Cash-Out Mortgage - Getting the appraisal I need.

31 Replies

Hello. I recently bought a duplex cash, and wish to cash out the equity, so I can purchase more. I have a couple questions: 1: my understanding is that the property has to "season" for 6 months. Are there any other rules I need to know. 2: Will banks accept a price-to-rent valuation when appraising the property? The recent sales comps value the house at about half of what a price-to-rent approach would. Thank you in advance!

@Chris Hannigan not sure what a price-rent ratio appraisal is but if it’s a duplex it will likely be appraised by the comparable sales approach

@Chris Hannigan  sorry I should have been more clear.  I know what price to rent ratio is, I just have never heard it applied to an appraisal. 

Like I said earlier as this is a duplex it’ll most likely be valued based on comparable sales.

My duplexes do receive an income approach to value when appraised, but because it is residential, the comps carry much more weight.  Cost to build will also be a factor, but carry little weight compared to comparable sales.  

Did you buy with cash?  If so, you can 'borrow' if from another entity you have to avoid it being a cash out refi, thus removing or reducing the seasoning requirement.  If you bought with a loan, you have to wait.  Not the end of the world...impatience kills lots of eager beavers in this business.

@Steve Vaughan ... this is my first rental. I didn't have a good down payment, but I do have good credit & a higher personal income, so I was able to acquire a large enough personal (signature) loan to buy with "cash." I bought at a depressed price, so the hope is to cash out the equity, pay back the personal loan, and perhaps have enough left over to use a down payment on a second property.  The market here in Cleveland is rapidly evolving an very "block by block." I am worried an appraiser that isn't very familiar with this section of Cleveland will undervalue using recent sales comps. I am pretty certain it will value higher if they consider what I am getting in rent. Thanks for the reply. 

@Chris Hannigan - gotcha.  Would be nice if they gave more weight to the income approach, but doubt they will appraising a residential asset.

What I do when I buy with cash (meaning no lien or mortgage on the purchased asset) is self-encumber it with a 'loan' from one of my entities.  That takes away the 'cash out' component and makes it a rate and term refi.  Less fees and less seasoning that way.

There is also a DFE - Delayed Financing Exception that gives you back immediately the lesser of your purchase price plus closing costs or 75% of value.  I think borrowing the money in any way will exclude you from doing this, but @Chris Mason is a mortgage master and can clarify and possibly provide other options to you if he has time.   

@Steve Vaughan , thank you. I am not in any hurry, I can carry this personal loan for 6 months or a year while it "seasons." I just want to maximize what  I can pull out.

I have done a few cashouts. my lender will take 75% of the rental rate and bounce that against what the new mortgage will be. as long as its higher then it's a go. I haven't heard of the approach you mentioned before.
I use C&F Mortgage. if they aren't in your area try going to local smaller banks. I have found them to be much easier and flexible to work with.
Originally posted by @Chris Hannigan :

Hello. I recently bought a duplex cash, and wish to cash out the equity, so I can purchase more. I have a couple questions: 1: my understanding is that the property has to "season" for 6 months. Are there any other rules I need to know. 2: Will banks accept a price-to-rent valuation when appraising the property? The recent sales comps value the house at about half of what a price-to-rent approach would. Thank you in advance!

1. Some banks will want it to season for 6 months or even 12 months before they will consider anything other than the price you paid for it as the true market value.

2. It's a duplex so it falls under residential lending & valuation standards.......In short comps are the only thing that will be used to compute value of this home. The price to rent ratio is irrelevant in an appraisal of a residential property.

I have had the problem of not being able to pull capital out of a deal that I had massively increased the value of. If you are willing to get a commercial loan from a small local bank they seem to value based on income, even for a duplex. I had way better luck with commercial rather than residential. Also that personal loan will mess up you DTI ratio so better to go commercial anyway. No seasoning requirement (with the ones I use at least).

Originally posted by @Chris Hannigan :

@Steve Vaughan , thank you. I am not in any hurry, I can carry this personal loan for 6 months or a year while it "seasons." I just want to maximize what  I can pull out.

 Starting 3 to 6 months ahead of when you want to do the cash out refinance, start going to your future-current comps during open houses. Get disclosure packages, which listing agents will generally send out to anyone who requests them saying they are interested in the property. Now you know everything wrong with your comps. Cherry pick from that, and hand this over to the appraiser. That way he knows that 123 Main St sold for $30k less because of the foundation, etc, rather than dinging your value because they didn't know that information. 

Originally posted by @Lee Ripma :

I have had the problem of not being able to pull capital out of a deal that I had massively increased the value of. If you are willing to get a commercial loan from a small local bank they seem to value based on income, even for a duplex. I had way better luck with commercial rather than residential. Also that personal loan will mess up you DTI ratio so better to go commercial anyway. No seasoning requirement (with the ones I use at least).

In my experience, much better to wait or lend to yourself via one of your entities to minimize the seasoning than settle for a commercial loan.  I couldn't get rid of my commercial loans (on commercial property) fast enough.

Shorter terms, higher rate, adjustable, callable and bothering you every year for your financials.  No thanks. 

@Chris Hannigan did you make any improvements to the property? An appraiser is able to see not only comparables, but also what you paid for the property. Let's say you paid $100,000 last month, did nothing to the property, then the appraiser is going to see the value as $100,000. If you are trying to say you got a good deal and that the value is double, then you will need comparables that have sold for $200,000. This isn't a matter of seasoning, but rather how they determine value. Let's say you paid $50,000 for a property and comparables sell for $100,000 then you can probably get the loan based on the $100,000 value.

My investment property appraisals have two components. They find comparable properties to determine property value and they find comparable rental properties to determine rent value. The report shows property value and rent value. They do not use rent value to determine property value. I have never heard of price-to-rent approach used either.

I know this isn't the answer you want, but based on the information provided, it sounds like your property has not doubled in value, so I would calibrate your expectations as far as the cash out amount.

I use PenFed for my investment HELOCs and they have no seasoning period at all. They do use appraisals to set the value though. I had a duplex that is renting for $1775 collectively just get appraised for $27k (which is way under value, but it is what it is, Cleveland appraisals range big time), they took that number and gave me 80% so a $21,600 HELOC.

Originally posted by @David Sanford :
I use C&F Mortgage. if they aren't in your area try going to local smaller banks. I have found them to be much easier and flexible to work with.

 What is their minimum purchase price?

@Joe Splitrock I did make improvements. I’ve done some more digging and found “rent ready” comps, which more closely mirror the condition of the property, that would give a valuation I can live with. I’m not concerned about waiting 6 month or a year, I’m not in a hurry. Thanks for the reply.

@Chris Hannigan

If you bought the duplex cash you don't need to wait the 6 months, you can use the "delayed financing" to get your money out after 4 weeks. Look into it, it may be your best option now.

Originally posted by @Chris Hannigan :

@Joe Splitrock I did make improvements. I’ve done some more digging and found “rent ready” comps, which more closely mirror the condition of the property, that would give a valuation I can live with. I’m not concerned about waiting 6 month or a year, I’m not in a hurry. Thanks for the reply.

Great, my recommendation is when you meet the appraiser, give them a list of all the updates and approximate value you believe it adds. Appraiser work for the bank, not you, so they will often be conservative on values. 

Most conventional financing will require the "Lessor of the appraised value or the purchase price" during the first year, so, document the improvements you have made and that can help with the purchase price issue somewhat. There is the "delayed financing" option but the issue you will run into is that if you did not season the funds from the personal loan into your account for at least 2 months, the loan will preclude you from the exception and you more than likely will need to wait for the full 12 months to season the ownership to be able to use existing value rather than purchase price. 

Your other option is some of the Alternative Non-QM lending programs that are out there, there are several that take the Rent Debt Coverage Ratio to determine the income or debt ratio instead of the borrowers personal income, most of these only have a 6 month ownership seasoning to use existing value, one company that has this program is Impac Mortgage, they have their credit matrix online to view at "http://impacmortgage.com/media/forms/iQM-Investor-... they require a low 1.0 debt coverage ratio so as long as your rents cover PITIA expenses then your good to go, cash out is required to be used for "business purposes" only their retail division is Cash Call mortgage, FICO can be as low as 600 and cash out LTV's from 65-75% based on credit, I used to work for IMPAC as they were rolling out the product, it is pretty competitive in the market for this type of financing.

Good luck.  

@Steve Vaughan could you go a little more in depth on 'loaning' to yourself via an entity? What does that process look like? How does this change the seasoning requirement from the perspective of a lender? 

Originally posted by @Evan Barney :

@Steve Vaughan could you go a little more in depth on 'loaning' to yourself via an entity? What does that process look like? How does this change the seasoning requirement from the perspective of a lender? 

I am also very interested in this method. I'm assuming you have a LLC lend you the funds to purchase the property?

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