Purchase with cash then mortgage property

[Morgan Wallace]

Good Evening BiggerPockets,

I found a property that I think I can buy at a deep discount with cash. If I purchase with cash, then clean out all the junk and have it appraised, can I get a mortgage based on the appraisal, and not on the price I paid?

To be clear, I would like to mortgage the property as is, then use the difference in the loan amount and the cash paid to repair the property. I wouldn’t be repairing the property until permanent financing is in place. Basically I want to buy the equity and tap it immediately with a conventional loan.

Can I do this? If so, how?

Thanks!

[Hugo Alves]

Hi Morgan,

Yes you can do this, exactly how you explained it. Find a lender and identify what their refinance LTV (loan to value) % they will do for you. This will give you an idea of how much equity you will have to work with. Buy the home, clean it up to make it as presentable as possible, verify with lender all items that need to be functional for the property to be mortgage-able and prep the home. Once that's completed, contact the lender for a cash out refinance.

[Farrukh Amini]

Yes, banks go off of appraisal. Keep in mind though the appraisal will depend on the recent comps, so it could come in high or low depending on the similar properties sold in that area. 

As for getting a conventional loan on a property that's "not livable" condition, to my knowledge, your only option is 203k loan which is an FHA renovation loan. If you qualify, then great. If not, then you have to look into other types of loans like fix and flip or rehab that carry higher rates.

[Aaron Bonne]

Hi @Morgan Wallace

Sounds like you have a nice opportunity on your hands! I agree with @Hugo Alves but would also add that some lenders might require a "seasoning period" of 6 months or so before they will refinance it. Just something to ask about as you call different lenders in your area to explore their refi options

[Morgan Wallace]

Thanks @Aaron Bonne. I was worried about a seasoning period as I was hoping to use the financing to pay for the rehab, which I’d want to start right away. I assume I can call around to different lenders or a mortgage broker and find out which loan products require this seasoning?

[Aaron Bonne]

@Morgan Wallace correct, just call around in your local market. The local community banks typically are more flexible on what they can do as they probably hold the loans in house, whereas the big regional/national banks bundle a bunch of loans up and sell them within days.  If you don't fir their narrow criteria, then they won't be that willing to work with you. Not saying it's impossible, just my experience.

I'd call a dozen or so banks in your area, start an excel sheet with criteria of what they offer such as LTV, seasoning or no seasoning, terms, etc. and you'll eventually find the best product for you and be on your path to success!

Good luck, let us know what you find and please feel free to reach out directly if you want

[Morgan Wallace]

Thanks for your response @Farrukh Madaminov. The owner purchased the property 10 years ago for a steal (2009: what a time to buy!) and his most recent tenant trashed the place, complete with tearing a hole in the floor to take his stash with him when he left.

All that being said, the comps are pretty good. The market here is so crazy high. I think by removing all the trash, tearing the flooring out, and patching the hole in the subfloor should be enough to make it presentable.

[Morgan Wallace]

@Hugo Alves, I’m so happy to hear it! What you lined out is exactly what I want to do, but I didn’t know if it was an option. Is there a specific name this strategy is known by?

[Morgan Wallace]

@Aaron Bonne I’ll do that. Thanks for the great advice. I’ll keep posting my progress on this thread to keep everyone updated.

[Jerry Padilla]

@Morgan Wallace

In theory you can do this. Not sure it is going to work out as great as you hope. An appraiser is going to value the property significantly higher, with just cleaning up the property and no improvements made. They are going to see what you paid for the property very recently and typically they want to see improvements made to increase the value greatly. Plus, if the property isn't in livable condition, it will not qualify for conventional financing. A couple of other idea's:

Borrow from a HELOC on your primary if you have one and pay back later with the cash out refinance. Maybe home improvement loans or personal loans?

There are also Renovation loans if you have 4 or less financed properties, including the subject property. HomeStyle Renovation loan is one of these options. 

[Alain Chan]

Hi dear, @Morgan Wallace

The answer is " NO, you are not able to immediately do that !!! "

The strategy you are executing is what we call "Delayed Financing" in the mortgage industry. 

Unfortunately, you need to wait for a 6-month seasoning period before you tap into your home equity cashing out to start and accomplish your renovation projects. 

https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html

Cash-out refinance transactions must meet the following requirements:

• The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
• Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.
• The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
  • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
  • The delayed financing requirements are met. See Delayed Financing Exception below.
  • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower's six month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)
  • If the property was owned prior to closing by an inter vivos revocable trust, the time held by the trust may be counted towards meeting the borrower’s six month ownership requirement if the borrower is the primary beneficiary of the trust.
• For DU loan casefiles, if the DTI ratio exceeds 45%, six months reserves is required.

For the maximum allowable LTV, CLTV, and HCLTV ratios and credit score requirements for cash-out refinances, see the Eligibility Matrix.

" Delayed Financing " on your freshly cash-paid property is immediately allowed and appraised at the purchased price plus documented improvement costs " with LTVs up to 75% on primary residence or 70% on investment property by my bank institution. 

Alain Chan, NMLS# 1390006, 

"No IncomeCheck home loans available in all 50 states & DC"

Quontic Bank, NMLS# 403503, federally chartered by US Department of Treasury. 

[Morgan Wallace]

@Alain Chan, thank you for the info. This was exactly what I was worried would be the case. However, this info is based on Fanny/Freddy funding, correct? As not all conventional loans are backed this way, does this info apply to all conventional financing options?

[Brooke Andrea]

@Morgan Wallace Have you looked into the 203k loan (I think it's called)?  Where you can finance the purchase and rehab costs of a property?  That might be a really good option for you!

[Alain Chan]

Hi, @Morgan Wallace

That guideline applies to all conventional loan financing that you have to wait for six months to cash your equity out. 

[Jazmine Waters]

@Alain Chan

There are lenders who allow you to refinance in LLC.

[Morgan Wallace]

@Brooke Andrea I have come across this option, yes. I was hoping to simplify the process by getting permanent financing in place with the fewest number of steps, and I figured delayed financing was the most efficient way to get the most equity out of a property.

Thanks for your response! I didn’t know the name of this type of loan product.

I spoke with a local bank who will lend the lesser of the two: 90% purchase and repair or 70% assumed ARV. They will loan this amount up front as interest only (6% I think), then roll it into a 5 year balloon with a 20 year amortization schedule at around 4%. It seems like a great loan product.

[Morgan Wallace]

I mentioned that I would keep everyone posted on my progress, so here’s a few updates:

1) My favorite local bank said 6-month waiting period after the rehab is completed, so either fund it a different way or pay cash for both the purchase and repair. They did, however, offer an option to finance the purchase and repair, then roll it into a standard loan without additional closing costs.

2) My local mortgage broker said it can be done the way I had hoped with no waiting period. Simply clean it up, have it appraised, and they'd loan up to 75% LTV without any repairs. The value would be based on comps and the condition of the property. The one condition is that the money to purchase the property needs to be obviously yours. I.e. bank statements, settlement papers, stock account statements, etc need to be presented to show that the money really is yours and not borrowed from family or friends. Basically, the lender wants to be sure they're in first position.

3) the property was a total dump, like a tear down. My contractor estimated it would be a 6-figure rehab as everything needed some work and anything worked on would need to be brought up to code. With the crazy market in my area, labor would be expensive, so this property

might need $120k of repairs but the location would only warrant a $140k list price max. All-in-all the wrong opportunity but I learned a lot by getting this far in the process.

Thanks, everyone, for your inputs,

Morgan

[Brooke Andrea]

@Morgan Wallace Happy to help.  Please let me know if you have any follow up questions I can help answer for you.