Cash upfront; how hard is it to get financed after the deal is closed?

Question

I have always done cash deals on flips.  I am now looking at a potential buy and hold property.  It's an online auction so I'd like to incentivize my offer by using cash but long-term want to finance the property.  Obviously, I want to maintain as much liquidity as possible so I'll be ready when the next great flip deal is available.

So, since I have never used a bank (and quite frankly am quite intimidated by them even though my credit score is about 840) I don't know how hard it is to come by a cash-out refinance.  I talked to my local bank one time on this matter and they acted as if that was practically unheard of.  I've shied away ever since but don't think that I probably should.

Thoughts?

Curt McClements · Answer

Regarding credit score: I thought my high score (not too far behind you, @Angela Kelsay) would give me some sort of extra advantage. I've been told by several mortgage brokers that after the mid 700s, we're all in the same boat. I'm in the process of purchasing my first duplex. They required 25% down, couldn't do any better than 4.25% on a 30 year mortgage, and the underwriter has required a ton of docs from me. I have a great "regular job" where I've been for almost 28 years, and enough liquid assets to more than cover the purchase price. I was sure they'd all be fighting for a chance to provide a mortgage for me (ha!). It hasn't been difficult, but things sure have changed in the last 10 years...

Michael Herr · Answer

I agree with @Chris Kennedy

with one thing to clarify.  You do not need to wait 6-12months to refi if you are willing tobtake the lower of appraisal and purchase price as the value.

If you go to the commercial side of a local bank, you might be able to get your improvement costs factored into the home value, or appraisal to trump purchase price before 6months.

@rob

@Rob Beland The banks I have spoken with and used for this type of loan consider it, and process it as a "refi"  and not a mortgage.

@Angela Kelsay Short answer to your question, in my experience,  it's about the same, maybe slightly easier than financing at the same time as purchase.

If you have cash, essentially being your own hard money lender is a great strategy.

Angela Kelsay · Answer

VERY helpful information; especially the LLC advice.  This probably saved me a lot of headaches @Chris Kennedy.  Thanks for all the help.

Rob Beland · Answer

Thank you for the clarification @Michael Herr. I'm sure it may depend a lot on the particular bank and what type of relationship you have with them. More brain food for me.

Rob Beland · Answer

I think you are simply confusing the real estate terminology. If you have a mortgage on the property you might refi and ask the bank for cash back above and beyond the mortgage assuming you have equity. In your case, assuming the property qualifies for the mortgage, you are simply getting a first mortgage on the property. I see no reason why a bank would not give you a mortgage unless there are other factors like its a commercial property or not habitable. It sounds like you just need a conventional loan.

Chris Kennedy · Answer

Hi Angela,

Buying cash and refinancing later is a great strategy, and is done all the time. If you're primarily doing small residential property (1-4 units) then most conventional big bank lenders will offer this option - personally I have worked with Wells Fargo to do exactly what you're talking about.

In general, from my own experience, here are some things you should know ahead of time:

1. You will typically have to wait at least 6 months before a traditional lender will allow you to refinance.

2. Typically after 6 months you can refinance at 70-75% of your original purchase price.

3. After 12 months most lenders will allow you to refinance at 70-75% of the appraised value of the property (this is awesome if you bought at a discount and improved the property - for example: you buy for $100k, spend $15k in repairs, and then it appraises for $160k. You get 75% of appraised value, or $120k, when you refinance - that means you now have no money in the deal and get a $5k bonus too!)

4. Conventional lenders will generally not allow you to take title under an LLC, so bear this in mind up front as it can interfere with your ability to refinance unless you quit claim into your own name before the refi. This voids title insurance.

5. Portfolio lenders (smaller local/regional banks) have less stringent requirements, but their terms are typically not quite as good (higher interest rates, shorter amortization). They will allow title under LLC and may have a shorter time frame for a refi at appraised value. It's good to shop around.

Overall I love this strategy when it's done right! You can make great returns on the money invested and still keep a lot of liquidity. Good luck!

Cash upfront; how hard is it to get financed after the deal is closed?

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