Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
Here is the scenario. I have a home that I’ve owned for 6 years. It’s worth about $380k and I owe about $240k. I want to strip out as much equity as possible. Today a wild idea occurred to me and I want to consult the community. But first the traditional options and why I don’t like them.
1. Refinance - This would require 80% LTV and only allow me to strip about $64,000. Also requires closing costs.
2. HELOC - same as above with a higher interest rate and an additional monthly payment on the borrow. Also requires closing costs.
Now for my wild idea...
3. Sell to myself - If I buy the house from myself using an FHA loan @3.5% down I'll pay about $13k plus closing costs. I'll get the tax exemption having lived in it for 2 of the past 5 years along with a new basis of $380k. Most importantly, I'll clear about $140k on the sell side with $13k plus closing going back in for a net of $127k. I realize I'll pay PMI and my monthly cost will go up..but putting an extra $63k in my pocket in the middle of a pandemic seems like the move.
Assuming that you have the property titled in an LLC currently, I don't think this will work since you are the Member of the selling entity. If its titled in your personal name, it would just be a refinance.
I would try to find a friend or family member who has an under performing IRA or has money in a bank CD. Give them a 2nd mortgage in exchange for your equity. You get the cash, they get a safe stable investment, and it never appears on your credit.
@Joe Hazeltine I am not anticipating a market decline. Frankly I am looking to pull cash strictly to increase my reserves and give myself a better level of comfort in uncertain times. Everything I am reading says my local market of Phoenix is in a boom, but I like to have a backstop. I realize I could do that via HELOC...but I don't want to pay interest, and if I am wrong they could call the HELOC due in a declining market.
I may look to redeploy some of this capital into additional investments at some point...but for now it’s about trying to break into the piggy bank without collateral damage.
@Matthew Olszak this is actually amazing now that I’ve read through it. It’s not out of the question to have my brother rent it for 6 months from me before selling to him. You may have just solved my problem!! Appreciate you.
If you're itching to get as much equity out as possible with lowest costs, there are 100% LTV HELOCs out there (at least ive done them in the past, prior to covid). Had to meet certain income and DTI thresholds. The total cost was $0, not even an appraisal fee. Loan term was 15 years I believe with option to lock into a fixed 15 year term at any time. That was through Key Bank. HELOCs often do not cost any money to obtain. Plus, don't have to pay interest when not in use. Thats along the lines of what I view as your best option.
As everyone has said, this is unlikely to work - why not refinance traditionally and use proceeds to buy another property or maybe even two if you FHA one and use the other as a traditional?
You're jumping over dollars to pick up pennies in my opinion. There are much better LTV's out there for cash out refis on owner occupied homes.. My local portfolio lender lends at 95% LTV on owner occupied COR.
Frankly the idea isn't legal, if it were... What's 4-5k in closing costs for a cash out refi in the grand scheme? using the funds to purchase another cash flowing asset would negate the closing costs in the grand scheme picture.
I see you don't want to pay interest, why? You're only paying interest if you use it and you'll have your cushion you desire. My last HELOC cost me maybe $200?
@Account Closed It's pretty enticing to try to pull out equity in a property when money is so cheap. I still didn't see "why" you wanted to do that.
Assuming you have another project in mind, it might make more sense to just use your equity as additional collateral and do an all-inclusive deed of trust on this property and the other project. This would save you from closing 2 loans.
If you just want to be "ready" when another project comes along, the HELOC makes more sense so you aren't paying interest on money you aren't getting use out of yet.
@Joe Hazeltine I am not anticipating a market decline. Frankly I am looking to pull cash strictly to increase my reserves and give myself a better level of comfort in uncertain times. Everything I am reading says my local market of Phoenix is in a boom, but I like to have a backstop. I realize I could do that via HELOC...but I don't want to pay interest, and if I am wrong they could call the HELOC due in a declining market.
I may look to redeploy some of this capital into additional investments at some point...but for now it’s about trying to break into the piggy bank without collateral damage.
Your comment about not wanting to pay interest makes no sense. You will be paying interest on the cash in any scenario. With a HELOC you would only be paying interest on the equity when it is in use (think like a credit card) vs. a refinance or purchase mortgage where you're paying interest on the principle balance the entire duration of the loan.
Just do a HELOC. You can likely get up to 90% LTV (excluding your current mortgage) and should be able to find a lender who will do it with little to no closing costs. I just got a new HELOC this year 89.9% LTV, prime interest (hovering around 3% all year), no closing costs just a $50 annual fee.
@James Maradits In the event the underlying asset tanks, a HELOC that I haven't drawn on gets reduced. A HELOC that I have drawn fully out only allowed me to pay additional interest (more than a traditional refi) on money that was sitting in reserves during the draw period. This does nothing to protect my downside risk in the event values were to take a massive hit. Nobody draws out $80k on a HELOC to let it sit on the sidelines at 4.5% interest unless they are nuts.
As @Matthew Olszak suggested....if I were to rent to a family member for 6 months and then sell it to said family member I get all the downside protection with a fraction of the skin in the game. If my family member were to purchase the house from me with 3.5% down and the asset values crash 6 months later I'm sitting on $120k in cash. My family member gets a FHA loan at ideal interest rates, a new basis for depreciation, and after one year he could take me on as a tenant paying our way out of the crash. Everyone wins.
A HELOC is the convenient answer...and in my opinion... the wrong one to limit downside risk.
@Account Closed It's pretty enticing to try to pull out equity in a property when money is so cheap. I still didn't see "why" you wanted to do that.
Assuming you have another project in mind, it might make more sense to just use your equity as additional collateral and do an all-inclusive deed of trust on this property and the other project. This would save you from closing 2 loans.
If you just want to be "ready" when another project comes along, the HELOC makes more sense so you aren't paying interest on money you aren't getting use out of yet.
I want to strip equity so that I can keep it liquid in reserves.
Here is the scenario. I have a home that I’ve owned for 6 years. It’s worth about $380k and I owe about $240k. I
want to strip out as much equity as possible. Today a wild idea occurred to me and I want to consult the community. But first the traditional options and why I don’t like them.
1. Refinance - This would require 80% LTV and only allow me to strip about $64,000. Also requires closing costs.
2. HELOC - same as above with a higher interest rate and an additional monthly payment on the borrow. Also requires closing costs.
Now for my wild idea...
3. Sell to myself - If I buy the house from myself using an FHA loan @3.5% down I'll pay about $13k plus closing costs. I'll get the tax exemption having lived in it for 2 of the past 5 years along with a new basis of $380k. Most importantly, I'll clear about $140k on the sell side with $13k plus closing going back in for a net of $127k. I realize I'll pay PMI and my monthly cost will go up..but putting an extra $63k in my pocket in the middle of a pandemic seems like the move.
Has anyone ever done this?? Is it even legal??
"Selling it to yourself" is nonsensical. A refinance is what you'd need to do here.
@Whit B. Thanks for the creative/fun idea! As a contract law principle, you are not creating a contract unless the agreement is between two prices. You agreeing to sell a widget to you is not a contract. But as others have said, you can have some extended family member or a legal entity that you create be the other party. But then you have legal fees and annual fees to maintain the entity. Looking forward to hearing from others on this matter. Good luck!!!
@Dylan M. Im curious how people pay off the heloc? Do you use cash flow from those investment properties to pay off whatever you borrowed ? Thanks in advance !
@Henry Laze-row Im curious how people pay off the heloc? Do you use cash flow from those investment properties to pay off whatever you borrowed ? Thanks in advance !
@Preston Porter Im curious how people pay off the heloc? Do you use cash flow from those investment properties to pay off whatever you borrowed ? Thanks in advance !Z
Pretty funny this is almost my exact circumstance. Owe 218 on my house I bought 6 years ago and it's worth around 400. With the heloc you should be able to take out 80% which is 112,000 no? You can then use this as a down payment. I'm looking to find a 6 family in my area for around 550 and do this and should have cash flow.
@Michael P. I’m the guy who read five articles from tax advisors about people selling their properties to themselves (their entity, which is effectively themselves). Heres one just for reference. You must be the other guy.
As for #3--- I have had issues regarding the "arms length" part of it trying to sell from LLC to personal and vice versa... Ended up having to sell to my wife for it to work from my LLC to my wifes personal.
BP should make a rule: If anyone says something is "illegal"--- they need to also should be required to include the section and code, and settled case law associate associated with it to prove it is illegal and not just something they have never done or understand...
No one on here is deliberately on here trying to scam/con anyone or any institution or they wouldn't be posting on BP their strategy.
@Preston Porter Im curious how people pay off the heloc? Do you use cash flow from those investment properties to pay off whatever you borrowed ? Thanks in advance !Z
Yep. Buy in council bluffs--- decent cashflow still there but a little bit rough.
@Whit B. Thanks for the creative/fun idea! As a contract law principle, you are not creating a contract unless the agreement is between two prices. You agreeing to sell a widget to you is not a contract. But as others have said, you can have some extended family member or a legal entity that you create be the other party. But then you have legal fees and annual fees to maintain the entity. Looking forward to hearing from others on this matter. Good luck!!!
Spot on. The legal fee's/annual fee's should be worth it if its working capital right? Yep. Good Info.