Brrrr method questions

[Shawn Byrd]

So an army buddy of mine and myself are looking to break into the brrrr method within the next year but I have a few questions I cannot seem to find on the answers to on the forums. I plan on trying to buy a house below market value at auction. I understand some risks are involved and as far as I can tell, as long as i buy below market value, check for liens that could transfer to my name via a title search and estimate a modest ARV and rehab costs, i should be able to lower the risk a bit. Is buying a house at auction a stupid idea for a brrrr method? I figure getting a house well below market value would give you a bigger chunk of change during the cash out refi? Also, is it possible to get financed on an auction deal through a bank? Do you just get pre qualified and bring a 20% down payment? During see research on the forums, I see people who have trouble actually doing the cash out refi because banks just won't do it. Why won't the banks refi people's houses that have the equity in them? I also heard that banks will only let you have up to 4 mortgages in your name before the kinda cut you off, however you can use a portfolio lender to cash out refi, what is the REAL difference between them and a bank. From my research it seems you get kinda screwed when using a portfolio lender because they want you to get a 15 year loan or a 7 year ARM. Is this true? Basically how do you positively break past the 4 houses mark without getting a horrible finance deal. I'm trying to stay away from hard money or private lenders because I'm not entirely sure how those deals are structured. Sorry for such a long post, just trying to smarten up so I don't ruin the first buy.

[Andrew Postell]

@Shawn Byrd lots of good questions here. I'll address them one at a time. My first question, are you or your buddy still in the military? The reason why I ask is that could you qualify for BAH? And if so, how about buyng a duplex with your VA loan, living in it, and renting out the other side? That way, you get into a home at 0% down, you live for free from your BAH, and you make money from the other unit. Just an idea. Now for answer:

• Is buying a house at auction a stupid idea for a BRRR method?  - Not at all!  But you will not be able to use a conventional loan for this type of buying.  Auctions work on cash only.  You will owe the full amount due within a few hours...maybe 2 days...at an auction. It would also be likely that you cannot check title when you are at auction...so most hard money lenders would be out too.
• I figure getting a house well below market value would give you a bigger chunk of change during the cash out refi? - The whole idea is to buy a house below market value.  If you buy a home AT market value...you actually pay MORE than market value for the property due to closing costs.  You MUST buy below market value.  Which normally means you buy homes in distressed condition to get the value.  But the 2nd part of your question addressed cash out.  It will also not be likely to get cash out of a property either.  The cash out rules to investment property lending are that if you buy with a loan, then you cannot get cash out for 6 months.  So if you do purchase with a loan, you'll have to wait 6 months with a conventional loan (Fannie/Freddie).  
• Why won't the banks refi people's houses that have the equity in them? - I somewhat answered this above. 2 main loan types for receiving cash out. "Conventional" and "Portfolio". Conventional loans are not governed by the bank...so it's not up to them on that rule. Portfolio loans ARE governed by the bank...it's their own portfolio of money. So those could go higher than the 75% or sooner than 6 months. But each bank will have different rules. So you would literally have to call every bank to learn about their specific rules to lending on cash out loans. MOST will not go above 80%-85% of the ARV for the property. But ALL portfolio loans will have terms not as favorable as conventional loans. Meaning, the rate might be higher, or it might be adjustable, or the term might be shorter...or all 3!
• OVERLAYS - Something else to know about here:  Bank "Overlays".  Overlays are the rules that banks put on top of Fannie/Freddie loans.  It sounds weird but banks will put even more rules on top of a conventional loan to limit their risk.  It can be anything from needing a higher credit score to not using rental income.  Or limiting the number of loans to 4.  That is an overlay.  So seek out a bank that has no overlays...or very few at least...and you will be finding the most flexible lender you can find.  Usually a small to mid-sized bank is best. 

I know that was a lot of information, feel free to ask more questions if you need.  Thanks!