Using home equity as down payment
Investor · Omaha NE · Member since 2021 · 14 posts · 4 votes
Please read this plan of attack, which my loan agent wrote for my private lender and me.
(Private Lender)- Purchases home at $100k
Renovates the home for $20k
ARV: 160k
I will buy the house from him @125k.
He will gift me the $35k difference, which I will use as equity for a downpayment.
I'm confused about using the equity he gifts us as a downpayment to purchase this home. Would that mean we would refinance ourselves, taking $35k cash out of our home from HELOC or a Loan, then using the actual cash for the downpayment and have a separate loan for the full payment of the house? I see that our total loan would be 160k which could be considered refinance in a BRRRR, and I mean, the numbers work great with our plans. But how does someone use equity to buy a home???
Please read this plan of attack, which my loan agent wrote for my private lender and me.
(Private Lender)- Purchases home at $100k
Renovates the home for $20k
ARV: 160k
I will buy the house from him @125k.
He will gift me the $35k difference, which I will use as equity for a downpayment.
I'm confused about using the equity he gifts us as a downpayment to purchase this home. Would that mean we would refinance ourselves, taking $35k cash out of our home from HELOC or a Loan, then using the actual cash for the downpayment and have a separate loan for the full payment of the house? I see that our total loan would be 160k which could be considered refinance in a BRRRR, and I mean, the numbers work great with our plans. But how does someone use equity to buy a home???
I've been doing creative financing for over 25 years and I can't sort this one out. A lot of it doesn't make any sense as you've written it out. You may misunderstand how the transaction is designed. I never sign unless I know how everything works and I agree to the terms.
He appears to be putting $120k into the deal and taking serious risk to sell to you for $125k. Nobody who understands real estate will do that unless it is for their parents.
But, let's assume he actually means to do the following:
He will buy the house and rehab it, you will buy the house from him using a loan. He will get the difference between your loan amount and what you "buy" the house for. So, the numbers go like this:
He buys the property for $100k and puts $20k into rehab. He then sells to you for $160K and you get a loan for $1650. After the dust settle you "gift" him $35k. That's the $35 difference between your loan amount and what he has into the property. So, at closing he gets his $120k back that he used to buy and rehab the house plus after that you "gift" him $35k for his troubles. You have a house and a mortgage for $160k, he has made $35k. It's "as though" you bought it for $125K.
Several questions:
1. How does he know the home will take only $20k to renovate? Who covers the holding and closing costs?
2. How does he know you will qualify for the new loan?
3. If it is an FHA or VA loan it may not work unless done properly and legally. For FHA they will require you to put 3.5% down of the sale price. So on $160k it's about $5,600 that needs to be in your account for about 60 days prior to closing. You can receive the $5,600 as a gift from a family member but it has to be a gift not a loan.
4. How does he know the appraiser will appraise it for $160k? What happens if the appraisal comes in lower or higher?
5. Be very careful on the loan application, if done improperly it could be construed as loan fraud and wire fraud and tax fraud. Very serious issues. Never lie on the application. If it can't be done legally and ethically then it isn't worth doing.
6. It isn't at all clear why he would prefer this approach. The only thing I can see is an attempt to avoid capital gains on the $35k (by gifting instead of as profit) which is roughly about $4k tax depending on his tax bracket. But he may be over looking that and not know. There may be something else that he wants to accomplish that is perfectly legit, I just don't know.
7. Sometimes banks require "seasoning" of 6 months or longer before they will do a loan on a cash purchase. Check with your lender.
Just a few thoughts.
Thanks for that info, and yes, these are questions we have been analyzing and are still through the investment. I guess I should also mention the private lender I am using is my fiance's dad, and he is not asking for a fee for his investment, he really just wants to get us into a place we can build wealth off of.
IT sounds like you are making this WAY too complicated when it does not have to be. Have him lend you the money on a year term. YOU do the rehab. Now YOU have a property that is worth 35k more than you owe your future father in law. Sell the house and you have some cash in your hand.
Go out and do it again. Maybe this time, you are now able to get a loan on your own and can refinance him out of the loan. Now you have your own home with equity AND you have 35k to pay off bills.
@Rick Pozos Thanks for your input, but that’s a flip and I want to own and rent this house.
I agree it is more complicated, but I think the outcome is the same if he were to lend me the money and I do a traditional BRRRR.
I’m not sure why our loan agent suggested this way but he explained to us he’s done this type of transaction multiple times. I’m going to meet with him Monday to further discuss.