Can I use Convenience checks to start off my rehabbing business?

Question

Twice a month I have been getting checks from Chase and Discover offering $10k, $12k at 0% interest for 12 months. I usually shred them on the spot but was wondering if I can deposit them in my account in order to show proof of funds when making an offer. $20k extra plus some money I have been saving to start my business would help me start making all cash offers. My goal is to buy my second property from a motivated seller or off the mls.

Rob K. · Answer

I have some experience with these checks. You will pay 3% of the amount borrowed. $10,000 would cost $300. In 2006, I had a nice little scam going with those checks. At that time, it was 3% up to a max of $75. I was getting offers everyday for 0% interest for 12-15 months. Banks were also paying big interest on savings accounts. One local bank was offering 5.5% if you had at least $100,000 in the account. I then secured five credit cards with a total of $170,000 and maxed out the cash advances. I put the 170K in the bank earning 5.5% and paid minimum payments on the credit cards every month at 0%. I had online bill paying and sent the credit card companies back their own money each month and kept the interest. Over the course of the 12-15 months, I pocketed $10,000 after fees. I still have those cards open with zero balances waiting for the same perfect storm to come back one day.

Rob K. · Answer

I wanted to add that if you're ever late with a payment, your interest rate will go from 0% up to about 30%. Be careful.

Michael Farney · Answer

Watch your utilization. If you go too high, your credit score will tank badly. And if your credit score is too low, you can't refinance your property to pay the credit card off. I did a $25k check and it dropped my score from 740 to 615. After I paid the balance in full, I was back up about a week after the statement posted.

Chris Masons · Answer

I have done exactly as Rob as described and made out very well. ALot of the fees were 1% and not 3% but if capped at 75 makes no difference... I have seen these offers come back around with Chase and BOA. BOA charging 3% transaction fee and chase charging 1% Only now my credit lines are not what they once were. BAck in 06 and 07 I had and I kid you not well over 150k in revolving credit at my disposal. I actually took advantage and used a convenience check for 50k to fund a DP on a 2 fam. about 8 months ago..... You just have to be careful about being late as mentioned above. But long as you are aware of fees involved and you can still manage to put to good use I'd say it's a great means to get cash quickly without tapping other assets.. Chris

Kevin McGinnis · Answer

I've used these checks to buy forclosures. Sure it works.

David A. · Answer

Thanks for the replies. I will be saving a few more months to fund the rehab out of pocket. If i need to I will be using my cc. Yesterday a friend of the family who is a truck driver wanted to talk to me. He has been working for about 10 years driving trucks across the country and making good money but he wants to invest in real estate. Another door just opened, we could do a joint venture but I may want to manage my first rehab by myself.

Shane Johnson · Answer

Thanks for the input Brian Hoyt . I have been wanting to tap my CC to finish off my attic and basement. The attic would be a master for me, and I have one renter in the house right now at $350 for the small spare bedroom. So, instead of making my attic pimp pad, the idea in my head right now is try to finish the basement for $7-8000 and rent it out for $5-600 a month, putting my ROI just under 1.5 years,(and my personal cost of housing at $0) at which point, will be the 2 year mark on the property, and the house will then have a finished basement, which will demand more rent at that point ($1400 instead of $1000-1100). Still on the fence if I want to pull the trigger and encumber myself with that type of debt...

James H. · Answer

If you want to go conventional and you borrow tens of thousands of dollars in consumer credit right before you get a loan, your application will be scrutinized for sure - I would assume declined. When I refi'd my personal house, the mortgage company ran a second credit check right before closing to make sure nothing weird happened between the time we started the process and when we closed (about 6 weeks). At a minimum, the new debt will temporarily lower your credit score and will also hurt your DTI ratio as long as you still owe. For conventional type financing, I don't think this is the way to go. OTOH, if you have enough cash to buy a distressed property but not enough to fund the rehab, this could be a great way to go. I rehabbed my rental pretty much with my credit card. I bit the bullet and paid extra money from my paychecks to pay it off, but it went a lot faster than saving all the money before-hand because I also had rental income to send with the payments. The rent payments are pretty significant when you don't have to pay a mortgage. It took about 12 months to pay off about 12K with the rental income whereas it would have taken twice as long to save it all up ahead of time. I had very little cash to my name and was depending on what available credit I had freed up on the credit card as a temporary "cash reserve", but after the CC was paid off, it only took a couple months to build a real cash reserve. I would do it again and am always keeping my eye out for similar properties even though my goal is to get into better properties eventually.

Ben Stout · Answer

I have a credit card with a $50k limit I run no balance on. I recently tried to use this as POF to make an offer. They wouldn't accept it. I thought that was kind of odd considering I could easily just write a convenience check for $50k and drop it in my checking account. I ended up having to show a bank statement before they'd approve it. I would definitely agree with Kyle here; in the old days it would take a month or so before they'd realize what your total outstanding balances were, but everything is so digital and instantaneous these days that it could really jack your DTI ratio through the roof. What J Scott said is good advice. You might look at how much you'd pay realistically--best/worst case scenarios. If your card is at 8% interest, it may very well be a better alternative for a flip than paying points on a hard money loan /origination fees, etc. Do the math and I think you'll figure out the right answer. Some cards also charge 2% more for a cash advance than a convenience check. Best of luck to you.

Kyle J. · Answer

It could work. Just keep everything that J Scott pointed out in mind. On the other hand, if you cash one of these checks and then decide not to buy with cash and try to go conventional, your DTI ratio would likely be prohibitively high.