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Updated almost 3 years ago on . Most recent reply

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18
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5
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Manny Garcia
5
Votes |
18
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ReFi issues and the BRRRR method not an option in this market?

Manny Garcia
Posted

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

Most Popular Reply

User Stats

58
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68
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Christopher Reeder
  • Rental Property Investor
  • Auburndale, FL
68
Votes |
58
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Christopher Reeder
  • Rental Property Investor
  • Auburndale, FL
Replied

@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

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