First out of state BRRRR & refi with Delayed Financ

First out of state BRRRR & refi with Delayed Financ

San Diego · Member since 2018 · 44 posts · 22 votes

Hello BP fam,

Thought it about time to write up my first investment purchase (BRRRR deal out of state).

Refinanced my $ back out in just under 6 months using Delayed Financing, my rehab $ too.

In short, did exactly what Alexander Felice outlined on his BP podcast (#301), as well as from his posts at brokeisachoice
Many thanks man!!! Hope it can help others. Will try and make it short and sweet and go from start to finish.

Deal

Deal came from a wholesaler in Indianapolis. I'm from Indy but live in San Diego.  

Photos gave impression of basic cosmetic rehab. I purchased site unseen as photos were pretty good and I was tired of loosing out to other buyers or a highest and best situation. I locked up the purchase agreement within a few hours after estimating Rehab and ARV as best I could.

  • Asking/Paid: $41,900
  • Rehab: ~$15,000
  • Closing fees: $1,846.57
  • All In as listed on Settlement Statement: $58,746.57 (sum of all above, more on this below)
  • Holding Costs: ~$470/month (HELCO payment ~$330/mo, Taxes/Insurance: $140/mo. Not included in below to make explanation easier)
  • ARV (appraised): $83,000
  • Rent (actual): $900/mo

Purchase

Purchase and Rehab funds all came from a HELOC on my condo in San Diego.

A month or so before I pulled the trigger I did 2 things.

  • 1: Found a bank that could do Delayed Financing with me living out of state.
  • 2: Called 2 title companies in Indy (ones that my wholesaler used) and asked if they could add funds, in addition to the purchase amount, to the Settlement Statement or HUD-1 form and hold them in escrow for me. In this case, $15,000 for the estimated Rehab. Both titles companies said no issue, though cost me $300 to do so.

I wired $42k (purchase amount) and the additional $15k (estimated rehab costs) to title company. At closing the wholesaler was paid from title company and I had my $15k in escrow that I could draw upon when I needed. Again…all I did was follow @Alexander Felice's steps he laid out in podcast and site.

Inspection was ordered the day of closing and showed some other basic problem areas that were easily fixed (various outlets not working, no fan/vent in bathroom), but nothing major. I was fortunate with the inspection.

Rehab:

I guessed.

I arrived at the rehab amount in a very quick and rough way. Estimated avg cost per sq/ft for flooring, paint and the basic dollar about for general fixes I could see via the photos. Came to a confident amount of about $15k.   

I was, and still am, plagued with "paralysis analysis", so if I was high or low on rehab amount by a few thousand I was OK with that.  Knowing and acknowledging this mental barrier helped.  If rehab cost $20k instead of $15k would I still move forward?...yes was the answer, so I did.

I got bids from contractors for the majority of updates myself as they were basic and didn't need a GC. Replace carpet for vinyl plank, add gutters, moisture barrier in crawl space etc...   Purchased the vinyl plank myself online (Home Depot sale) from San Diego and had the flooring contractor pick up the pallets in Indy.  Just put order under his name.  Easy. 

I paid for materials and the contractors with my credit card after each individual item was completed.  Then I called the title company and asked for a draw from my $15,000 held in escrow.  They mailed me a physical check and I used that $ to pay myself back/pay off credit card. Got credit card reward points as well.  First 3 draws were free if I recall correctly.  Easy.

The property manager I hired finished the rest of the work (painting walls, hanging & replacing doors, porch fixes) to get the unit rent ready. Paid them using same method above.  

This took little longer than 2 months. PM got it rented at the 3 month mark for $900/month. Probably a bit long on my end, but it was my first go.

Refinance….Delayed Financing

Conventional refi of a SFR is 75% of ARV after 6 months of seasoning.

I was at month 3 and wanted my cash back.

To refinance earlier than 6 months you have to use a “Delayed Financing exemption”.

Delayed financing lets you refinance a property for Up To 75% of the ARV (for a SFR) but not to exceed the purchase price of the home (what was recorded on your HUD or closing statement), excluding any rehab.  You can’t get additional cash back out with this method…only what you paid for it.

Pre apologies if my wording on above is not quuuuite right, but it's what I underwood.  My lender and I were on the same page in either case.

This thread Here and this good write up helped a ton.  Many thanks Robert and Andrew for these explanations. 

Fanny Mae guidelines on Delayed Financing Exemption.

So I paid $41,900 for the property but my additional $15,000 in estimated rehab costs my recorded HUD/closing statement was (closing costs included) $58,746.57 (see photo).

The bank, that I found before I made the move to purchase, approved me for delayed finance exemption and an appraisal was ordered.  It came back at $83,000. Woot!!

Side note...This process was a PAIN! Took 2-3 months and could be a whole other thread. I work at sea and have Sea Pay which is recorded differently on my W2 and varies month to month.  Add a condo rental in Tijuana with leases in Spanish increases the confusing fun. These two things were the cause of the delay. Gotta give the bank credit though, as it did work out in the end.

From a standard BRRRR deal this seems to have checked all the boxers. I was all in (purchase + repairs) for less than 75% of ARV.

75% of $83,000 is $62,500…and I was all in for $58,746.57.

A conventional refi (after 6 months) I should have been able to pull out $62,250 I believe.

With Delayed Financing I could only pull out 75% of the ARV up to my initial purchase price not to exceed 100% of HUD or $58,746.57 in my case.

Insert Alexander Felice's method here.  The Felice method I guess:). 

I was able to successfully refi out $55,030.43...at about 5 months after purchase. 

Eye roll I know, pretty close to 6 months. Guess I didn't have to delay finance after all. My sea pay W2 and Tijuana condo added a huuuuge delay.  Good learning experience any way. The $3,716.14 difference was in closing costs of the new mortgage.  Gotta figure out how to include those in next time! 

Also have to include holding costs during the first 3 month before it was rented (HELOC payments, taxes & insurance): $1410

  • Rent: $900/mo
  • New Mortgage PITI: $452.58
  • Maintenance 10%: $90
  • Management: $50 (actual)
  • Vacancy Loss 10%: $90
  • Cash Flow: $222.58

In the end this worked and got me a decent first rental for about $5k out of pocket.

Now off to get my next 100 if I can kick more paralysis analysis to the curb.

Hope this helps some folk!  

Photos below as well as highlighted Settlement Statement 

Before Before After before basic landscaping After
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Most Popular Reply

Investor · Philadelphia, PA · Member since 2014 · 134 posts · 49 votes
6y

@Keith Shadle Thanks for sharing. What would be the downside of being highly conservative with the rehab estimate for purposes of the escrow? e.g. why not estimate $30-40K? 

Would it somehow get tied up by the title company due to the actual rehab being less?

See this reply in the discussion

31 Replies

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  • Rental Property Investor · Los Angeles, CA · Member since 2018 · 40 posts · 17 votes
    6y
    Originally posted by @Keith Shadle:

    Hi @Jibu V., If I estimated that high I would have had to take that much more out of my HELOC, which I would be paying interest on. I don't want to pay interest on $ I'm not going to use. Though I would be able to get unused or excess funds back from title company with no issue. Did that on my 3rd purchase.

    Having only 15k in there kept me to it too.  I had 20 or 25k, it would have been easy to spend and then my #'s would not have worked out. 

    Thanks for the question!:)

    @kieth, do you view paying the interest on the extra rehab funds you wouldn't be using from your HELOC and/or when you take out the delayed financing?

    Alt Scenario 1:

    Would your outlook change on adding in $20k-$30k in rehab monies (vs. $15k) if it wasn't coming from a HELOC but cash that was just sitting in a bank to allow for any additional rehab funds to be baked into the delayed financing?

    Cons: Delayed financing allows you to take out 75% ARV or HUD, whichever is less so potentially going over budget on rehab wouldn't allow you to take all your money out either way (which still is not the worst and a BRRRR-Hybrid)

    Scenario 2:

    Keep your rehab at $15k and pay cash out of pocket that you indent to keep in the deal knowing your purchase+$15k rehab is close to the 75% ARV and assume any $$$ over your rehab budget you'll be keeping in the deal.

    Hopefully a buyer doesn't need to go over budget and entertain scenario 1 or 2 but just throwing it out there to understand alternatives. Always best to go into a deal knowing your options. thanks!

  • Seattle, WA · Member since 2017 · 19 posts · 14 votes
    6y

    I have the same query as @Matt Silverstone, if it wasn't from a HELOC, is there a reason to not estimate rehab higher than it actually will be?

    Also, @Keith Shadle, you linked the post by Andrew Postell, https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property. He mentioned the strategy where you put a lien on the property from an LLC. Is there a reason you did not go for that route?

    Thanks for the great post!

  • New to Real Estate · Folsom, CA · Member since 2019 · 2 posts · 0 votes
    5y

    Great explanation of the whole BRRRR process using the delayed financing exception method. I found this post very helpful and bookmarked it for future reference. @Keith Shadle, would you mind sharing which title company you were using on this deal?  

  • Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y

    @Keith Shadle, great job, thanks for sharing!

  • San Diego · Member since 2018 · 44 posts · 22 votes
    5y

    Thanks @Dmitriy Fomichenko and @Stephen Pratt! I used Monument Title. They didn't have a issue holding extra $ in escrow on the HUD.

    @Matt Silverstone, @Rand Knutson. Sorry for the long time coming reply! I think I should and would estimate higher rehab budget next time and pay that amount on HUD. Whether it came from my HELOC or cash in an account didn't matter much to me. The rate on my HELOC was pretty good so I was not going to worry about any of those extra payments as I was confident with the rental price to cover it. In any event if I over estimated rehab, paid it on HUD and didn't use it I could request the residual from the title company whenever I wanted.

    I was not aware of Postell's strategy of putting a LLC on property. Will look into it!

    Currently trying to fix up my first off market rental in Indy using hard $ so we'll see how that goes.  Fingers crossed.  

  • New to Real Estate · Folsom, CA · Member since 2019 · 2 posts · 0 votes
    5y

    @Keith Shadle Thanks for the reply and the title company recommendation!   

    "Currently trying to fix up my first off market rental in Indy using hard $ so we'll see how that goes. Fingers crossed."  Good luck on your next deal!  Is that going to be a flip or a buy-and-hold?  I'm guessing that if it's hard money you won't be doing the DFE route since that wouldn't qualify, but just curious as to your strategy.  

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