How doe the Appraisal affect the down payment?

[Joshua Beeler]

I have a house under contract for $137,000, I am guessing that it will appraise for around $210,000. When it comes time for the down payment, can I use the equity in the home as the down payment? 

[Joshua Beeler]

Originally posted by @Andrew Postell:

@Joshua Beeler aha! So now we are on to something. So if you are using conventional financing you will be VERY limited to your options here. Let's examine traditional, conventional financing (Fannie/Freddie) vs. Hard Money Lending (HML) for this purpose.

Conventional Lending

• Will Require a Down Payment in all scenarios
• Won't allow a rehab budget on a duplex
• Does have a 30 year fixed rate option
• Might not approve the property at all if it's in very rough condition or if 1 major thing is wrong (like a foundation or a roof)
  Can be cumbersome, 30 days to close
• Low interest rate

Hard Money Lending

• Won't Require a Down Payment
• Will allow rehab
• Short term money only (so you have to refinance if you are keeping the property)
• Doesn't care about condition since you will have the rehab included in the loan
• Super easy, can close quickly
• Higher rate and higher fees

So here's how this all plays out:

Conventional lending - will require 25% down payment on a duplex investment property ($34,250 based on your numbers above) + closing costs ($7,000?)  + rehab ($10,000) = $51,250 out of pocket to acquire that property.  That's a lot of money.

Hard Money Loan - will lend UP TO 75% of the ARV. 75% = $157,500. So purchase of $137,000 + closing costs ($7k) + rehab ($10k) = $154,000....that's less than $157,500. So you will come out of pocket ZERO using hard money!  I hope I expressed that loudly enough - ZEROOOOOOOOO!!!!!!  

So do you want to come out of pocket $0 or $51,000. Yes, you have to refinance with HML...so let's say that costs you $7k out of pocket to refinance...so now it's $7k vs. $51k. Woopty dooo. Using HML you are $44,000 better! That's like a year's salary to some people. $44,000! You just saved yourself $44,000! Why are we still reading this post? Go switch lenders IMMEDIATELY.

Now, seriously. This is why we use HML with the BRRRR method. There's no comparison. I hope all of this makes sense but let me know if you have any other questions. Thanks!

@Andrew Postell

Thanks for the help and details!