Buying a home with Cash, what now?
OH · Member since 2016 · 121 posts · 60 votes
Buying a home with Cash, what now?
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Brad Fausett clearing title is likely the only item you will wait on to close when buying with cash and the description of the title company handling the transfer of the cash is also accurate. I would like to weigh in on the financing area AFTER you close. I wanted to include @Natalie Schanne for this next part as well.
Conventional loans, those are the loans governed by Fannie Mae and Freddie Mac (if you recognize those names), will limit your initial cash out of a property within the first 6 months of ownership. Actually, the only method by which they even allow a cash out loan is if you did buy with cash. This process is called a "Delayed Financing" - when you buy with cash and then refinance to get the cash back out of the property. There is a really important rule when refinancing a home with a Delayed Financing transaction - you are limited to receiving purchase price + closing costs OR 75% of the After Repair Value (ARV)...whichever is lower. So if you bought a home for $75,000, put $10,000 of work into the home, and the ARV is $90,000. Then the lower amount is 75% of the ARV, or $67,500, and that is what you will be limited to. However, if you bought a home for $75,000 put $75,000 and the ARV is $175,000 then the lower amount is your purchase price + closing costs. I hope you are following me on this math. This rule is a conventional rule. Meaning if any bank offers a conventional loan then they have to follow this rule at minimum. Where it can get confusing is that banks are allowed to put MORE rules on top of this. So if one bank says, this rules applies in the first 12 months for us instead of the first 6, then they are allowed to be more strict but not less strict. Some banks will have no extra rules and some banks will have lots of extra rules.
However, portfolio loans, or loans governed by the bank itself and not Fannie/Freddie, can have an entirely different set of rules. So in theory, they could refinance you at a higher amount and/or sooner. But they could also have a significantly higher rate, be on a lower term (15 or 20 year loan), have prepayment penalties, etc.
I hope this information is helpful.
21 Replies
- Professional · Springfield, IL · Member since 2016 · 12 posts · 1 vote9y
I just recently paid cash for the first time. I would start by contacting the title company that is conducting the closing. You probably have to drop the deposit off in escrow there. They will take care of the rest. You will show up and sign a few papers and be out of there in no time. Make sure to arrange transfer of utilities and other things that are often overlooked when closing quickly.
- OH · Member since 2016 · 121 posts · 60 votes9y
Thanks Jeremy. How long did it take for you to close on your property? Should i expect weeks or days?
- Investor · Danville, IL · Member since 2012 · 8 posts · 0 votes9y
In my state the realtor will give you a total from the hud statement before closing date you go to your bank and get bank check in that amount go to closing with check sign a few papers you are done very quick closing.
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes9yBrad Fausett - from my experience, if you pay with cash, you can only refinance the purchase price within the first 6-12 months. But after 6-12 months, if you've made improvements and you can show the market appreciated, you can get more than your purchase price. My situation: I bought a house for 255. I put 20k into it but created about 50k value over 30 days. I was owner occupying and renting rooms out. I tried to refi it 3 months later but the lender would only give me 80% of 255. I tried again about 8 months after purchase and got a 80% loan on $305k (the new appraised value). So I pulled out 40k more cash by waiting 6+ months. I'm not sure if you can or want to tie up your cash for that long. Check your lender for their current rules of 6 or 12 months before they will consider your added value / improvements.
- OH · Member since 2016 · 121 posts · 60 votes9y
@Natalie Schanne - So i have talked this over with my lender a few times. I am told, that if i pay cash, i can do whats called a reverse mortgage for 100% of my purchase price, closing cost, updates not to exceed 75% of the appraisal value. By doing this I am able to ultimately leverage my cash to reduce my investment into the property. I am confident the property will appraise for 75-80K on the low side. I am buying it for 55k and expect to put 3-4K in before having the appraiser out.
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Brad Fausett clearing title is likely the only item you will wait on to close when buying with cash and the description of the title company handling the transfer of the cash is also accurate. I would like to weigh in on the financing area AFTER you close. I wanted to include @Natalie Schanne for this next part as well.
Conventional loans, those are the loans governed by Fannie Mae and Freddie Mac (if you recognize those names), will limit your initial cash out of a property within the first 6 months of ownership. Actually, the only method by which they even allow a cash out loan is if you did buy with cash. This process is called a "Delayed Financing" - when you buy with cash and then refinance to get the cash back out of the property. There is a really important rule when refinancing a home with a Delayed Financing transaction - you are limited to receiving purchase price + closing costs OR 75% of the After Repair Value (ARV)...whichever is lower. So if you bought a home for $75,000, put $10,000 of work into the home, and the ARV is $90,000. Then the lower amount is 75% of the ARV, or $67,500, and that is what you will be limited to. However, if you bought a home for $75,000 put $75,000 and the ARV is $175,000 then the lower amount is your purchase price + closing costs. I hope you are following me on this math. This rule is a conventional rule. Meaning if any bank offers a conventional loan then they have to follow this rule at minimum. Where it can get confusing is that banks are allowed to put MORE rules on top of this. So if one bank says, this rules applies in the first 12 months for us instead of the first 6, then they are allowed to be more strict but not less strict. Some banks will have no extra rules and some banks will have lots of extra rules.
However, portfolio loans, or loans governed by the bank itself and not Fannie/Freddie, can have an entirely different set of rules. So in theory, they could refinance you at a higher amount and/or sooner. But they could also have a significantly higher rate, be on a lower term (15 or 20 year loan), have prepayment penalties, etc.
I hope this information is helpful.
- Real Estate Agent · Chagrin Falls, OH · Member since 2017 · 33 posts · 25 votes9y
my understanding has been same as Natalie and Andrew's comments. Immediate thought is what are the closing costs and terms on a reverse mortgage compared to conventional. I've heard people are critical of reverse morts as being semi-predatory lending, although legal. Never looked at it. Discussing re-fi Ive been asked to show cash flow history. I think it also matters to lenders that you have experience doing this.
Depending on your long term financing objectives you could also think about HELOC which is a cheap ready source of cash but won't let you borrow as much and will have variable but cheap rates, or collateral based loan which may have higher rates and short terms. Depends on whether you wanted cash flow, or keep taxes down and let tenants pay Mort along tax benefits of higher expense and depreciation - but in that scenario your cash flow is minimized. I will not pay points and I seek to minimize the side costs of financing as it is a drag on returns. I finance for the longest period possible at the lowest rate to reduce my monthly obligations, then I usually pay off early.
I model these scenarios against the worst situation i can imagine in the future and try to pick a middle ground. A mentor of mine says "When in doubt, do half". If we had an event and I needed cash, houses are not liquid and I could lose big time dumping them, so that instructs me not to lever to the hilt. Owning outright can invite lawsuits so if I own outright I need other protections like an umbrella policy or LLC owning LLC. Owning outright gives max cash flow but also subject to ordinary income tax so have to keep tax rate forefront in mind because who cares about gross cash flow, all that's matters is net.
If you model your scenarios with you working/ not working for other income you eventually will start to get some clarity about where rentals or flips fit in your financial life and lifestyle.
If you have cash guard it, it can be dripped away very easily. Fiscal responsibility is really tough when you get into investments that could require unpredictable and unending cash infusions. I like what Bob Collett said about what kind of returns most people actually are getting and suspect he is very correct. Glad he put that out there.
while I am a Realtor and not an authority on lending, the knowledge I have regarding reverse mortgages indicates a win-win for all involved, but it is up to the individual to make an appointment with a qualified reverse mortgage specialist to learn about it for themselves- find someone who has earned the title of 'certified reverse mortgage professional' (CRMP), not just any lender.
Also, I'm not sure the OP qualifies anyway as you need to be age 62 or older.
- OH · Member since 2016 · 121 posts · 60 votes9y
^ I am definetly not 62, Yet. However I don't believe we are actually talking about the same program.
- OH · Member since 2016 · 121 posts · 60 votes9y
@Andrew Postell @Andrea Hauserman
I want to clarify what my intentions are, Andrew I hope you can verify I am following your math and my strategy does indeed work as I intend.
I have entered into contract on a home that I am buying for $55,000. I plan to repaint the interior and replace some vinyl flooring. I feel confident that the home is currently worth $70,000 and will be worth $80,000 on the low side after I clean it up and address a few of these aforementioned updates. My estimate for these updates are are $4,000.
If I were to purchase this home as a straight up conventional loan with 25% down, I would need to put $13,750 down.
Now lets suppose I purchase this home in cash, I initiate a delayed mortgage and the appraiser agrees that the home is indeed worth $70,000 ( which I have plenty of comps to support) I would be able to mortgage 75% of the $70,000 or $52,500.
By employing my strategy, I just reduced my investment into this home from $13,750 to $2,500. I now have $11,250 to invest into another property that would have otherwise been tied up.
Now with this being said, I am told I can do the lesser of 75% of the appraised value or 100% of my purchase price, closing cost and repairs as long as they do not exceed 75% of the appraised value.
I hope this is clear enough, I feel that I have properly explained to my mortgage advisor my exact intent and have been told that my plan works within the guidelines. I am essentially using the difference between my low buy price and the actual value to compensate for my downpayment.
- Professional · Springfield, IL · Member since 2016 · 12 posts · 1 vote9y
It should only take a week or so to close. It just depends on the speed of the title company. There are many ways to get the money back. In the end, you get it back. Get it back the exact way you intend and call multiple lenders until you find one that fits your need. The way you explain, it is just like financing up front with 25% down, only you get the added benefit of quick closing, less costs, and the potential to add value (which reduces your out of pocket costs when you pull it out in the form of equity). Plus, you don't have to meet the minimum requirements in terms of property condition when you pay cash, whereas, that is harder to lend around. Once your rehab is complete, call lenders and tell them how much cash you want until you find the best deal (it will be even more advantageous to have it leased out while searching for an equity loan). In the end, still having 25% equity in a newly rehabbed property seems like a safe investment as long as it cash flows reasonably- full leverage maybe not so much.
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Brad Fausett your description does help. I also want to bring up a couple of math items for you to consider. Your strategy is sound and I think knowing some of the calculations will help making your analysis accurate and assist you on your next purchase too.
If you pay $55,000 for the home, $4,000 for the updates, and lets say $1000 or so in closing (title, etc) your total outlay is $60,000. Paying $60,000 for a $70,000 home is a good deal. Your math on receiving $52,500 is spot on and that gives you a difference of $7,500. But you will also have closing costs on the refinance again. Maybe $3,500? The max your loan is allowed to be is $52,500 so the closing costs on the refinance will have to be brought to closing. So your total investment outlay should be $11,000.
I would also recommend for you to consider your total outlay is $11,000 on a home worth $70,000. So the realistic comparison should be against a $70,000. 25% on a $70,000 is $17,500. Which means you are still ahead on your strategy over buying with a standard conventional loan. However, one other item for you to consider is that you don't have to bring 25% down to buy a home with a conventional loan (refinancing needs 25% equity but purchasing does not). You can do 15% down or 20% down. Also, there are conventional renovation loans. If you wanted to buy a home that needed work, you could wrap the construction into the loan amount with a conventional renovation loan. Those renovation loans do take 30 days to close though. So if your selling point is that you are buying cash and closing quickly type of thing then your strategy works out again.
I think that your strategy is a good one. And while I may it might seem that we went a little overboard with the analysis here knowing these numbers will guide you on a property that needs $20k of work, or has a higher purchase price, etc. The intent with this post is just to give you the necessary information you need to have to make a good, informed decision. I hope this helps. If you have any other questions or concerns feel free to ask. Thanks!
- OH · Member since 2016 · 121 posts · 60 votes9y
Again, thank you for your detailed post. You mention that 25% is not required. My lender is telling me 25% is required since these are investment properties. Is this not true?
- OH · Member since 2016 · 121 posts · 60 votes9y
Lastly, my intentions and thoughts is the home will appriase for $80,000 if not higher. If I buy for $55,000, $4,000 in updates and $1,000 in closing via cash this brings me to an all in of $60,000 as you said. If the house appraises for $80,000 or higher my total out of pocket should only be closing cost since $60,000 is 75% of $80,000. If the house appraises higher I could ultimatley get 100% of the say total $63,500 invested back out. But the reason I am beating this up is I have never done it. So i want to make sure I understand all avenues of possible issues. I am looking to add several more properties this year. Tying up 60K in one is not part of my plan. I listed the comps below, worst case if I were to get the median of the comps even though my purchase is nicer I should still come out ahead about 3k. However this seems like alot of trouble for 3K. I need to appriase at 75K -80k.
Home I am buying: 5 bed, 3 bath 2,444 sqft Duplex Finished attic and basement, large fenced in yard, large deck.
Nearest Homes ( immediate neighboorhood)
Comp1: 4 bed/ 2ba Duplex Sold $79,900
Comp 2: 5 bed / 2 ba duplex Sold $69,900
Comp 3: 4 bed / 2 ba duplex Sold $55,000
Comp 4: 4 bed / 2 ba duplex Sold $61,500
Comp 5: 6 bed / 3 ba duplex Sold $64,200
Average of $65,920 and none are as nice as the unit I am purchasing.
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Adjacent Neighboorhood- less that 1 mile from home
Comp 5: 5 bed / 2 ba duplex Sold $105,000
Comp 6: 4 bed / 2 ba duplex Sold $72,500
Comp 7: 6 bed/ 3 ba duplex Sold $100,000
Comp 8: 6 bed / 2 ba duplex Sold $148,000 - 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Brad Fausett ah, sorry that your lender is telling you 25% down. That is called an "overlay". Overlays are extra rules that banks put on loans to be more conservative with their lending. I know, it sounds a little crazy that a bank wants to lend LESS money but this is a decision that someone really high up in the bank made about their risk tolerance. But yes, it is possible for a bank to have a higher credit score than what is needed if they want, to have loan limits if they want, and to require more down payment if they want. They are NOT allowed to be MORE flexible than the guidelines. So the guidelines are as little as 15% down. You can find plenty of banks that will follow that rule. Mostly Non-National banks.
And very good that you are asking about this scenario. The rule that you need to keep in mind is that if you buy with cash, then you can get cash back in the first 6 months but will be limited to either the purchase price + closing costs OR 75% of the ARV...whichever is LOWER.
So on your scenario above that you described, if you bought for $55k and it appraised for $80k, we have to analyze which is the LOWER figure - purchase price or 75% of ARV. 75% of ARV would be $60,000 but purchase price is $55,000. In the above scenario you could get a $55,000 loan (because that is the lower figure) and add $3500 in closing costs on top. Even if the home appraised for $1million, you are still limited to the lower figure, purchase price or 75%, in the first 6 months. This only applies to delayed financing loans. Does that make sense?
- OH · Member since 2016 · 121 posts · 60 votes9y
They are telling me it is part of the fannie/freddy guidelines. This is what he sent me.
- OH · Member since 2016 · 121 posts · 60 votes9y
However, i found another lender who will do 15 - 20 -25 percent down but my original lender, who is a friend, says this is a non-conforming loan? This is riskier but he said for me to send over the info. He said if it truly is a better deal he would tell me. All this lending seems so complicated. I am now thinking maybe i just do a standard conventional loan use my cash for the reasonable updates then refi in 6 months to get my capital back out. I really appreciate all of your help! You are awesome!
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Brad Fausett sorry, I totally missed the duplex conversation. Sorry for the confusion. But yes, you do need 25% down to buy a 2-4 unit property and that also changes how much cash you can get out of the property. You will be limited to 70% of the ARV or purchase price whichever is lower.
And the portfolio loans (aka non-conforming) are always important to have as investor. When a portfolio loan bends a rule that conventional loans have there will be something else that changes - like the interest rate will change, or the term will be a 15 year, or something like that. Lending is complicated....its a full time job afterall! And these rules change all the time. They just had another set of changes in January. So it's important that you have a lender that knows how to navigate all of these rules for investors. Specializing in investment lending is really important but also rare. If you get someone that is good at it you can give them your goals and they can help you get to the finish line.
- OH · Member since 2016 · 121 posts · 60 votes9y
now it sounds like everyone is on the same page. Your last statements are directly in line with my lenders. Thank you Andrew!!
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