Would me doing this be legal? advice needed

Question

My original intent was to purchase a property with private money. Do the rehab. lease it. Then do a cash out refinance. I've contacted no less than 30 banks, credit unions and financial institutions trying to locate a portfolio lender but with no luck. I've recently come up with a creative solution, For those knowledgeable please let me know if the below is legal. Thanks

My idea is fairly simple. lets say I purchase a property(3b 2b) for $40k, tax value is 80k. Using private money, I would then have 2 rehab budgets, the first will be 10k and the second will be for 15k with higher end materials. I'd show my private money lender the second. So total private loan would be $55k. When time comes to start rehab ill use the first rehab plan with the budget of $10k to complete the work. Work finishes, new appraisal comes back at $100k. The 5k left over from rehab budget will be my "cash out". I would then lease the property for around $700 per month. This process should take around 30 days. I would then do a rate and term refinance which doesn't require the 6 months of seasoning as I understand it. The new mortgage company would pay back the $56,560 ($55k @ 3%) that I owe my private lender. The payment on my new mortgage of $56,560 should be under $500 per month, easily covered by monthly rent. My private lender is happy because he got a 3% return on 55k instead of 50k. I'm happy because I got my 5k cash out and a lower interest rate since im using a rate and term refinance instead of a cash out refinance.

That's the idea. Any thoughts? Legal, Illegal, too risky, wouldn't work, please give reasons. Thanks

Will Barnard · Answer

In addition to what Bill stated, your purchase contract stipulating in writing the contract IS assignable is in fact providing notice and disclosure that you may in fact intend on doing so. Nothing hidden there!

Bill Gulley · Answer

It's called mortgage fraud, you can get a new home at very little expense thanks to tax payors! :) I suggest you stop thinking of creative ways, at least you asked..... To be successful in creative techniques means having a good command of all the rules you must abide by in the process. This ain't the wild west with Simon Lagree. :)

Larry Lee · Answer

Hi Ann, again as I've said several times now this was simply an idea. It popped into my head and so I decided to come on here and see what others thought about it. Doesn't mean I was going to attempt it, doesn't mean i've already attempted it. Just means I had an idea. I have no intention of committing any sort of fraud. ideas aren't equal to actions and bad ideas often come before good ones. I dont know how much simpler I can make it. Some of you guys/gals act as tho i've committed a crime just for asking a question. But thanks for your opinion and ill just hope that everyone on this site doesn't share your opinion.

Ann Bellamy · Answer

Larry Lee, I applaud you for reconsidering after you were told the above was fraud, however, the fact that you made it clear in your first post that you planned to lie to the lender, even if you backed off, will make it difficult for anyone to refer you.

Larry Lee · Answer

I agree. I've learned more from this website, doing research and simply taking action and trying things than I have from most courses. I've received some bad advice along the way as im sure most have but its usually sorted out in short time. Anyway if anyone knows of a portfolio lender in NC or another way to do a cash out refinance without the 6 months of seasoning please share.

Will Barnard · Answer

Larry, thats because the courses usually come from gurus who spew garbage. If there are any posts on this site that recommend "hiding" the facts in a wholesale deal, I am quite sure that one of us expereinced investors have posted responses to counter such poor advice.

Larry Lee · Answer

Hey Will, thanks for commenting. Your correct, placing "this contract is assignable" into the contract not only protects us but lets the seller know we have the option to assign. After I fax or email a contract they sign and I get it back. 95% of the time no one even asks about assigning or what it means to the deal. This is more of a protection for us than a notice for them in my opinion. In any case having that statement doesn't change the fact that what I said above is true. As Bill stated there are more transparent methods to get the job done. Those methods simply aren't as widely used. I base that statement on the content of the courses i've purchased and the posts i've come across on this site.

Larry Lee · Answer

The keywords in my last post were "in most cases" I didn't state all wholesalers do this or that there weren't other methods. I also know of 1 wholesaler who states up front what he plans to do, but again I haven't found this to be the norm. Most i've come across locally and online, this site included, do things as I stated. And if you check the wholesaling area i think you'll see ALOT of other individuals doing things as i described so im not sure why i'd be worried about my name being viewable on this forum. Nothing to hide here. This isnt old pro vs. new pro as there are bound to be differences in the way the older generation operates compared to the younger. If stating my opinion on the matter offended you Bill I apologize as it wasn't my intent. The purpose of this thread was to find out the validity of the idea and if it wasnt valid to hopefully hear how others have achieved my end goal of doing a cash out refinance. As I stated above my intention is not to commit any sort of fraud, no tangled webs are being weaved, just ideas and opinions. Good luck on your ventures as well Bill and thanks for your insights.

James H. · Answer

I agree. Rates at 12 percent I find reasonable, but the fees just suck all the excitement out of most deals. I have found, too, that if you are financially equipped and have a good enough deal to use a HML, you usually can do it just as well without the HML.

Bill Gulley · Answer

That really is amusing, :) Those who think they have to sneak around to do simple assumptions and assignments are saying to the old pros that we lack the ability to control a transaction, we can't explain how what we do adds value to the transaction, we can't deal in good faith because we feel we can't be honest in what we are doing and we lack the social skills in presenting deals and justify valuations so we have to try and hide what we do. My last wholesale deal last year; met the seller at a bar while I was picking up lunch, told me he was needing to sell. I told him I probably know people who would buy it as a rehab and sell it and asked what he had to have, we agreed, made a quick agreement that was later refined, called a buyer, assigned the contract and they closed with me picking up a check in less than 3 weeks. Pretty simple, told the seller up front I could get rid of it for him for less than the RE commissions and do it quicker and he agreed. I told him the truth. When you begin to deal with the truth at hand you'll see how easy it can be. That's the difference between a professional business person and a street corner wheeler dealer or a strawman who has to act unethically and decieve to be able to operate simply because they lack knowledge and skills. No one expects you to do things for nothing in RE. You can't develope skills if you don't use them. Many newbies don't understand how small RE circles are in communities, how quickly the word gets out and how they end up with a reputation. If an investor type in my area lied to a lender the word was out within a month, sometimes sooner, depends on when the next MB/MBA or NBA meeting was, watercooler talk can kill your business. I was "wholesaling" properties before the term was invented, we didn't have gurus devising schemes for flipping a property to a construction guy or a landlord at an "as is" quick sale price. How do you think I took people out of bad loans, installment contracts where they were failing? I've done more by accident than most who call them wholesalers do on purpose working thier tails off. It's not hard to do. So, it was amusing to me to see you explaining what you and others do. What surprised me was admitting in a public RE forum of your approach....with your name and location. Larry, just advice you can take or leave, this post is not just for you but for others as well to consider. Good luck to you! :)