Using equity of one purchase to finance another?

Question

hey BP,

I've got two properties I'm looking at, both selling below appraised value, and both cash flow positive within my criteria for the local area. However, I don't have the down payment to cover both.

How likely, possible, or willing is a bank going to let me buy one, hand them a recent appraisal, and take out an equity loan to cover the down payment on the second?

Obviously this will decrease the cash flow of one property and I need to find out by how much, but I just want to know if it's possible and maybe what questions I should ask the bank. This assumes of course the seller isn't lying (I haven't had the properties appraised yet, but he said he has and have me the figures)

-Joe

Chris Martin · Answer

Regarding "How likely, possible, or willing is a bank going to let me buy one, hand them a recent appraisal, and take out an equity loan to cover the down payment on the second?" It's all in the numbers. My company uses collateralized pools for scenarios like you are talking about. In the pool we have first (mostly) and some second liens. This is a commercial lender (not using GSE underwriting) where we have established relationships.

So, to answer...  Likely? Not likely. Especially a GSE (fannie mae, ... ) underwritten loan. Possible? Everything is possible. Willing? I'd say banks are willing for the right numbers in the deal. Been great the last few years, since the small local banks see the value in good deals... more than in the dismal years of 2007-09.

Jerry W. · Answer

I have used equity in houses I own as the security via a second mortgage for the 20% down to buy other properties.  In those cases I had paid off at least 20% of the outstanding loan, so the total owed was less than 80% of value.  I do not think many if any banks will let you get about 80% of value now days, I believe its not allowed anymore on investment properties.

Jean Bolger · Answer

Just a note of friendly warning: more than once on these forums I've come across the equivalent of "Well, the first person I talked to at Wells Fargo said OK, but then the second guy........ "

I don't know what it is with those first guys at Wells Fargo ;)

I want to be encouraging, but I'm thinking you might be better off picking just one of these two properties.

Andy Collins · Answer

If you are talking about paying $50k, for a property that is worth $100k, that are some creative ways to do that,,,if your talking about $85k on a $100k valuation,,,you won't be pulling any money out anytime soon.

Mortgages on investment properties are typically 75% of the appraised value (again, on investment property, not your personal residence).

A couple of years ago you could work something like that if you found a super deal,,end up pulling cash out,,unless your market is a LOT less competitive than Dallas,,your not going to be paying 60% of appraised value (unless it needs rehab, but then you have to add that cost in)

Brie Schmidt · Answer

I think that the problem you will run into is most appraisals on a purchase will not put the value much more than the purchase price, maybe 5%

That is my own experience

Joseph Lieberman · Answer

well a quick call to Wells Fargo later and they said you could immediately refinance the first house to its full appraised value and use that to potentially make the down payment on the second. You end up paying 1.5% of the cost in title + loan fees twice this way... But that seems so far the best option.

Bryan H. · Answer

What you want to do is entirely possible - if you find that lender. They will want their own appraisal, they will typically only lend 60-75% of that value.

After searching for years, I have found one in MI that will work like this/

Joseph Lieberman · Answer

interesting! I am out in oregon if anyone else has any info and that helps.

When a bank does an appraisal I assume thu charge you for it?

-Joe

Shawn Thom · Answer

I am looking into this now and finding it to be more difficult than I thought.  A lot of states are different and I guess Texas got a little harder.  A lot has to do with the value of the home and how much you want to take out.  I am finding on houses less than 100k in Texas it is difficult.  Everyone is blaming the new laws that went into effect in early Jan.  I don' t know if that is true or not.

I don't think anyone will take your appraisal.  They will want to do their own.  The best thing I'd suggest is to pick up the phone and start calling.

There may also be seasoning requirements so you may not be able to do it day1 on a new purchase.  The magic thresholds seem to be holding times of 6 months or 1 year.