Cash out refinance question

[Eddie Werner]

My partner and I are making cash offers on duplexes. We have some of our own money and some investor money. Our strategy is to acquire properties at a 25% discount so we can refinance with a bank and get the 75% LTV back out as cash. This ensures we can pay back our investors. How do we go about feeling confidence the appraisal will be in line with our research and expectations?

Example: Purchase duplex for 50k cash when it is listed for 70k. Refinance and get 75% of the "appraised" value, hopefully around 70k. 75% of this is $52,500, which covers the cash we need to get out of it.

I am going to review this with some local appraisal companies to get their feedback. Has anyone had this same concern and how did you overcome it or feel comfortable with what you expected the property to apprasie for?

[J. Martin]

There are a couple hurdles you may run into here.

I see many appraisals as a bank regulator and have looked at a lot of different options for cash-out financing as an investor. First, with the appraisal, is that it can be very difficult to determine what the appraisal price is going to be until it's performed BY THE LENDER who is going to provide the financing (unfortunately, they can no longer take the appraisal that YOU ordered like they could pull off back before the S&L crisis.) I've seen these all over the place, depending on the comps chosen, weight on adjustments, and internal bank scrutiny (sometimes they will actually send it back to the appraiser for edits.) You can try to get a commitment letter from them before the purchase, but that would be difficult if you're trying to get a quick close done on a cash deal.

The other potential issue is that many banks will use the lesser of appraised price or purchase price, if the property is purchased in the last 1 year. I've heard of some exceptions with local banks if you get a commercial loan instead of a residential loan. This may be necessary anyway as it seems like the standard residential underwriting becomes difficult to qualify for after multiple properties due to restrictions on rental income qualification and debt/income ratios.