How to unlock a HELOC

Question

Hello BP Team!

We were planning on purchasing our first rental in Feb of next year. Instead we are thinking about requesting the current owner open a HELOC on the home. They current have about ~275k in equity. We could then use this HELOC as seed money to begin our investing in other homes in the area.

(We live in the house and have been renting it out for them for the past 5 years. The owners are my parents which is why they would even entertain a silly idea like this.)

My question is:  What are the steps my company would need to take to gain access to this HELOC? Would it just be as simple as them going to a bank, presenting their current mortgage status, and them getting the credit. Then when I find a house to purchase, they cut me a check and I can throw the money where I need it to go?

I understand there will be interest that must be paid when they withdraw the funds. But what are the exact steps I would need to take to make this happen?

Thanks in advance!

Ndy Onyido · Answer

@Sam Valme

This is a very simple situation. You do NOT own the house and cannot obtain a HELOC from it, simple.

@Scott Weaner is correct.

Only way this could work is like a simple lending from your parents from the proceeds of the HELOC i.e the rightful owners apply and get approved for the HELOC, and they drawdown from it by writing you a check..period!. Your credit eligibility does not come into play here.

Daria B. · Answer

@Sam Valme

I can tell you the process that I just went through with my primary to get the HELOC. As for you and your parents arrangement, you may want to seek the advise of an attorney to determine your agreement between you and your parents regarding the money.

The HELOC is relatively a simple process. It took 1.5 months from beginning to end for me to get mine.

I talked to a lot of banks first to find the best deal for me.

The bank I chose, and most likely all will ask for the same thing, wanted to get:

• 2 years of w2
• 2 pay periods of paystubs
• 2 years of tax returns
• Any open mortgages they wanted the last statements to verify. ( I have 2 investment properties with mortgages)
• Copy of declaration page for property insurance on my primary
• Personal financial statement that lists all liabilities and assets

I filled out an application and they started the process by ordering an appraisal. The appraisal was actually a BPO Broker Price Opinion that I disputed since the person only did a drive by of my property and compared it to other properties (comps) that they had full knowledge of upgrades for the interior and exterior. Not a fair comparison. They ordered a full appraisal that came in much higher and was more equitable.

They paid for closing costs as long as I keep the account open for 2 years. I got a 1st year very low interest rate and I can also use what they term as a 'loan in the line' that allows me to do my draws (at variable rate) and then convert them to a fixed rate. They will do a credit check and look at the credit score of the applicant(s).

Prior to closing they did a verification of employment that took 2 days. Afterward, closing to sign all the documents.

Hopefully this will help you.

Good luck.....

Tim Carter · Answer

Sorry to play the Devil's Advocate here a little bit. Everything sounds great on paper but it all hinges on you making money on your deals. Make no mistake, if your parents default on the HELOC they will lose their home. As @Jason Moore alluded to, things can get ugly fast in these types of situations. As he said, I think you need to be careful how you structure this to make sure they are protected as much as possible. If you do that, I think you should be fine. You are fortunate to be in the situation where your parents have so much equity available and you are smart for leveraging that position. Kudos for that!

The way I see it some changes you could make to the agreement would be:

Don't set the rate at 5%, but rather the adjustable HELOC rate +2% for example. You could be generous and give them 5% during their introductory rate period as a little bonus for setting this up for you. I recently applied for a intro rate of 1.2% but it only lasts 6-months. After that it would go back to (prime+x)%. I say this because 5% could very well have them losing money on every dollar they loan you a year or two down the road.

Sorry, I missed the part where you said you would be paying the interest on every statement they ever get. In that case your terms are more than generous. They really do make the full 5% even if you don't use the money for a full year, yet, you still have the incentive to repay the loan early.

Also, what "maintenance costs" you will be covering need to be carefully defined.

What happens if the loan extends past 1-year? Is the 5% still due? That could be hard to pay in the middle of a project that goes longer than expected. You do realize that 5% of $200,000 is $10,000 right?

My advice? Make money on your first deal and get it done quick! (easier said than done) That way you can have more cash going in to the next deal and/or get better terms on your next loan. This loan sounds expensive! Basically, if I read this right, you add  +5% on top of any money you take. If you get the first deal done in the HELOC intro period, you will be much better off. Future deals you would be paying upwards of 9-10% or more on your money.

Scott Weaner · Answer

I don't think that you can use a HELOC that the current owner applies for.

Sam Valme · Answer

Thanks @Daria B.! Thats exactly what I was looking for. Now I have a good idea of the asks i'll have to make when creating this solution. I have an attorney now and if we get to a common ground I'll definitely be getting him involved.

Sam Valme · Answer

Thanks @Tim Carter. With the right plan and a proper team. I hope you're right!

Tim Carter · Answer

Sounds like you got your head screwed on straight. I bet you'll do better than break even. Good luck to you sir!

Sam Valme · Answer

Excellent to know @Daria B., I actually have a meeting set tomorrow with M&T Bank's mortgage department.The primary agenda of the visit was information on refinancing but I'll be sure to get some details from their side as well on HELOCs.

@Tim Carter, playing devils advocate is my favorite game :) . Thanks for those points! Because I've been managing the property for awhile, we have a good bead on maintenance descriptions and costs. But I'll make a note to get this outlined in our agreement.

I am aware that 5% of 200,000 is 10,000. However target purchase price will be sub 100k. We'll have 20k in cash reserves when this boat sets sale so we do have a bit of cushion. Also, I've been made aware of the risks of losing the house. I live in said house currently so trust me, there is definitely a HUGE incentive to get this done right.

The strategy we are building is to do exactly as you mentioned. Take our time, do one, do it right.  Focus on the responsiveness of our vendors and contacts. Realign resources if necessary. Then analyze potential areas of improvement after the dust clears. Reset. Do it again. Then build some trending data. My realistic goal for 2016 is to do one with a 10k profit on our end. But if we break even, we'll still consider that a success.

Daria B. · Answer

I found some that had an annual fee and choose one that all I have to do is do a draw to satisfy the annual fee. Now of course I don't want to waste my draws BUT I'm looking at actively using the HELOC so that should take care of not having to pay the annual fee. Initially though, I chose this lender because when I asked about an annual fee I was told there was none. They still had the best deal regardless of annual fee so at the signing when I found out there was a fee (YES not a happy camper) I just knew I had to do a draw to satisfy it. They have a minimum 2 year open on the account. Otherwise, if I close it before the 2 years and one day then I have to pay the closing costs that amounted to $1,100 +/-.

How to unlock a HELOC

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