ReFi issues and the BRRRR method not an option in this market?

Question

Hi y'all!I have a quick question on an issue that came up when reaching out to local banks/credit unions when discussing their ReFi options.I've contacted 8 local banks and credit unions and the issue is that they will only loan up to 80% of the appraised value, which they are considering as the lower of either the purchase price or the County's appraised value  ...in other words, they don't run a comp with other recent sales.I may be wrong, but these ReFi conditions may limit a perfect BRRRR, because although I am buying under market value and I am willing to put some elbow grease on it, the bank will only loan 80% of the purchase sale (and 80% of the Reno costs) which means they are not recognizing the added equity/value to the house, and I could not recover 20% of my investment.One (creative) alternative I could have is purchasing the property for a price above the agreed price (let's say +$40k) and then request a check/credit from the seller for that same amount. That way the purchase price would be such that would allow me to get all my investment money back, but seems a bit of a loophole to me (and would increase the taxes on the property slightly).How have you navigated this issue before?

Thanks for the help!M

Christopher Reeder · Answer

@Manny Garcia

I’ve run across the scenario you’ve described a few times with local banks in my market. Each institution has their lending criteria to control their risk appetite. You sound like you have found many that have similar criteria when determining their risk for cash-out refi’s.

Conservative banks like to have borrowers with cash in the deal. As investors, we are working to have the least amount left in the property after the refi. Many times these are 2 premises that will be at odds with one another.

If you acquire a property that needs a renovation and refinance, I’ve found it can take 4-6 months to complete this full cycle. In speaking with a lender yesterday, they indicated their time to close is pushing 60 days. That leaves 3 months for renovation and a month for lease up to support your estimated new value. This scenario isn’t that uncommon currently. The 6 month seasoning when taken into this context is reasonable.

I’ll add one more idea to consider which Brandon Turner mentioned a lot in podcasts. Leaving $5, $10 or $20k in a deal does not make it a bad BRRRR, it just might not be the home run. A lot of us are building wealth hitting singles every few months.

Chris

Manny Garcia · Answer

@Joshua Janus thanks for the feedback!That was the plan, man! :) but talking to some local banks made me realize that I would not be able to pull all my money out (see my recent response to Greg above this post)....I may need to discuss this approach more in depth with the couple banks I contacted or look for a new bank.Thanks again, Joshua.

M

Greg Scott · Answer

You just made another post asking people to analyze your potential first deal.  Now this post makes sense.

You are asking banks about a hypothetical refi so they are giving you a hypothetical answer.  I've never once heard of a bank relying on any county assessor's view of value for anything other than taxes.  That made zero sense.  Telling you you can get only 80% of purchase price makes sense if you have not seasoned the deal.

Plenty of people do cash-out refis every day.  The key you are likely missing is you need a real property and then you need to season the deal for 6 months before you can do a cash-out refi.

Manny Garcia · Answer

Andrew, thanks for your feedback, and yeah, that makes absolute sense!...and yes, you are also absolutely right about what would happen if it appraised at that +$40k value, those funds would be tied up.

Thanks again for your feedback, @Andrew Moore

Much appreciated,

Manny

Andrew Moore · Answer

Re: Purchasing it for $40k over, and getting a check cut back.

The problem with this theory is that you are going to be purchasing something that requires value add. Most banks will require an appraisal to be completed to determine the value they are willing to lend against. With that being said, your property would need to appraise for an additional $40k for them to justify loaning not only the price of the property, but the additional funds you are looking to get back from the seller.

Say you were able to have it appraise. In that case, you couldn't personally receive those funds back. At close, those funds would need to be distributed either to an escrow account to be used for the rehab. They could go to an reserve account for a larger commercial facility. It can't however go back to you directly, so those funds are still tied up in that asset

It sounds like you just need to keep looking for new financial institutions that have more conventional methods for valuing properties.

Joshua Janus · Answer

Buy the property that needs repairs with hard money, cash, private money or some route besides conventional as you will run into appraisal issues. Fix the place up and in 6-12 months, refi with a conventional or loan of choice and if you did it right you'll get all or most of your money back.

Anthony Dooley · Answer

Typically, it's 25% down on multiple properties. It's a commercial loan, so if you can get it with 20% down, you are doing well. If the lender wants more down or wants special terms, it's because they know it's not a great deal. I am an expert on Columbus GA investment property. It's a great market, if you are in the right area and your property is clean and updated. Hot rental market.

Manny Garcia · Answer

@ Chris, I really appreciate your feedback and thanks for sharing your (similar) experiences.I am glad to see I am not the only one that has seen this ...for a second I was wondering if I was not asking the right questions or could not get my point across when discussing financing with local banks.And you bring up a good point, not everything needs to be a home run.

Thanks again for your help, Chris.All the best!M

Manny Garcia · Answer

@Greg Scott, thanks for taking the time to answer my question.

What you say is exactly what I had heard before on the BP podcast and I had read several times on the forum as the "perfect BRRRR." However, when I talked about seasoning the deal and working on these distressed properties to increase their value, two of the banks that were open to discuss this scenario, told me that it wouldn't really make a big difference. They said that for the first 6 months or first year they would give me 80% of the lowest of the purchase price or the County's appraised value, and after that time they would use only the County's value (which is surprisingly close to the purchase price), but they would be willing to add 80% of "whatever construction expenses on the properties you can justify," which wouldn't really capture the equity added to the property.I agree that lots of people do cash-out ReFis every day, but I am wondering if they are actually able to pull all of their money out.

If that's the case, it sounds like I will need to reach out to more/other banks!Once again, thanks again for your time Greg!All the best,

M

ReFi issues and the BRRRR method not an option in this market?

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