How to unlock a HELOC

16 Replies

Hello BP Team! 

We were planning on purchasing our first rental in Feb of next year. Instead we are thinking about requesting the current owner open a HELOC on the home. They current have about ~275k in equity. We could then use this HELOC as seed money to begin our investing in other homes in the area.

(We live in the house and have been renting it out for them for the past 5 years. The owners are my parents which is why they would even entertain a silly idea like this.)

My question is: What are the steps my company would need to take to gain access to this HELOC? Would it just be as simple as them going to a bank, presenting their current mortgage status, and them getting the credit. Then when I find a house to purchase, they cut me a check and I can throw the money where I need it to go?

I understand there will be interest that must be paid when they withdraw the funds. But what are the exact steps I would need to take to make this happen? 

Thanks in advance!

So far I have financed all my flips with my HELOC and credit/merchant cards. The keyword there is "my." To answer your second question first, yes, it would be as simple as your parents going to a bank and applying for the loan. They still need to run a credit check and income verification, however. Assuming they are approved for the loan, they can write checks from the account for whatever they so choose. The way my HELOC works, and I assume they are all the same, I don't pay interest or fees unless I carry a balance. I paid no closing costs to initially set up the loan, or to have my house appraised either. I pay no fees to write checks or use the money aside from the variable interest rate. I am only required to pay the interest every month, which I frequently pay from the same account.

As for your first question. I have no idea how your company would gain access.

Thanks @Tim Carter , thanks for the input! From what it sounds like, it would be a pseudo partnership that would need to be formed. There should be some written agreement between my parents and my company on terms to release funds to us and how those funds should be allocated. 

@Sam Valme

I can tell you the process that I just went through with my primary to get the HELOC. As for you and your parents arrangement, you may want to seek the advise of an attorney to determine your agreement between you and your parents regarding the money.

The HELOC is relatively a simple process. It took 1.5 months from beginning to end for me to get mine.

I talked to a lot of banks first to find the best deal for me.

The bank I chose, and most likely all will ask for the same thing, wanted to get:

  • 2 years of w2
  • 2 pay periods of paystubs
  • 2 years of tax returns
  • Any open mortgages they wanted the last statements to verify. ( I have 2 investment properties with mortgages)
  • Copy of declaration page for property insurance on my primary
  • Personal financial statement that lists all liabilities and assets
I filled out an application and they started the process by ordering an appraisal. The appraisal was actually a BPO Broker Price Opinion that I disputed since the person only did a drive by of my property and compared it to other properties (comps) that they had full knowledge of upgrades for the interior and exterior. Not a fair comparison. They ordered a full appraisal that came in much higher and was more equitable. They paid for closing costs as long as I keep the account open for 2 years. I got a 1st year very low interest rate and I can also use what they term as a 'loan in the line' that allows me to do my draws (at variable rate) and then convert them to a fixed rate. They will do a credit check and look at the credit score of the applicant(s). Prior to closing they did a verification of employment that took 2 days. Afterward, closing to sign all the documents. Hopefully this will help you. Good luck.....

Thanks @Daria B. ! Thats exactly what I was looking for. Now I have a good idea of the asks i'll have to make when creating this solution. I have an attorney now and if we get to a common ground I'll definitely be getting him involved. 

@Sam Valme

This is a very simple situation. You do NOT own the house and cannot obtain a HELOC from it, simple.

@Scott Weaner is correct.

Only way this could work is like a simple lending from your parents from the proceeds of the HELOC i.e the rightful owners apply and get approved for the HELOC, and they drawdown from it by writing you a check..period!. Your credit eligibility does not come into play here.

@Ndy Onyido is correct...your parents could either:
1. Become part owners of your company by putting the money in the company as contributed capital, or
2. They could simply put the money in as a loan to the company with a market interest rate that you paid back to them. Assuming this loan would put them in a first lien position on the property your working on,
3. A personal loan to you, again with them in first lien position....
I mention making sure that your parents are in the first lien position assuming they are putting in the bulk of the funds for this property and also assuming you haven't already gotten a loan on the property (which of course would mean the bank is already the first lien). But as a person with experience in high dollar family real estate & business deals they can get ugly fast. It's best to make sure that your parents feel that you are putting them in the best place to recover their money should things go sideways. Too often family borrowers tend to feel like they can just walk if a deal goes bad! Not saying you feel that way but you have to go above & beyond even what you would with a bank!

@Scott Weaner , @Ndy Onyido , & @Jason Moore , I really appreciate the help guys. What I've determined so far is for all intensive purposes my parents would simply be giving us a loan as if they had it in cash. I find the deal and they would just write me a check. We would have predefined terms written up from my attorney that would go over the use of those funds as well as a repayment schedule. 

Right now here is how I'm planning on positioning the agreement: 

HELOC Withdraw Terms:

All requests for withdraw will be preceded with written proposal describing the home and planned conversion of the property. This will include the address, current value, estimated repairs and ARV. In addition to a estimated project timeline. (We'll be using the BP calculators to present this information quickly)

All loans will be assumed for 1 Year at 5%APR; If the loan is pre-paid the 5% will still be due.

In the event the loan extends past 1 year. My wife and I will personally guarantee the loans repayment. Which will be paid at a rate of (the loan amount / months until the HELOC expires).

All interest payments incurred from the HELOC by the my parents will be paid by my company.

In Exchange for allowing us access to these funds:

My wife and I will continue to rent out the home and cover all utilities and the mortgage. 

My company will pay for all maintenance and capex costs that are incurred by the home. 

So the way it shakes out in my head:

Parents Win:

Get 5% of every dollar my company takes out.
Continue to gain equity in the home and have all the bills paid.
No longer have to come out of pocket for all of the maintenance costs as home owners.
Money is guaranteed. 

Company Win: 

We gain access to ~$250,000 as a private capital investment. 

Any feedback on additional terms that should be added would be great! This list came from my wife and I collaborating last night so I'm sure there may have been things we hadn't considered. 

Originally posted by @Sam Valme :

@Scott Weaner , @Ndy Onyido , & @Jason Moore , I really appreciate the help guys. What I've determined so far is for all intensive purposes my parents would simply be giving us a loan as if they had it in cash. I find the deal and they would just write me a check. We would have predefined terms written up from my attorney that would go over the use of those funds as well as a repayment schedule. 

Right now here is how I'm planning on positioning the agreement: 

HELOC Withdraw Terms:

All requests for withdraw will be preceded with written proposal describing the home and planned conversion of the property. This will include the address, current value, estimated repairs and ARV. In addition to a estimated project timeline. (We'll be using the BP calculators to present this information quickly)

All loans will be assumed for 1 Year at 5%APR; If the loan is pre-paid the 5% will still be due.

In the event the loan extends past 1 year. My wife and I will personally guarantee the loans repayment. Which will be paid at a rate of (the loan amount / months until the HELOC expires).

All interest payments incurred from the HELOC by the my parents will be paid by my company.

In Exchange for allowing us access to these funds:

My wife and I will continue to rent out the home and cover all utilities and the mortgage. 

My company will pay for all maintenance and capex costs that are incurred by the home. 

So the way it shakes out in my head:

Parents Win:

Get 5% of every dollar my company takes out.
Continue to gain equity in the home and have all the bills paid.
No longer have to come out of pocket for all of the maintenance costs as home owners.
Money is guaranteed. 

Company Win: 

We gain access to ~$250,000 as a private capital investment. 

Any feedback on additional terms that should be added would be great! This list came from my wife and I collaborating last night so I'm sure there may have been things we hadn't considered. 

 Sam,

You're doing some great planning here. Don't forget about the tax end of this by consulting your CPA. :)

heloc typically has a yearly renewal ($75?) and shop around cuz some go 80% and others up to 90% LTV. You can write checks, take out cash, and even offer a debit account.

pretty much just like having a checking account. the interest rates are crazy cheap right now.

Thanks @Daria B.  , This is definitely going to help jumpstart my business if all goes well! I'm definitely going to have my Accountant involved as we're working on the details. 

Thats good to know @Scott W. . I'm going to be sure to include any costs that may be incurred as part of my expenses. 

Originally posted by @Sam Valme :

Thanks @Daria B. , This is definitely going to help jumpstart my business if all goes well! I'm definitely going to have my Accountant involved as we're working on the details. 

Thats good to know @Scott W. . I'm going to be sure to include any costs that may be incurred as part of my expenses. 

I found some that had an annual fee and choose one that all I have to do is do a draw to satisfy the annual fee. Now of course I don't want to waste my draws BUT I'm looking at actively using the HELOC so that should take care of not having to pay the annual fee. Initially though, I chose this lender because when I asked about an annual fee I was told there was none. They still had the best deal regardless of annual fee so at the signing when I found out there was a fee (YES not a happy camper) I just knew I had to do a draw to satisfy it. They have a minimum 2 year open on the account. Otherwise, if I close it before the 2 years and one day then I have to pay the closing costs that amounted to $1,100 +/-.

Originally posted by @Sam Valme :

@Scott Weaner , @Ndy Onyido , & @Jason Moore , I really appreciate the help guys. What I've determined so far is for all intensive purposes my parents would simply be giving us a loan as if they had it in cash. I find the deal and they would just write me a check. We would have predefined terms written up from my attorney that would go over the use of those funds as well as a repayment schedule. 

Right now here is how I'm planning on positioning the agreement: 

HELOC Withdraw Terms:

All requests for withdraw will be preceded with written proposal describing the home and planned conversion of the property. This will include the address, current value, estimated repairs and ARV. In addition to a estimated project timeline. (We'll be using the BP calculators to present this information quickly)

All loans will be assumed for 1 Year at 5%APR; If the loan is pre-paid the 5% will still be due.

In the event the loan extends past 1 year. My wife and I will personally guarantee the loans repayment. Which will be paid at a rate of (the loan amount / months until the HELOC expires).

All interest payments incurred from the HELOC by the my parents will be paid by my company.

In Exchange for allowing us access to these funds:

My wife and I will continue to rent out the home and cover all utilities and the mortgage. 

My company will pay for all maintenance and capex costs that are incurred by the home. 

So the way it shakes out in my head:

Parents Win:

Get 5% of every dollar my company takes out.
Continue to gain equity in the home and have all the bills paid.
No longer have to come out of pocket for all of the maintenance costs as home owners.
Money is guaranteed. 

Company Win: 

We gain access to ~$250,000 as a private capital investment. 

Any feedback on additional terms that should be added would be great! This list came from my wife and I collaborating last night so I'm sure there may have been things we hadn't considered. 

Sorry to play the Devil's Advocate here a little bit. Everything sounds great on paper but it all hinges on you making money on your deals. Make no mistake, if your parents default on the HELOC they will lose their home. As @Jason Moore alluded to, things can get ugly fast in these types of situations. As he said, I think you need to be careful how you structure this to make sure they are protected as much as possible. If you do that, I think you should be fine. You are fortunate to be in the situation where your parents have so much equity available and you are smart for leveraging that position. Kudos for that!

The way I see it some changes you could make to the agreement would be:

Don't set the rate at 5%, but rather the adjustable HELOC rate +2% for example. You could be generous and give them 5% during their introductory rate period as a little bonus for setting this up for you. I recently applied for a intro rate of 1.2% but it only lasts 6-months. After that it would go back to (prime+x)%. I say this because 5% could very well have them losing money on every dollar they loan you a year or two down the road.

Sorry, I missed the part where you said you would be paying the interest on every statement they ever get. In that case your terms are more than generous. They really do make the full 5% even if you don't use the money for a full year, yet, you still have the incentive to repay the loan early.

Also, what "maintenance costs" you will be covering need to be carefully defined.

What happens if the loan extends past 1-year? Is the 5% still due? That could be hard to pay in the middle of a project that goes longer than expected. You do realize that 5% of $200,000 is $10,000 right?

My advice? Make money on your first deal and get it done quick! (easier said than done) That way you can have more cash going in to the next deal and/or get better terms on your next loan. This loan sounds expensive! Basically, if I read this right, you add +5% on top of any money you take. If you get the first deal done in the HELOC intro period, you will be much better off. Future deals you would be paying upwards of 9-10% or more on your money.

Excellent to know @Daria B. , I actually have a meeting set tomorrow with M&T Bank's mortgage department.The primary agenda of the visit was information on refinancing but I'll be sure to get some details from their side as well on HELOCs. 

@Tim Carter , playing devils advocate is my favorite game :) . Thanks for those points! Because I've been managing the property for awhile, we have a good bead on maintenance descriptions and costs. But I'll make a note to get this outlined in our agreement.  

I am aware that 5% of 200,000 is 10,000. However target purchase price will be sub 100k. We'll have 20k in cash reserves when this boat sets sale so we do have a bit of cushion. Also, I've been made aware of the risks of losing the house. I live in said house currently so trust me, there is definitely a HUGE incentive to get this done right. 

The strategy we are building is to do exactly as you mentioned. Take our time, do one, do it right.  Focus on the responsiveness of our vendors and contacts. Realign resources if necessary. Then analyze potential areas of improvement after the dust clears. Reset. Do it again. Then build some trending data. My realistic goal for 2016 is to do one with a 10k profit on our end. But if we break even, we'll still consider that a success.