that will be done for the refinance.

The idea being that you want to appear as organized and professional to the underwriter as you can. By providing this detailed information, that the underwriter usually won't have, you give the underwriter a far better feel for what is going on with this particular property and loan.

You wouldn't believe how much smoother and easier these three things will make a refinance go (at least in my experiences).

Lynn Z · Answer

We borrow from commercial bank lender.  He gives the OK and the offer is made as a cash offer with no contingencies.  It is a "cash" buy for all intents and purposes and no one knows better nor cares until the closing and looks at the HUD.

To me the interest only payment for 6mos-year is no big deal.   This sounds like a light remodel so the interest only payment on a commercial loan, 15-20 amor. 5 yr. balloon is a great way to go.  We pay about .5pts. and the paperwork is simple.   Use other property equity as collateral for the 20% normal down.

If you have to take it through a winter to wait for great tenants etc., better looking tax records  or better interest rates you can then refi.  But getting a long term conventional investor refi  loan is tricky and costly in my opinion.  I like the option of leveraging and using the cash for the remodel.

Account Closed · Answer

AK,

I am not complete sure I am following what you wrote. Assuming that I did get it you and I are on the same page.

Leverage is a tool and it can be used to enhance one's total returns plus manage the tax impact.

John Corey

N/A N/A · Answer

Good luck on your investment!

Scott Miller · Answer

You might to investigate the lending landscape before you cement your exit strategy---title seasoning/chain of title guidelines are an expanding feature in today's lending enviroment.

Regards,

Scott Miller

Richard Warren · Answer

I frequently pay cash for properties and then rehab them.  If I’m going to rent the property I will refi at that point.  I avoid using hard money this way.  Some lenders have seasoning requirements on cash out refinancing so be sure to have you funding source lined up before paying cash if that is what you intend to do.  Having cash and the ability to close quickly can be a huge factor in getting a deal.  I purchased a house in June with an all cash offer and 10 day close.  I offered less than I was willing to pay but the seller accepted without a counter offer because of the fast close.

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