Paying 100% Cash for a Property, then get a Mortgage

[Ryan Copeland]

Hello BP,

I'm thinking of ways to get deals quickly and be more of an appealing buyer.  If I bought properties for cash, would I be able to get a mortgage on them afterwards through a conventional loan?  Would that be a cash-out refi with the lender?

For instance, let’s say I paid $80,000 cash for a property. Then a few weeks later I reach out to a lender to get a conventional loan on it. Is that a thing? If so, how does it work? And would that even make financial sense for me being that I would have to close on the property twice? I can buy for cash, but I would need some or all of that money back to rehab the place.

[Kaiser J.]

It is absolutely possible, but may or may not be necessary depending on what you are trying to achieve.  It may also come with potential pitfalls that you should be aware of.  Below is an example based on a property that I purchased a month ago and am currently in the process of getting a mortgage for.

First, there is a difference between "writing a cash offer" and "buying with cash". Writing a cash offer just means that your offer is not contingent upon your being able to obtain a mortgage. You can write cash offers all day and get a mortgage at close for every one of them, so long as you truly had the financial capacity to still close on each deal if the mortgage had not come through. Note that you will provide a proof of funds when you submit your offer, and that you can in fact be forced to perform on your purchase obligations. From the perspective of a traditional seller on the MLS, who is oftentimes expecting a buyer to need +/- 30 days to close, it may be a good strategy to write a non-contingent offer but still get a mortgage in place if you don't want to tie up a chunk of your cash.

Alternatively, there are situations in which a true cash purchase is going to be necessary, e.g., a short timeline or a property that is in poor condition. In these instances you would pay cash and then consider taking a mortgage out later. For example, five weeks ago I bought a SFH from a wholesaler for $160k. It was a fairly turnkey rental in good condition, but they needed to close in less than two weeks. I therefore paid for the house out of pocket and sent an email to my banker to kick things off.

From there the process for obtaining a mortgage is similar to any other, although you should line up the bank in advance since not all will provide a cash out refinance loan.  A few notes to be aware of:

- If you are applying for the loan within 6 months of the purchase date then your loan size will be limited based on an LTV to the lesser of the purchase price or the appraised value. In my case, the house appraised for $233k but the bank can only lend based on the $160k purchase price. This "seasoning period" is why many investors will choose to wait six months before getting the mortgage. My personal preference is to keep leverage low and put each property to bed quickly so that I can move on to the next, so I'm fine with it. To each their own.

- The bank will still use traditional underwriting criteria. You mentioned a need for the proceeds of a mortgage to fund your rehab work. A lender is going to want to see 3-6+ months of cash reserves in your bank account, the mortgage process will probably take 4-8 weeks start to finish, and the bank may have certain criteria as to the condition of the property that they will lend against. Be careful about this strategy if it will leave you unable to meet those criteria or without the financial flexibility to keep going if/when things go sideways. Just today my banker informed me that they will have to push closing back by 3 weeks due to how busy they are - and I'm dealing with a relationship bank that knows me, we have the appraisal in hand that basically puts their loan at a 51% LTV, and there is no seller to deal with. The best laid plans...

- One more note, if you're paying $80k for a property then you may have a more challenging time finding a traditional (non-hard money) lender for this strategy.  Many banks have a minimum loan size, and not all may be willing to provide a loan that is in the neighborhood of $50k.  You may have better luck once you rehab the property, wait six months, and (I'm guessing) have the ability to get an appraisal above $100k.