Hello BP Friends,
I’m a new investor in the market for a live-in flip. I am wondering if paying what would normally be considered “too much” really matters if I am just going to perform a cash-out refinance soon anyway. Please challenge my rationale in this example:
Let's say the seller wants $100,000 for their house, it is in an excellent location to rent rooms out, and it is getting little traction on the marketplace. I would have to spend $50,000 to achieve an ARV of $200,000. Because I will apply for a cash-out refinance of the property after the repairs are completed, I think I should just give the seller the price requested ($100,000) to ensure I grab the property instead taking the risk involved with offering less (let's say $90,000). My down payment will not be drastically different even if I put down 20% of the purchase price ($20,000 versus $18,000). My rationale is that difference ($2,000 in the example) does not matter much anyway because the bank will insist when I refinance that I keep 20% equity in the house ($40,000 assuming my ARV estimate is accurate). I grant the time-value-of-money principle says I could have reinvested that $2,000 difference, but that matters little to me given that I spent $70,000 (50K in rehab costs plus 20K down) to make $50,000, a 28% ROI. The house is now worth $200,000 and that $2,000 is "stuck" in the house as equity either way. I also grant the risk of my offer strategy goes up as I replace fictional numbers with real ones, but wouldn't same rationale still apply?
Regards,
Danny
