How to Work with Lenders for the BRRRR Method (+ a Massive Open Secret to BRRRR Success!)

by | BiggerPockets.com

Consider this: You’re looking for a lender to do a BRRRR in your chosen market, and you find someone through the traditional way—referrals. But we have all gotten referrals by friends and family that turned out to be lousy. Why? Because most people like to help, so when you ask for a referral, your friend or family member wants to give you a name. They don’t know if the lender is competent, if they will be happy to work with an investor, if you have aligned goals, or if the lender is even good at their job! It’s a crapshoot—and a terrible way to build a team.

That method doesn’t even really require the internet. If you can do it without using technology, then there is a better way to do it! I wonder what the chances are that there is a lender in the BiggerPockets community who knows how to do a BRRRR, works with investors, and lives in your area. The chances are HIGH! Also, finding people on BiggerPockets gives you advantages because you’ll know that both parties at least have an understanding of our culture here. The lender will know common themes about how investors on BiggerPockets talk and interact, as well as what common strategies they like to use. The “hive mind” on BiggerPockets can be a valuable tool in that it gives people aligned goals and common interests. This provides a huge head start when finding a lender; otherwise, you’re just some rando emailing some rando lender. You have to potentially build the entire shared base of knowledge from the start.

Use the BiggerPockets search function to find lenders active on the site in your area or at least to seek out people who have done multiple BRRRRs in your area so you can learn what lenders they use. Maybe this isn’t possible if you live in some remote suburb (or maybe out of the country), but for the vast majority of people on this site, this is possible, available, and seemingly underused. If you think about it, that’s crazy since connecting people is why this site exists. USE IT! In case I sound like a shill: BiggerPockets does not pay me to say this—I doubt they even read my articles actually [untrue, we read each and every word!—Editor]—so I write this without bias. It’s just good advice.

Don’t Use a Bank—Use a Broker From the Start

Do you want to buy four houses and then stop? If not, don’t go to a bank. Fannie/Freddie guidelines say that you can only have four loans per bank, so when you use a bank and then get four loans, you’re done. You now have to go find a new bank and build a new relationship from the ground up, which, after doing four loans with someone, is an expensive relationship to have to give up! Instead, set your long-term lending strategy up for success from the start and get a broker who can work with multiple banks. This at least gets you to 10 loans, and by then, you’ll have a lot more resources with which to deploy creative workarounds. The person at the big bank is really just a broker too, and they only sell loans from the host bank. Getting a broker opens your options up to lots of banks all at once—big advantage. Trust me on this one. I’m a banker by day, and we are the worst! 

Related: How to Take the BRRRR Strategy to the Next Level with a 198-Unit Apartment Building

Also, as I said earlier, make sure this broker knows how to do a BRRRR, make sure they work with investors, and ideally make sure they are on BiggerPockets or closely connected to someone who is. You want to get a lender who is in it for the long haul so you can grow together; you don’t want someone transactional. You need a person with direct experience doing what you’re trying to do, because while learning together is fun, what you really need is experience and someone who can propel you further.

Use the Delayed Finance Program

The BRRRR method is good, but using delayed financing along with it is better—far better. I’ve been reading the forums for years regarding this topic and the vast majority of people not only don’t know about this solution, but they miss an important massive open secret to BRRRR success. The delayed finance exception allows you to skip that pesky six-month minimum seasoning requirement. What you give up for this is the ability pull created equity out. It limits you to only finance what’s on the HUD (or 75%, whichever is lower), which is usually what you pay for the house, so most people assume you can only get back the capital for the house purchase, not the rehab.

This is not correct, and it’s a huge mistake.

When you buy the house, you can put the rehab, your insurance, and any other hard costs like this on the HUD. Then, when you refi, you can get the entirety of your capital out, and you can do this lightning fast. My last BRRRR took less than nine weeks from the time I closed on the house until the time I had 100 percent of my funds returned. The reason this is really valuable is that if you have a house that you buy for an all-in price of 75% of the ARV, you wouldn’t get any additional capital out anyway, so if you use this, you’ll have saved four months and sacrificed nothing. In fact, it’s actually longer than that because in most real world scenarios, you won’t even start the loan process until that six months is up, so add another month—now we are saving five months!

How did I learn this apparently secret and relatively unknown magic trick? My lender taught me. This is why finding the right broker is so important—they will teach you the nuance of debt strategy that you don’t know. If you get a lender who doesn’t know this stuff, it’s the blind leading the blind.

You don’t have to use delayed finance, but it allows you to get lightening quick turnarounds (my last was less than 9 weeks!), and you at least want the option to do this at some point. If you find a broker who doesn’t know how to accomplish this, you may be stuck without the possibility. Do not settle for a pigeonholed strategy. Find the lender with competence to help you grow in every way.

Get the Lender Involved Way in Advance

When we are new investors, there is a common tendency for us not to bother vendors until we are “ready.” We don’t want to waste anyone’s time, right? No one wants to call a contractor, real estate agent, lender, etc. six months before they are ready to buy something. I’m certainly guilty of this myself, but the mistake was bigger than I had originally realized.

Say you buy a BRRRR, and when the house is ready to refinance, the bank says you can’t for whatever reason. Well, now you’re on the reactive rather than the proactive, so you decide for the next deal that as soon as you get your offer accepted, you’ll talk to a lender. Let’s say he says all should be good. When the time comes, though, unless he did a full underwrite, he may notice something that will delay or hinder the refi. This isn’t speculative—this happens to investors all the time. Instead of waiting until last minute, I recommend going way early instead. In fact, just start now. The longer you have the relationship built, the more productive it’ll be. Plus, you never know what relationship will take you from learning to doing!

Related: Case Study: How I Made $40,000 on My Recent BRRRR Real Estate Investment

These days, when I file my tax returns, I call my lender and ask him to look them after the CPA gives them to me but before I sign them. I do this so my lender can see if my financial situation will allow me to implement the debt strategy I had envisioned for the year. A great lender is not a transactional part of the puzzle; they are your teammate. Get these people invested early and often into your success.

The importance of this—and everything I write about regarding building relationships—cannot be understated nor repeated enough. Find a lender that you can strategize with and make friends with, who has goals aligned with yours, and whom you can work with long-term. This will not happen with a few quick emails when you need to fund a deal in a hurry. If you want to buy a house any time in the next 12 months, I highly recommend searching for lenders who can help now.

Investors: Any questions when it comes to lenders and using the BRRRR strategy? How have you found success?

Weigh in below!

About Author

Alexander Felice

Alex is a long distance single-family real estate investor and a full-time underwriter at a commercial bank. After a few years of success in real estate, he felt compelled to teach people real estate is more profitable than they might think and far less risky than they assume. Alex is the author of brokeisachoice.com

38 Comments

  1. Stephen Stokes

    Maybe works in your market but getting 100% of the upfront capital back on any deal in my market is not likely possible. I recently completed BRRRR on a duplex and cannot recoup any of the upfront capital but did see a nice return on the rehab forced appreciation and rents are way over what the appraiser suggested.

    What is key to the strategy is getting an appraisal to come in high enough to pull capital and even though we know the value of the property in my example here is much higher, the appraisals lean on the conservative side due to past downturn issues where appraisers were partially at fault. Competition in my market is high.

    • Alexander Felice

      it’s not 100% of capital, it’s 75% LTV, very different. I just make sure to buy low enough that I can bring my total cost in at 75% so my capital outlay matches the funding guideline.
      Sure it doesn’t work in EVERY market, but nothing works in every market. This one works in a lot of markets though!

      As for appraisals, this is tricky for me as well. You’re right that appraisers want to be conservative, that just means I have to be very careful when I do the purchase.

      remember in real estate you don’t make money when you sell, YOU MAKE MONEY WHEN YOU BUY!

  2. stephanie cabral

    Hi Alex, great article! I am very interested to learn more about this and had a few questions, maybe others will benefit from the questions as well:

    1. The delayed financing strategy requires the original purchase to be in cash (or some unrecorded vehicle, like a line of credit), correct? Specifically, would this work if I purchased the property using hard money and recorded the mortgage?

    2. Second, this strategy only works if you put the renovations on the HUD, correct?

    3. Can you recover the closing costs from both the original purchase and the refinance?

    4. Lastly, the 75% that you refer to is 75% of the ARV, correct? So even though they’re limiting you to 100% of costs, the appraisal is still important to make sure the loan isn’t exceeding 75% of the ARV, correct?

    • Alexander Felice

      Stephanie happy to help

      1. the original source doesn’t have to be CASH, but it has to be YOUR funds. Meaning you can use a HELOC or LOC, maybe borrow from an IRA or 401L. What it cannot be though is a loan from someone else. There are ways around this, but none legal enough for me to disclose here 😉

      2. this strategy works BEST when you put the rehab on the HUD. If you don’t use this tactic you’ll be left refinancing out only the purchase price and leaving a whole lot of money in the unit. Not ideal.

      3. closing costs must be paid by you. Sorry to deliver this bad news. HOWEVER, what I do is get my broker to trade points for rate. Meaning, my costs to close is very low and I pay a higher rate in exchange. While no one wants to pay higher rates, if I take a .75% higher rate I pay nothing out of pocket. Well that rate increase is only like $20/month on a $60K loan (estimates). So depending on the loan size this may be an option to get more of your capital back out

      4. yes yes yes. the DF rule is 75% LTV of appraisal, OR 100% of HUD, whichever is LOWER. appraisal is always important when dealing with banks. if the appraisal comes in too low, you’re left stuck with money in the deal.

      estimating ARV and buying low are still CRITICAL in this method, as with any real estate purchase

    • Alexander Felice

      glad to hear it DJ!

      you know this article has driven a lot of people to reach out to me. Instead of searching BP it seems they all prefer to ask me if I know people all over the country LOL Please let me know if your search is fruitful.

      good luck dude!

    • Alexander Felice

      yes. It’s as simple as it sounds. make sure you have this strategy worked out with your lender FIRST so the HUD you give him lines up with loan requirements. Other than that, it’s as simple as just asking, and they will do it because why would they care? 😉

        • Chris Nelson

          So by asking your title company to please include your “rehab and repairs” number, on Line #1303 of your HUD, you’re saying that the $10,000 will then be paid out directly by the title company to your rehab contractor (Season to Season Home Care LLC, in this case), correct? And then if the rehab turns out to be less than the $10K, you just get that reimbursed from the contractor back to you? This is pretty slick.

  3. Jesseme McVey

    This post could not have come at a greater time. I’m currently getting ready to close on a quick fix and flip property (cash). However, I always have a backup exit strategy which in this case is refinancing if the property doesn’t sell. 6 months to refinance was not ideal but now I know this exists…..priceless!

  4. John Murray

    Great article! I have 9 rentals and have done BRRRR on 6 of the 9. Made just north of about $500K on the 6. The trick is to purchase at a 20-30% discount in a booming market. Right now I’m selling off my inventory 1 at a time. The train left for purchase about 2 years ago. I will BRRRR the remaining 3 and sell off 1 at time to avoid capital gains and keep recapture to a minimum (thanks GW Bush!). BRRRR is one of the great ways to invest, the caveat is it’s a lot of work. You must do this in a booming market and have about $500K in seed money and you are on your way providing you have the proper skill sets.

  5. Ben Naughton

    Maybe Im missing something here, but the lenders I’ve talked to have said for Delayed Financing I can get 75% of either the ARV or the sales price (whats on the HUD plus rehab, etc), whichever is lower…. That still only leaves me with 75% of my investment recouped. Is this article saying I can get 100% financing for whats stated on the HUD (including rehab if I put in on there).

    • Alexander Felice

      I am saying you can get 100% of your funds, including rehab, out of the refi

      you need your all-in costs to total 75% of the ARV.
      then you finance 75% ARV and 100% of your total costs.

      I am not saying or claiming there is 100% LTV loans or lenders, but it is possible to finance 100% of your capital out. The key here is to buy distressed and CREATE some value, if you rehab a house and your total all-in cost is equal to ARV, you’ve grossly overpaid.

      buy cheap!

  6. David Jason

    Wish I had this 6 months ago. My broker is not a REI so the knowledge is not strategic, but he knows the requirements. Called him last week to ReFi at 75% ARV to cash out the investment, looks like I’ll be leaving lots of cash in unless I execute a 2nd HELOC draw and wait a year to consolidate.

    One question, how does High Balance of Jumbo guidelines play into this?

    Thanks for the learning.

  7. Igor Zabrodin

    Hi Alex, thanks for writing about this topic and for providing a very useful example.

    I feel like in your example ($50K purchase price and $11K of rehab costs and soft costs), having the $11K figure as settlement charges isn’t really “fishy” or unreasonable for anyone to balk at. In contrast, the last 2 BRRRs that we did in our area cost us about $120K purchase price and around $50K-$60K for rehab costs and soft costs combined. Do you think having $50K/$60K as “settlement charges” would be a bit fishy? We happened to be all in between 55% and 75% of the ARV in these 2 cases. Do you suppose we would have been able to follow your model with these numbers? Thanks!

    • Alexander Felice

      I used this example because I had just signed the HUD the day I was doing this article. The amount is irrelevant. I have done it with 30-40K as well. It’s not ‘fishy’ at all anyway, it’s not against any rules and it’s not even frowned upon. The title company doesn’t care what you pay, the seller doesn’t care if you add costs either, who cares? the bank doesn’t care either, and fannie/Freddie is who designed the program.

      It says ‘settlement charges’ but it also lists the vendor underneath and anyone can see it’s for rehab. If you’re not doing anything illegal or with ill-intent, then you have nothing to worry about.

      As for LTV, if your all-in costs come in far below 75% then using delayed finance may not be ideal. For instance if your all in is 55% and you use delayed finance you’re going to leave 20% of capital in the deal (75% or 100% of hud whichever is LOWER). so in those circumstances it may be better to wait the 6 months. Just depends on how much cash it is for you.

      • lee liberman

        I just wanted to clarify where the money goes related to the rehab at settlement. Say you purchase a house for 50k and put 60k into it. You are listing the 60k on the hud1 to go to contractor. Does the contractor get that as one lump sum or does the title company issue that money out from escrow as you say to release it (likely per draw schedule of rehab agreement with contractor). I want to make sure the contractor still follows a draw schedule in using this method. Any idea if the title company charges a fee for each draw? Thanks.

        • Alexander Felice

          I always do it as one lump sum these days, but any title company should be able to set up disbursements quite easily. I was never charged extra.

          I do not believe they will be able to build in abstract construction goals as disbursement events though. Likely you’ll just have to include a schedule. That said, everything is about people and relationships, if you need that solution, someone at title will help you build it, just make friends 😉

  8. Keong Kam

    Great article! And a quick question:
    What happens if you
    1. change contractor for some reason? HUD1 says $xxxxx to vendor 1. And I end up going with Vendor 2.
    2. if you end up spending less than what’s oh HUD1? Do you have to modify HUD1?

    • Alexander Felice

      great questions.

      Once the HUD is signed, the contractor should go to work the next day. I would be confident with who I wanted to hire before I closed. Don’t buy a house THEN figure out how to rehab it, that opens the door for a lot of problems and a big waste of time.

      You have to spend what’s on the HUD, if your contractor gives you a refund after the fact, that’s really not how it’s supposed to work as it could be considered fraudulent, but it’s unlikely anyone would care.

      Once the HUD is signed and recorded, there is no modification possible.

  9. Ray Thorsen

    This is a great article I am going to try this with my next purchase if it gets accepted. A couple more questions. Before reading this and knowing a little about it I was going to offer say 20k more and ask a credit of 20k. But your method seems like it would be separate from the purchase price. This may be cleaner for the seller since they would be not involved. Also If I did some of the work myself could I take the withdrawal from escrow or does it have to all be to third party contractors?

    • James Roberts

      I’d also like to know if the rehab cost can be paid to yourself and put on the HUD for documentation purposes for the delayed financing.
      I spoke to a few lenders recently who claim to be familiar with delayed financing and they told me the rehab costs would not qualify even if it was on the HUD. The Fannie Mae website states “The new loan amount can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan…” I guess what falls under “initial investment” is up for interpretation.

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