Real Life BRRR - The facts about delayed financing from a Newbie

[Zach Westerfield]

I hope people find this write up helpful. I tried to be detailed without getting too long winded, but if I missed something don't hesitate to ask. I really wanted to highlight the lessons learned on the BRRR strategy as well as delayed finance, as I find often details are left out when people discuss them.

The final numbers. When it was all said and done, I have a property cash flowing over $300 a month, with $28,000 in equity. I bought the property with only $4,800 out of pocket, and I gained a wealth of knowledge as well. One of my biggest take aways was the value of knowledge, planning, and running the numbers. I was never stressed in this deal because I knew my estimates were conservative, the numbers worked, and I always had a fall back plan (even though it was my first deal). I also identified a niche I plan to pursue: finding off market deals that are not good flip candidates (this particular one was locked up for 90 days due to a previous short sale). In my area there are a lot of flippers, making finding deals competitive. However, using the BRRR strategy on homes that have current tenants or other timeline issues is something I plan to pursue.

My final solution was to reach out to the network, and @Arianne lemire recommended a bank that knew delayed financing. I worked with them and was able to close on the property, three and a half months after the original purchase date. I got a loan for $84,000 (including $4,500 in closing costs), 30 year term at a fixed 4.875%. This meant I had a monthly payment of $444 a month. Another thing to note here is the bank insisted the $70,000 private loan had to be paid directly back to the lender, not to me. This wasn’t a huge deal since I planned on doing it anyway, but it would be annoying if I wanted to continue to use that money. I received $9,500 in cash back.

To make an already long story shorter, the bank backed out of the deal, mostly because they didn’t understand it. The loan officer even came back and said they learned a lot about delayed finances from me and might consider them in the future. This happened 4 months after I entered the original agreement, and 1 month after purchasing the property (by the way, I had been talking with the bank for 4 months as well). Because of the conservative estimates I mentioned early (which I beat) I was in no danger of losing money. My worst case was to wait for 6 months after purchase date and do a traditional refi. However, I was eager to get some capital back to get started on the next deal, and I had promised the private money lender to pay them back within 4 months. Thankfully they were very understanding.

When you purchase a property, and want to refinance into a desirable Fannie Mae loan, there is what is called a 6 month "seasoning period". This means for six months, the amount you can refinance the home for automatically defaults to the purchase price, in my case $79,500. As you may can tell, this is not good for investors hoping to purchase a home, fix it up, and refinance to get their money back out and put it to work again. The way around this is a delayed finance. This is a rule Fannie Mae has that says if the home was purchased all cash, then the refinance can be based off of an actual appraisal. For any new BRRR newbies out there, this is the best way to complete the process faster than twice a year and still get Fannie Mae financing. Easy said, not so easy done. I know a lot of BRRR investors fail to mention the 6 month seasoning period, which was critical for me as I am trying to scale to numerous properties a year. While I though this delayed finance would be this answer, I found that most banks didn't know about it. I quickly learned that what most banks don't know, they don't trust, at least for a newbie. This meant lots of questions, and requests for statements and forms, not just for me but also from my private money lender. It seems you have to be careful when documenting the private money loan and how the money is actually transferred (especially from family members), otherwise the bank may see it as a gift. Another hiccup I ran into was the fact that my final purchase docs identified to the transaction was a lease option, which is another non-starter. A key thing to note about delayed finances is that they will only finance up to the amount of the paid price. So I was not able to pull out more cash than I put in, even though I was approved for up to 80 % LTV. I imagine holding for 6 months and doing a traditional refi would alleviate this.

The real learning curve started when it came to financing. Based on advice of many of the podcasts and blogs I have read, I called 9 different banks to get quotes, almost all of them small local banks. I found this to be sound advice and settled with a local bank. The real problems started when it came to a delayed finance. New investors be warned, most loan officers ARE NOT AWARE of the delayed finance exception. I found myself explaining how it worked on many occasions. This should have been a red flag. The bank assured me everything would go through, until the last moment. Here is the quick summary of a delayed finance for the fellow newbies, experienced investors feel free to correct any errors I make.

After the three month period I purchased the property ($79,500 after final negotiations) and rented it out for $1020 a month. The bank I was working with had the property appraised at $122,000! I was sitting very nice. I had a cash flowing property with a decent amount of equity, and so far I had paid less than $10,000 out of pocket. Now all I needed was the refinance.

My total expenses in the three months of renting and repair were $4,933. This included $410 for a home inspection, $1,494 in interest on the private money loan, $450 in rent, $550 for an appraisal, and $2,029 in repair and appliances. For the appliances, I went to a second hand store and picked up a dishwasher, stove, and refrigerator. After going through two dishwashers, I decided to go to the local hardware store and just get a new one. It seems from now on I will not bother with used dishwashers, they don’t seem to last.

Once I learned the aspects of the deal, I realized it was perfect for my situation. It gave me a three month period to make repairs to the property myself, saving a lot of money on labor while not paying additional holding cost. If I wanted I could have also sublet it out (Because it was my first deal, and the time of the year, I chose not to sublet). I was able to secure a $70,000 private money loan from a family member at 4% APR, interest only. This was a huge help in getting this deal started. My plan was to take advantage of the delayed finance exception and refinance immediately after completing the purchase at the end of the 3 month period. Using conservative numbers, I estimated the property to be worth $100,000, and rent for $850 a month. Using a calculator I developed, I knew the property would cash flow at these numbers. Since I knew they were conservative, I had confidence to progress through this deal that in my opinion was quite complicated for a first timer. In my opinion this was the key to my success.

The deal I agreed to was a lease option contract starting on December 23, 2016. The terms were, a 3 month lease period at $150 a month, with option to purchase at end of period. The agreed purchase price was $80,000. The catch was I had to have a cash down payment of $70,000. I have to admit, at the time I didn’t know a lot about lease options. This was definitely a deal that required a lot of research on my part, and there wasn’t a lot of time to get it done. For the sake of the beginners like me out there, I want to stop and explain this deal before I go further. A lease option means I lease the property for a predetermined period at a predetermined rate. At the end of that period, I have the option to buy the property at the predetermined price, or not buy it, and all I would lose is the paid lease money. In this specific deal, I had to put a down payment of $70,000 at the beginning of the period (which was three months). At the end of the lease, I had the option to back out, and get my $70,000 back, or purchase the property by paying the remaining balance of $10,000K.

The deal was a 3 bedroom, 2 bath single family home in a local town of Crestview, FL. I included Crestview in my scope as it has local military installations as well as cheaper prices. The house was in a solid B neighborhood with a family friendly atmosphere. It was built in 2004 and was in rent ready shape as is. All that was needed was to spruce up the landscape, replace a leaky faucet and garage door opener, clean out the gutters and give the interior a coat of paint. I also put in appliances and gave it a cleaning. My original intention was not to do the work myself, as I am currently also doing a live in flip on another house, but the way this deal worked out it was more advantageous to do everything else myself. While the house would have been a good candidate for a modernizing remodel, the comps in the area and the fact that I wanted to rent it out convinced me that a minimalist approach would be best to achieve the valuation I desired. I will explain more later on, first I want to get to the numbers.

After search several properties and making a few low ball offers, I found my first deal through the hosts of one of the local REI groups here in Ft Walton Beach. I have to shout out to @arianne Lemire and her husband Chris, owners of G&H Houses. They brought me the deal and have been huge sources of information. I cannot thank them enough.

Here is a true life write up of my first attempt at a BRRR strategy. While it was a success, I learned many things along the way. I wanted to do this detailed write up to include some information for newbies that is often overlooked, and seldom talked about by experienced BRRR investors. I started researching real estate in February of 2016, and after saving up some money and reading everything I could, along with networking at local REI groups, I was ready to buy in the Fall of 2016.