Purchasing a House all Cash Then Refinancing

63 Replies

I would like some expertise on this current issue I'm facing.

I have this house 155,000 purchase price.  I want to do all cash and refinance.

I am going to get an appraisal done Monday, the seller is very confident the appraisal will come out to 200k or above.

Lets say it comes out to 200K, as soon as i close the house i want to refinance the home.

The bank that im using is saying they will give me back 75% of the appraised value.

So say i put 155,000K cash in.

Appraised value 200,000.

Bank gives back 75% of money= 150,000 back.

So in essence i get this house for 5,000 down cash.  

How can i lose here?  What am i missing?  I feel like this is a deal to good to be true.

I have 1 investment home, this will be my second, so im pretty new to this.

Also the appraisal for the house will be the same appraiser the bank will be using when i refinance.

This property is in NJ, i will be holding this property its a 2 family home.

@Neil P.  It could be a great deal, but never assume you can't lose.  Your appraisal and the bank's upon refi may be different.   My experience is that bank appraisals in refi come in about 8% lower than what I think is realistic.  This is in contrast to bank appraisals upon purchase or on short sales. These often come in high.

Even if the bank appraisal is $200k you will have closing costs on the purchase and refi that we put your all-in price higher. Maybe $11k. 

But all in all it sounds appealing at first glance. What do you plan on doing with the property?

@Neil P.  What you just described is our main entrance and exit strategy.  It works only if you get enough cash flow after the refinance though...how much is enough is up to you.  One of the huge benefits of doing this is the ability to reinvest the cash again after you refinance it out.

As @Larry T.  mentioned, be careful of the appraisal.  They don't always come out the way you need them too, so you need to be really good with your analysis before hand.

Having said that though, in your scenario, getting a lower appraisal doesn't kill the deal (I guess that depends on how low though).  Here's why:

I'm assuming there are no rehab costs in addition to the 155 since you didn't mention them.  With it also assumed then, that the 155 covers all costs (buy/rehab.closing/etc...), then 75% of a 200k appr. would get you 150k...and you'd only have 5k in the deal.  Now you made no mention of what the cash flow would be AFTER you figured in the REFI monthly payments.  If you were making 250/month in CF, then it would take you only 20 months to get the rest of your cash back and be 100% whole again.

In the mean time, you've reinvested 150k of your original cash into the next deal.  If you keep repeating this over and over, you can collect a number of cash flow properties quickly, without ever really spending any cash...since you get all of your cash back with the last refi.

As a side note, if you can get deals, or your refi can substantially increase your LTV at REFI, you may be able to cash out on some of these refis.

Joe Villeneuve
REcapSystem
A2REIC

@Joe Villeneuve  @Larry T.  , sorry for mentioning other details on the property.

Rental income will be: 2400 a month so 28k a year

Mortgage paymets will likely be 1100 including tax and insurance on a 30 year fixed.

This property will need some work done to it looks like about 5k.

Now question about the refinance.  The bank that will be doing the lending is giving me the contact for there appraisal company.  So in essence ill be doing 2 appraisals one on monday.  Then one again when i refinance.  The same appraisal company will do both. 

So you think the bank will come back with a lower appraisal 30 days later?  If so how much lower can it go.

Thoughts on this?

Why not buy conventionally at 80% LTV? The cash purchase/refi is great when the as-is and as-refi'd values are significantly different. If this needs no work why close twice unless your seller has to have a cash offer?

I would run your own comps because I haven't met a seller out of the 100 I've talked with that had a realistic idea of the value of their home (at least not in our discussions). The bank is going to take the appraiser's value as gospel. Once you purchase cash you're committed so be prepared for a lower appraisal.

How is it worth $200k and you're getting it for $155k all in? Does it require any rehab?

Be mindful that cash out refinance appraisals are commonly done much more conservative than a Purchase loan appraisal. The appraiser's are extremely weary while doing the appraisals. Appraisals are very subjective to the appraiser and it's a difficult process, if at all possible, to argue a crappy appraisal.

I've done a few all cash purchases to cash out refi after my rehab, and I know this first hand! 

If hypothetically it does cash out at $200,000. You'll have to run your cash flow numbers on this amount financed, and not just the $155,000. Be sure the property can sustain itself.

@Mike M.  If i were to buy this with a loan, its 25% down for an investment home in NJ.

That would be 38,750 down.

Then closing fees, plus 5 worth of work that needs to be done to the house.


Other route i mentioned above i can get the house with 5k down.  You really think the appraisal will be much different even by the same appraiser once the deal is closed?

@Mehran K.  , positive cash flow for this property will be about 1000 a month with a 30 year mortgage that i showed above.

This property does need about 5k worth of work cosmetic repairs. 

So what type of appraisal should i ask for?  The same company will be doing the appraisal for the bank.

@Neil P.  The bank usually handles the appraisal.

@Michael J. Banks usually want anywhere between 2 - 6 months to do a cash out, depending on if you did anything to increase the ARV after your initial purchase.

To get it done faster, use a non-traditional source...which is what we do.

Joe Villeneuve
REcapSystem
A2REIC

You will need to do a "Delayed Financing Exemption" rather than an actual cash-out refi.  Many lenders will have a one year wait period for cash-out refi.  With delayed financing, you can get 70% of appraisal up to 100% of original cash purchase price plus closing costs.  You don't really HAVE to get two appraisals.  If you buy cash, then you can skip it for your initial purchase - needs appraisal for the actual financing, of course but if you are comfortable with your own evaluation, you don;t have to pay twice for appraisal/ 

I'm curious too though why the seller charges you 155K for the property when it is worth 200K.  Sounds like a rather charitable thing to do.....

@Neil P. That small local bank that will cash out refinance with no seasoning will NOT write you a 30 year loan fixed rate loan. It will likely be a portfolio loan with either an ARM or balloon. There will also be a slightly higher interest rate as well.

As mentioned above, you're not involved with choosing the appraisal/appraiser. 

How are you calculating your cash flow? I hope it's not Gross rent - PITI. Just being sure.

If you are doing a cash out refinance on a residential investment home, there is a 6 month waiting period with conventional loans. You can do a cash out refinance with a conventional loan up to 80% loan to value. On another note, FHA loans, owner occupant properties, you can do a cash out refinance up to 85% loan to value but they have a one year waiting period from the closing date. Just had a client with the similar situation. Maybe this article will help you

http://gustancho.com/cashout-refinance-mortgage-loans-2/

Gustan Cho

www.gustancho.com

So the bank i talked too, the guy is giving me there appraisal company (3rd party) that they use for there home appraisals.

This is a multi unit home, the mortgage guy said when i refinance i can do a 30 year old however i will have to do bi-weekly payments.  He will add 1 point and the loan will be a little higher it will be 4.75 as opposed to 4.25.

@Mehran K.  

He stated that i can do the refinance process as soon as the record date is given.  That usually takes a month but i can rush that.  Again im using the bank that will be lending me, the same appraisal company they use.

For 5+ Properties there is a great Blanket Loan program to refi all properties into one loan with all cash out no seasoning. Also can sell a property out of the portfolio.

Originally posted by @Neil P.:

I would like some expertise on this current issue I'm facing.

I have this house 155,000 purchase price.  I want to do all cash and refinance.

I am going to get an appraisal done Monday, the seller is very confident the appraisal will come out to 200k or above.

Lets say it comes out to 200K, as soon as i close the house i want to refinance the home.

The bank that im using is saying they will give me back 75% of the appraised value.

So say i put 155,000K cash in.

Appraised value 200,000.

Bank gives back 75% of money= 150,000 back.

So in essence i get this house for 5,000 down cash.  

How can i lose here?  What am i missing?  I feel like this is a deal to good to be true.

I have 1 investment home, this will be my second, so im pretty new to this.

Also the appraisal for the house will be the same appraiser the bank will be using when i refinance.

This property is in NJ, i will be holding this property its a 2 family home.

Delayed financing guidelines (DFE) or AKA cash out after a cash purchase is 70% max LTV (loan to value) within 6 months following your cash purchase. A regular cash out of a property single unit (1-4 financed properties) is up to 75% on a non owner (conventional guidelines) if you've owned the property longer than 6 months.

so 70% of 200k is only 140k then you'll have 15k in the "game," with probably 1500-2500 closing costs I assume?

The guideline for DFE states that you may cash out to 70% of market up till your acquisition cost so in theory if you could find a deal that has enough meat on the bone you could pull out all of your original funds and closing costs (not rehab money - there are other strategies for that).

I've done DFE's up to a point where investors have near infinite returns because they got a return of so much of their money post refinance that there wasn't much left in the property except for 10-20k.

In order to avoid headaches, just know that you have to source/document every single source of funds that made up the "cash," that you used to purchase the property. So if the property was 155k and you used 7 different account transfers, wires, selling of an asset, title loan on a car, etc you will have to provide cancelled checks, and banking online print outs, title loan note (all pages), etc etc (example) prior to the DFE refinance closing.

You can avoid the 6 months seasoning with the cash out refinance via delayed financing program, however, mortgage lenders will go off the initial purchase price and not the appraised value.  He is an article I recently wrote about delayed financing. [REMOVED]

This post has been removed.

Originally posted by @Joe Villeneuve:

@Neil P.  What you just described is our main entrance and exit strategy.  It works only if you get enough cash flow after the refinance though...how much is enough is up to you.  One of the huge benefits of doing this is the ability to reinvest the cash again after you refinance it out.

As @Larry T.  mentioned, be careful of the appraisal.  They don't always come out the way you need them too, so you need to be really good with your analysis before hand.

Having said that though, in your scenario, getting a lower appraisal doesn't kill the deal (I guess that depends on how low though).  Here's why:

I'm assuming there are no rehab costs in addition to the 155 since you didn't mention them.  With it also assumed then, that the 155 covers all costs (buy/rehab.closing/etc...), then 75% of a 200k appr. would get you 150k...and you'd only have 5k in the deal.  Now you made no mention of what the cash flow would be AFTER you figured in the REFI monthly payments.  If you were making 250/month in CF, then it would take you only 20 months to get the rest of your cash back and be 100% whole again.

In the mean time, you've reinvested 150k of your original cash into the next deal.  If you keep repeating this over and over, you can collect a number of cash flow properties quickly, without ever really spending any cash...since you get all of your cash back with the last refi.

As a side note, if you can get deals, or your refi can substantially increase your LTV at REFI, you may be able to cash out on some of these refis.

Joe Villeneuve
REcapSystem
A2REIC

 When you say you can keep repeating the deal over and over again, you can't go past 10 refinances (Freddie/Fannie), right?  Unless, they are portfolio loans with a shorter term and higher rates.  How many times can you actually refinance?

@Neil P. Welcome!

I believe the bank will refi after 6 months and either use the Appraised or Purchase Value, which ever is lower. Cashout will be 75% of that.

Did the Bank, Loan Originator give this to you in writing?

@Neil P. - The financing is legitimate under the delayed financing exception or as a portfolio loan from your lender. Sounds like you got a good deal. Make sure your ARV is in line with the comps. Go for it.

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