Getting a buyers cost inflated for rehab costs?

Question

I'm currently looking at a 1 bd 1 ba 524 sq ft. It needs a little TLC but given the size of the house I can't imagine it being more than $20,000 in repairs. I plan on renting the property after the rehab. The purchase price is $69,000 but The zestimate is $118,000. My question is can a buyer request paperwork to state the sell price is actually $118,000 (as long as it appraises) and ask the seller to give the remaining $49,000 in cash for the rehab?

Jonathan R McLaughlin · Answer

mortgage fraud.

you will sign something that says the monies exchanged are the entire part of the deal and no outside arrangements exist.

Jonathan R McLaughlin · Answer

you can legitimately get a rehab loan/construction loan through a bank or hard money lender. I forget the exact percentages but a bank could lend you 80% of the "as finished" value. If it appraises correctly, and you have some funds, you can get a substantial amount of the rehab paid for.

So..you buy a place for 50K and the "as finished" appraisal comes back at 100K. This won't happen by the way but its easy math.The bank would lend you 80K, leaving you 30K in cash (25 really with transaction costs) to fund the rehab.

You would need to supply them with projected costs, consruction plan, evidence of being able to do this etc. They will likely do it on a draw basis, as in they won't give you one check they will pay as you go. Contractors can be wary of these. Definitely possible though and common

Albert Bui · Answer

Hi Andrea

You can talk to brandon brooks or bob thomas at merchants mortgage they’re a hard money lender can help you finance up to 90% of cost purchase, 100% rehab, for a total of 75% ARV or after repair value and they will hold back the rehab and cash out proceeds for you too so if you don’t use it all, once you refinance you can get it all released to you as “excess proceeds.” This is seen as excess or unused proceeds and some investors called this deferred cash back money.

This of course also requires your property to appraisal at a value high enough where your loan is 75% of that future after repair value or ARV so this by no means is a silver bullet of sorts, but it does allow you to do a BRRRR with out waiting 6 months to cash out refinance, you can do this without  title seasoning if it’s structured correctly.

I’ve helped clients acquire and get out of merchants mortgage HmL notes successfully using these strategies. We help them walk through the rehab budget, the area comps, values, and timing required to complete these.

Timing is important because you’ll want to have certain amount of sold properties at the value you need to get your exit appraisal for your refinance to have a high probability of success.

Best of Luck and merchants Mtg operates out of OR multinomah and Washington counties.

Andrea L smith · Answer

Yes that definitely gives more of a perspective. Thanks for the information. My intention wasn't to fraud hence the question on whether it's something that could be done legally. I just thought it would make more sense to get the rehab money out of the original loan and flipping for a profit after rehab vs rehab and refinance 🤷🏻‍♀️

Adam Martin · Answer

Someone correct me if I'm wrong but you may be able to do some form of this.  I closed on a house today and originally it looked like the sellers weren't able to cover some of the repairs but they found the cash.  I spoke to my loan officer and asked what we could do since they wanted to pay for it after closing but we wanted to make sure it was legit.  I was told that I could not receive money directly but we could have checks held back to contractors with estimates.  If you were able to get bids you thought were good and were willing to risk having the checks in the name of the contractor this may be possible assuming you can get the appraisal to work.  I have done this before when a house needed mortar work on the chimney but it was too cold so we got a money order made to the chimney company and they did it a couple months later when it warmed up.  The bank knew about it but it was reasonable and I never technically had the money since the check was made to an outside company.

Berek Dollinger · Answer

I'm pretty new, but if your bids for the rehab come in under 35k and you're not doing structural work, you might/should be eligible for a 203K Streamline FHA Rehab loan.

Jonathan R McLaughlin · Answer

sorry reading quickly wasn't a mortgage question?

I'm confused but still sounds like fraud...I'm in a bit of covid fog so could be wrong

In general when you are asking someone to sign something that isn't true its not a good idea. Plus, the buyer would then need to report that gain on their taxes etc.

And please, please, please dont trust zestimates.

Bill B. · Answer

An expert will probably come along with better answers but things to think about.

You’ll need $10k more for the down payment

The seller will owe $10k more in taxes unless it’s their primary home.

You’ll have to lie to the irs for the entire time you own it and when you sell it about how much you owe in taxes. (You’ll be lying during ownership about depreciation and when you sell it about capital gains taxes.)

All you’re getting out of this is a loan on which you’d paying interest. Why not just borrow the money with a heloc or a personal loan after the purchase?

Getting a buyers cost inflated for rehab costs?

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