Cash Flip to Rental with Conventional Loan

7 Replies

Hello BP,

I am putting together my next deal and I would like to try the following, and was wondering if this would be legal, as it is not an "arms-length transaction."

Bullet points for brevity's sake:

  • Purchase REO w/ cash in full
  • Rehab (also cash)
  • Sell to business partner using a conventional loan at fair market value
  • Add self back to title
  • Rent unit

Justification:
We have limited available capital and would like to move forward with another deal without having to wait 6-12 months to season the loan and refinance traditionally. We intend to purchase first in my name with cash, and then to him using his loan, as I do not currently qualify for any conventional financing myself. The margin created by rehabbing the property should allow us to pull out all of our equity (possibly even profit a little), after selling to ourselves.

We don't aspire, nor intend, to do anything even remotely illegal. I don't personally see any problem here, as we intend to sell the property to ourselves at fair market value, but I don't know how these things are regulated.

Questions:
Is this legal?
Would adding someone to title after securing a loan on the property trigger a Due-on-Sale clause?

I do intend to seek legal advice from an actual attorney as well.
Thank you all in advance for taking the time out of your busy day to consider my question.

You mentioned that you have a partner... would I be correct to assume that you have a partnership of some sort such as LLC, S-Corp or C-Corp with a valid operating agreement or partnership agreement?

If thats the case, why would you not deposit the cash into the above mentioned Entity tagged as "Member/Owner Contribution" and purchase the property in the Entity's name.  Then rehab the property using the deposited cash and have the Entity obtain financing with your partner guaranteeing the loan?

It seems this would achieve the same result and be less shady looking.

The cash out loan proceeds could then be pulled back out via Member/Owner Draw to get your cash back out of the deal plus any profits agreed upon.

The end result is you have your cash back you and your partner own the entity with whatever split you agree upon.  The Entity owns the fully renovated property with a mortgage in tact and the partner is personally signed for the debt.

Either way this is a viable alternative to what your suggesting.  You might even save a few recording fees.

Thank you Jeff.
What you're saying makes a lot of sense, but we are purchasing a condo that doesn't allow corporate ownership. Have you secured a loan through an entity before as you mentioned? Does the process differ at all from obtaining a traditional conventional loan for an individual? We do have an LLC, but we haven't set up an operating agreement yet, it is basically a name on paper at the moment.

Elan: "would like to move forward with another deal without having to wait 6-12 months to season the loan and refinance traditionally."

I would start by verifying your assumption first (6-12 months refi). While the national banks often impose a seasoning limit on refinances, you are likely to find regionals and credit unions who do NOT. I just did one on one of my properties in 5 months post purchase.  The credit union I used had no seasoning requirement and they were one of many who did not.

Originally posted by @Elan A. :

Thank you Jeff.
What you're saying makes a lot of sense, but we are purchasing a condo that doesn't allow corporate ownership. Have you secured a loan through an entity before as you mentioned? Does the process differ at all from obtaining a traditional conventional loan for an individual? We do have an LLC, but we haven't set up an operating agreement yet, it is basically a name on paper at the moment.

Yes, you can do a loan through an entity but if the entity does not have a credit history or significant cash flow or assets then it will need to be personally guaranteed by the entity's owner(s).  That decision will be up to the bank or financial institution that you decide to use.

@Will M is correct that it's part of the Financial Institutions lending requirements on whether they will require seasoning. 

For example we use a Portfolio Lender that does not require seasoning due to them servicing their own loans. Ultimately they make the decision on whether they will lend or not. They also have no issue taking ownership to a property in an LLC. On a side note there is also no due on sell clause with my Financial Institution.

Again this is specific to my lender, your lender may have different rules. 

@William Morgan That is precisely the kind of lender that I would like to deal with. How did you find your lender? I am currently 1 year into full-time REI and acquiring my second rental and 4th flip soon. Based on your experience, when do you think might be a good time to start seeking out lenders? I really don't want to waste their time, and would like to make a good impression once I have a few more deals under my belt, but I am sitting on 100% equity in my rental that I would really like to leverage ASAP.

Thank you both for your input.

I read the following article and called around asking the lenders the questions listed in the post:

http://investfourmore.com/2013/05/12/how-to-find-a...

This will basically be small banks with 10 branches probably in 1 or 2 states.

Good Luck

Jeff

Greetings Will,

You can try a portfolio lender that does not look at job history or tax returns; only cash flow of property.  Good luck!

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