Is this a way to pay cash and refi immediately? or am I crazy?

Question

I'm just brainstorming, and this is my first post, so if this sounds crazy, I apologize in advance. Tell me if this could work:

1) We're all familiar with the advantages of buying properties for cash. The drawback is that if you own them outright, you can't do a cash-out finance for 6-12 months (the seasoning requirement).

2) On the other hand, there is no seasoning requirement if you are doing a rate and term refi (as opposed to a cash-out finance), i.e., if you use a mortgage to purchase the property on May10th, you can refi that mortgage on May 11th.

3) So here's a possible way to (almost) purchase for cash while preserving your ability to turn around and immediately mortgage the property:

a) You find a property listed for $60k. You offer seller $50k, with the sweetener that you can close in 15 days, at which time he will receive either (i) funds from your lender or (ii) your cash, if the loan does not come through (your offer is accompanied by proof of funds, etc. so he knows you're for real) If your offer were subject to approval from a conventional lender, seller would insist on $60k list price, but given a fast and certain close, seller accepts your offer of $50k.

b) You strike the following deal with lender: You (buyer) will post $50k cash collateral with lender. In exchange, lender agrees to issue a short term (say one year) $50k mortgage so that you can acquire the property, suspending the usual underwriting requirements. Lender is willing to do this, because he has two sources of recovery: the real estate, and the $50k cash bond you've posted. The lender faces no risk here, so he's willing to do the loan without a ton of closing costs.

c) Once you acquire the property, you immediately refi the short-term mortgage into a conventional loan. The conventional loan could be issued by the same lender who issued the short-term mortgage, or another lender . . . that's neither here nor there.

So can this work? are there lenders willing to do it? If not, why not? Is there a bank rule prohibiting it? or does it just so happen that no lender is doing this?

Chris Martin · Answer

I will add this.... If you have a banking relationship with (typically) a small local bank and you and your company have a decent capital structure, you could set up a collateralized line secured by real estate, stocks, possibly cash (restricted or unrestricted), etc., that allows you do effectively reach your cash buying scenario (through a draw) using collateralized assets rather than your cash.

Also, in step 3 c) the "Once you acquire the property, you immediately refi the short-term mortgage into a conventional loan..." you are still subject to conventional lending and seasoning restrictions... so your $50K is still tied up like it would be if you just acquired directly with the cash.

Eric M. · Answer

I agree with Chris and in my experience rate and terms are not THAT easy at most banks. They do require some seasoning usually.

There is very little under the sun that is really new in RE. If you have to think that hard to create a scenario, most likely it is impossible in reality.
Lenders are simply not set up to do things in unconventional ways.

Chris Martin · Answer

This scenario would only work with the commercial lending side of a bank.

No disrespect, but concepts like "...suspending the usual underwriting requirements..." are fiction, IMO. Even borrowing $50K to purchase a $60K listed property may be a stretch. And "...The lender faces no risk here..." is not looking at the very possible scenario that if you can't refi, the bank is left with a note in default (although possibly a performing note initially).

But you should run this by your commercial lender... they are generally interested in lending, just on their terms.

Jeff S. · Answer

Ask your lender. It is about your relationship with someone that can do that.

Is this a way to pay cash and refi immediately? or am I crazy?

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