Creative ideas to legally/ethically avoid 6-month seasoning?

Question

Fellow investors: it is so annoying to rehab a cash- or hard-money-purchased rental then have to wait six months before doing a traditional/conventional/conforming/Fannie/Freddie cash-out refi.  I know that I could just bite the bullet and refi with a more expensive portfolio loan with more relaxed seasoning requirements, but are there any ways around to still get a Fannie/Freddie loan?  Some things I've heard (most of which I have strong misgivings about...)

• Purchase property initially in LLC, sell it to yourself personally and secure traditional financing, then transfer back to LLC (cons: taxes, blurring line between business/personal - corporate veil risk?  Due on sale, but no different than transferring to LLC in normal situtation).
• Refi after rehab with portfolio loan that's cheaper than hard money, then refi again with traditional after 6 months (cons: so many closing $$$$!!!!)
• Delayed financing refi, but not really an option because I want my cash back!

Other ideas?  They don't even have to be good ideas!  Just fostering creative conversation.

Chris Mason · Answer

Hi @Ryan Johnston,

There is no seasoning requirement on rate/term refinances. So if your initial hard money loan amount is high enough, boom no waiting period. In theory.

I had an idea to get HML to be willing to entertain going above their normal max LTV by allowing you to deposit a sum of money in escrow that is only refundable to you once you've paid off all loans with that given HML, and if you ever miss a single payment owed to that HML, they get to keep that entire deposit.

• That takes care of ensuring the HML is incurring no additional risk. On a $100k home, instead of lending you $80k (total exposure = $80k), they lend you $100k in exchange for you depositing $20k with them ($100k-$20k = total exposure $80k).
• Assuming the appraisal supports value, we can do it as a rate/term refinance as soon as you're ready for the appraiser to appraise the place. In the above scenario, we would be refinancing $100k. Because you borrowed $100k, and not $80k, we will call this a rate/term refinance and not a cash out refinance.
• The second you close the rate/term refi, you get that deposit back from the HML. That deposit will be (MUST be, for this to make sense) approximately equal to what your entire down payment plus reno budget otherwise would have been. 
• A RE lawyer needs to write up the paperwork to make it all legal and whatnot. 
• Everyone wins.

I said "in theory" above because I think when I posted the idea, only one HML on biggerpockets.com even understood just WTF I was proposing. None of them, except the one, could actually wrap their heads around the big picture.

All the HML needs to know is that we're not proposing to change his exposure to risk by a single penny. If the HML normally wants $75k down for the scenario, great the borrower is going to put that in a 3rd party escrow account somewhere managed by a neutral lawyer, and the HML is going to lend $75k more than they normally would if not for the security of that 3rd party account.

If you post a deal scenario, with purchase price, reno budget, ARV, etc, and get a hard money lender to tell you what they would want to do the loan, I can write up a way that will in theory allow you to do the refinance the second the reno work is done, with no additional exposure to risk for the HML.

Kerry Baird · Answer

This post should be ablaze.  Instead, *crickets.*

Rudy Manna · Answer

Yes, please see my response

https://www.biggerpockets.com/forums/49/topics/363...

Chris Mason · Answer

Hi @Andy D,

Not quite.

The $100k HML is repaid through the rate and term (NOT cash out) refinance process. ARV is presumably $145k or so.

Per the agreement with the HML, as soon as all mortgages with that HML are paid off (which the refi just did), the $20k is returned to the borrower.

So the borrower is in debt for $100k, and got their $20k back.

Brent Coombs · Answer

Rudy, how did you get on with @Stephanie Potter's product in this earlier thread?:- https://www.biggerpockets.com/forums/49-private-co...

Seems like she was promising 70% of their appraisal, regardless, with no seasoning?

(Note that Syvilay also asked you the same thing on that thread, today)...

Rudy Manna · Answer

@Chris Mason - The idea seems pragmatic and makes sense. Do you know any hml trying it out? i want to do it for my nxt deal, perfect for brrrr

Andy D. · Answer

So let me see if I understand this correctly. The underlying idea of what @Chris Mason described above is to get around the usual seasoning issues connected to monies for a "down payment", correct?

If so: what the above example shows is that - since there is no down-payment amount related to the property purchase and lien/title/etc at that point - the amount deposited as collateral with the HML (or some sort of trustee) can - at the time of refinancing into conventional/paying off the HML - be used as actual down payment (of whichever percentage) for the conventional loan. This assumes that these monies (= the $20k in the above example) are seasoned by the time they are to be used as down payment/pulled out of the . But that shouldn't be an issue as those 3/6 months will have passed by then in the majority of all cases, I guess.

Let me try to visualize this somewhat. PLEASE correct me if I got it wrong! Don't want to perpetuate any idiocy here from my end...

Normal situation:

Purchase price: $100k (we assume this equals actual value of property)

Buyer/borrower: $20k "skin in the game", i.e. money in the deal itself, used to pay part of the purchase price

HML: $80k as loan to borrower/buyer, paid at closing to seller

This makes $20 + $80 = $100k as total purchase price (we shall ignore any fees etc)

Refinancing part in normal situation (mind you, property is not sold):

New owner wants to pay off HML and goes via route of conventional financing. This requires him, again, to have 20% "skin in the game", this time called "down payment". As the new owner deposited $20k during time of closing, these $20k cannot be used as down payment as they "have not been in his bank account for x months" anymore. They are, from a lenders point of view, not seasoned as there was an interruption in the possession of the funds when looking at the owner/borrower. Depending on the overall situation this is the end for a quick refinance into a conventional loan. On the other hand this is a situation that will make the HMLs happy as they can lend for longer periods of times until the owner has finally scraped together money that can be considered seasoned to then, finally, go the route of conventional financing to pay off the HML.

The "CM approach":

Purchase price: $100k (we assume this equals actual value of property)

Buyer/borrower: $20k in some sort of trust account to prove to HML that there is money which HML could access if push comes to shove, i.e. to still make borrower/buyer have some "skin in the game", albeit not as part of the purchase price

HML: $100k as loan to borrower/buyer, paid at closing to seller

This makes HML having paid the entire purchase price (we shall ignore any fees etc)

Refinancing part in "CM approach":

New owner wants to pay off HML and goes via route of conventional financing. This requires him, again, to have 20% "skin in the game", this time called "down payment". So far the same situation as above. But now there is a difference: as new owner didn't actually give away the $20k to the lender/seller he is still the owner of those funds (*) and therefore these $20k can be considered seasoned and, consequently, be actually used as down payment immediately (again, assuming that they are indeed seasoned at that point, see above). The conventional lender then pays $100k to the HML, paying off in full the HM loan of $100k. HML is now out of the picture and property is financed conventionally with 20% equity of the owner.

(*) This might actually be an issue. Because, technically, once the $20k are deposited in a trust account, the trustor (= future new owner) is no longer in possession of these funds. While they have not changed legal ownership over to the lender/seller, they could - especially from the narrow point of view of seasoning - be considered "no longer held by the borrower". Therefore we would run into in the same issue as if they were acutal "skin in the game" as 20/80 with the classic HML scenario.

@Chris: have you, by any chance, looked into that aspect with your "CM approach"?

Now I'm curious if I described this correctly. Very interesting in any case! I might need to contact you for a chat, Chris. ;-)

Chris Mason · Answer

I cooked up the idea while on the phone with someone trying to put a wonky deal together. Told the person to ask a few HML, and put me on the phone with whoever appeared most receptive to the idea to fully flesh it out. Never heard back.

George Despotopoulos · Answer

Make that 2...well, I think I understand...and it sounds like a solid idea. On it's face, it seems like a win for the lender and then a win for a borrower who makes all the payments and gets a return of the escrow amount.

Was this something you were proposing in theory or actually trying to act on?

What was the reason or issue HMLs were having with it.

Creative ideas to legally/ethically avoid 6-month seasoning?

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