Cash Discount then Cash Out Refi??

Question

Is this plausible or am I out in left field?

If I am able to buy a 75K house for 50K because I am paying with cash, can I then execute a Cash Out Refi for 80% APV bringing 60K back in my pocket? The house is fine and comps are at 75K but I was able to get a nice cash discount. Does it matter if its a rental or owner occupied?

Thanks

Thomas Fortune · Answer

Wayne Brooks - your strategy is sound to me, and I'm implementing the same thing myself. A few notes I've learned from my deals in my market: - a Fannie Mae cash out loan is possible After 6 month seasoning - they'll cash out 75% of new appraised value (purchase price is irrelevant). - you can only do this with up to 4 mortgages. - if you find a local bank who is lending their own money, the rules may change. I've got a lender who will cash out 85% with no seasoning. This is a great strategy to jumpstart a rental portfolio in the few few years of investing , as you can recycle your cash over and over. Best of luck!!

Stephen Hundley · Answer

I think the main thing to take from this thread is establish a relationship with a local lender and try and get the shortest seasoning time possible. Relationships trump regulations when local banks are involved

Andrew S. · Answer

For a flip, if you put in significant improvements, the assessor WILL take that into account. However, the lender can and will ask for proof of those improvements (see other discussions on this board where the fliipper had to submit actual receipts to the prospective buyer's lender to justify the value added). That's separate from the seasoning requirement for cash-out refi though

Bill Gulley · Answer

You can run all the what ifs you like, you can have any opinion you like, but in reality, there are rules and regulations you'll be dealing with, they may not be logical to you or fit with your thinking but that becomes irrelevant in the reality of real estate. I agree with Pierce as to his appraisal techniques, but your negotiation skills are not a value that reduces a lender's risk, if you could buy it at that price does that mean that no one else could buy it at that price if it went to a foreclosure auction? Lenders don't lend on intrinsic values. And, there are distressed sellers. Such transactions may not meet the requirements of a market value sale, but then you have issues of your borrower having "skin in the game" a real financial interest that was paid for, not some windfall equity they have no risk in. These aspects are not just some banker's opinion, they are anchored in economics and accounting rules as well as regulations banks must abide by. Prudent lending practices that go to the safety and the confidence of the banking system and the economy. So, all that doesn't go out the window because someone got a better deal, banks don't buy perceived equities or lend on them.The rule is, within the first year, a transaction is valued at the appraised value or the price, whichever is less, after one year, it is the appraised value. You'll find this in legal and accounting assessments, you might buy a bag of diamonds, the value is that paid if the sale meet requirements as an arm's length transaction meeting other requirements, not a distressed situation, and that value will be the book value to the buyer for 12 months, then the book value will be changed to its market value. Holding the asset will be worth what was actually paid, then depreciated. Hearing some guru say he "made" 50K on a property after he bout it at a lower price is pure horsefeathers, it's Enron accounting, claiming nonexistent perceived equities as a profit. People go to jail doing that in some situations. :)

Bill Gulley · Answer

No! Not unless you found an idiot to loan you the money...LOLJoe mentioned seasoning. A purchase transaction sets the market value, first of all, if the deal meets the definition of market value, otherwise you bought a distressed property or had a distressed seller.Loans are made based on market value, the rule is the lower of the purchase price or appraised value within 12 months from a transaction, some lenders will go with 6 months, this time frame is the seasoning period where the market conditions may adjust, they will look to the market activity and price changes. :)

Jonathan Napper · Answer

So on these types of deals, what cash flow requirement do you require?

Bill Gulley · Answer

Next rule, cost of acquisition, your sale price + cost of improvements added, that usually means you'll be refinancing 70/75/80 % of that as a cash out. You don't get 100% of your added value, again, they might as well buy it if you want all your money out. :)

Jonathan Napper · Answer

DING! DING! DING! I get it now, it makes sense, thanks Professor Joe. :)

Jonathan Napper · Answer

SO Bill, your saying I just cant ask the bank to reappraise it 2 days after I bought it super cheap, I have to wait the 6-12 months to get the appraisal, which would be in line with other sales data and comps, not my purchase price?

Jonathan Napper · Answer

What about a flip though? If I buy it one for 20K and put 30K in it, will my appraisal be 20K because that's what I bought it at?