Hard Money and Private Lending Questions

[Jay Baxter]

Hello everyone, 

I'm a new investor buying in Birmingham, AL and I'm trying to get my financing sorted out before I buy any SFRs using the BRRRR strategy. I had a great conversation with a knowledgeable mortgage banker tonight, but thought it'd be wise to validate his advice with experienced investors here at BP.

The wife and I recently paid off our primary residence. Our plan was to use our HELOC to pay cash for properties, rehab them, place a tenant, and then finance them with a lender to pull 75% of the appraised value back out. Once we have our cash back (or as much as we can finance out), we'd rinse and repeat.

However, the banker told me this strategy wouldn't work unless I let each property season for at least a year. Even after seasoning, he explained I might only be able to get out the price I paid rather than price paid + rehab, meaning the bank is unlikely to allow me to pull 75% of the appraised value out.

Instead, he suggested I use a hard money or private lender as long as we can do the rehabs quickly, 30 - 90 days (which I'm comfortable we can do). That way a traditional lender can do a fannie or freddie loan to "refinance" the private lender. I'll get a great rate on a 30 year term and can likely do 75% of the appraised value even if that's more than I put into the deal.  

His opinion was that using a hard money or private lender so there's a loan to finance was the best way to go if I want to accumulate properties quickly on the best terms as long as I don't mind having them in my name. 

Can anyone opine on using a hard money or private lender versus using our HELOC? Has anyone run into this problem using their HELOC?

Thank you!

Jay

[Richard Scholtz]

Delayed Financing Defined

“Delayed” simply means a property owner can finance a property even after the property has been purchased. The transaction involves an owner paying cash for the real estate then immediately financing the purchase with a new loan, replacing most of the original cash used for the transaction. But the program had to address the “seasoning” issue. And this program does by eliminating a seasoning requirement altogether.

Check rates for Delayed Financing refinances here.

A “seasoned” purchase is one that has been in place for a minimum amount of time. This has been put in place to more accurately determine the current market value of a property. Before seasoning requirements, a buyer and a seller could collude and sell the property below market then immediately pull cash out of the home with an inflated value. The borrowers would pocket the money and if a foreclosure ever took place, the lender found that the home was worth much less than what is owed.

Fannie’s seasoning requirement was six months but is now effectively eliminated. You can pay cash for a home today and apply for a cash out refinance the very next day. No seasoning needed. Why the change?

Fannie Mae Delayed Financing Rule meant to Move Housing Inventory

The program was first introduced three years ago to help distressed properties get back into shape and ready for the market. There are few options for permanent financing that allow a buyer to obtain financing to acquire and rehabilitate a property with one loan program, such as FHA's 203(k) program. But unless the lender has direct 203(k) experience, this program can be confusing as well as time-consuming.

When any conventional mortgage is placed on a home, both the borrower as well as the asset being acquired must pass certain qualification tests. Besides helping determine market value, the lender must make certain the property is habitable. If the home is in such poor shape that no one can reasonably live there, the home must be repaired or rehabilitated prior to any loan approval.

Prior to the introduction of the delayed financing program, borrowers had to wait six months before tapping into the equity of the home with a cash out refinance. With this program, the requirement is waived.

That means borrowers can buy properties that need some repairs with cash, make the necessary changes to the property then reimburse themselves by pulling cash out of the property and replenishing their cash reserves.