Loan officers/others in real estate- can this be done

I am getting possibily involved pretty heavy in the real estate market starting this week as I already bought my 1st rental.

I have read or skimmed thru 10-15 books in the past 2 weeks, so I have learned quite a bit.

I read somewhere how this can be done. Is this true:

Lets say a home is listed for 100k and had been on the market for 6 months or so. You come to an agreement with the distressed seller to purchase the home for 85k from them. Your lender loans you the money with what ever down on the home that is needed (we will say 10% for discussion purposes). So now your principal on the home is 76k or so. You put 10k of out of pocket renovations into the home and now the once 100k appraised home is being appraised for 120k.

Can you refinance the home (not sure what these loans are called, renovation loans?) for 120k (remember you put 10k into renovations) and pay off the 1st loan of 75k and pay yourself back for the 10% down (8k or so, so you get back the 85k), reimburse yourself for the 10k in renovations and pocket the 25k for this. Even if they make you put 10% down on next loan (the 120k loan from the newly remodled, refinanced 120k home), you are up 12k or so.

Arent you basically buying 15% off of first apprasied amount from a distressed seller, fixing it up with out of pocket money than reimbursing all your past debts and reselling (by refinancing AFTER the home has been renovated) the home to yourself to now rent out for 30 years, which in turn will get you more rent for the improved home.

The reason I heard these are good is because they are no prepayment penalties on these as they (and I coud be wrong) let you do a free(?) refinance for the renoavtions as these are what these loans are for in the 1st place.

Is this legit? Do people do this? What are they called? Is there another way to do them? Just getting ready to call my loan guy but dont want to sound like a jackass.

I was thinking if you do your first 10 houses like this you are up 100k (which you can use to buy another home free and clear). Not trying to make money doing this as in essence it is still a loan that you have to pay back but you can build a bankroll doing this if you plan on going into this full time. The key is (IMO) to buy the house for 15% below orginal appraisal, renovate and get back double off of renaovation (put in 10k of value and get 20k), which maybe a little high but I figure if someone adds 10k to home than than they should get 20k of value right?

Thanks

i would say no. refinancing loses value.
if you fix it up and when your reappraisal comes around that gives you equaty which in hand is better than having a piece financed at it's value.

like your investment at85,000 is now appraised at 135 lets say. gives you more value towards purchase of the home becausebanks are more willing to talk and you get better credit score. may even put you in position to buy with no money down and still at a good rate . not exactly the same deal if you were first time buyer no money down where it would be impossible to refiance

or better yet. no loss situation here.
buy the houses in detriot 29,000 and rent them section 8.should pay for themself in about 5 years and hopefully toyata comes in and buys the plants up and put people back to work in the area and sell all of them

section 8 guarenteed money

IMO...If you're going to hold it and rent it out, you want to only borrow 80% of the appraised value of the house, as to not pay PMI, which hurts your cash flow. Also, the first loan that you are paying off with the refinance might have a pre-payment penalty, in addition to the closing costs for the refinance.

I bought a couple of houses three years ago with 20% and 30% down, getting adjustable rate loans with a very low monthly payment which here essentially "interest only" loans, as I would have to pay more than the minimum payment to cut into the principle. These loans DID insure me a nice positive cash flow from the properties though and got me leveraged in. Now I'm refinancing, as the interest has racheted up on these loans, and my liquidity situation has improved substantially.

As far as remodeling goes, it seems the best returns are by putting it into the bathrooms and kitchens, as well as cheaper cosmetic improvements such as paint and maybe a little landscaping.

Absolutely you can Iceman...you just learned how to become a real estate mogul. Unless of course there is a prepayment penalty on your first loan or some other restriction.

If you ever want to ask me questions, I own a commercial appraisal company, feel free to get my email address and I will answer to the best of my knowledge.

OK. I do know about the appraisal business and here is how it works. A bank will only be willing to loan you the appraisal amount of the house so you are at the mercy of your appraisal company. An apprasial does a study and apparaises your house almost solely from recent sales of similar sizes in the same area. If you put 20k worth of upgrades, yet you do not increase the square footage then you are very unlikey to get that 20k in increased appraisal value.

Appraisals do have a little bit of liberty in adding for upgrades but they are no where near what you would spend. If houses on your street have sold for $160 per sq foot then you will most likely get appraised for the same $160 per square foot. If your upgrades increase the square footage then you will see the increase. Otherwise they are very limited in ways they can increase the appraised value. New carpeting does not increase the appraised value of a house. It will sell easier, but it will not appraise for more.

WVU said:

OK. I do know about the appraisal business and here is how it works. A bank will only be willing to loan you the appraisal amount of the house so you are at the mercy of your appraisal company. An apprasial does a study and apparaises your house almost solely from recent sales of similar sizes in the same area. If you put 20k worth of upgrades, yet you do not increase the square footage then you are very unlikey to get that 20k in increased appraisal value.

Appraisals do have a little bit of liberty in adding for upgrades but they are no where near what you would spend. If houses on your street have sold for $160 per sq foot then you will most likely get appraised for the same $160 per square foot. If your upgrades increase the square footage then you will see the increase. Otherwise they are very limited in ways they can increase the appraised value. New carpeting does not increase the appraised value of a house. It will sell easier, but it will not appraise for more.

Click to expand...

Good answer from someone not in the business. If the seller is distressed, you are probably buying it for less than market value anyway...that is the real key. You will want to make the most minor improvements...carpeting, etc.

If you are buying a property at market value, you will not get dollar for dollar on your cosmetic stuff. Trust me, I put a $100,000 pool in my back yard and my residential appraiser made a $10,000 adjustment to the comparables with no pool.

Iceman...you will also help yourself immensely if you can get on the MLS, or find an agent/broker friend that will allow you to peruse theirs at your convenience. You want to know going in what comps in that area are selling for. I know guys who have made millions doing what you are getting into. But it is a lot of work and you won't see the true fruits of your labor until the market makes a significant jump.

But remember...Leverage, Leverage, Leverage

WC Bias said:

I put a $100,000 pool in my back yard and my residential appraiser made a $10,000 adjustment to the comparables with no pool.

Click to expand...

do you need a Butler :WTF: 100,000 pool.

you're going to get in the Real Estate business pretty heavy this week after skimming some books and asking some questions on a gambling posting forum?

Brilliant!

Journeyman said:

do you need a Butler :WTF: 100,000 pool.

Click to expand...

It's Las Vegas, a rectangular 15 ft. pool with nothing to it costs $40,000...you add a hot-tub, some stone work, landscaping, it starts going up fast.

besides, I bought my house for at least that much undermarket so essentially the pool was free. In the summers, it's like having another family room.

Very nice WC.

buddyboy said:

you're going to get in the Real Estate business pretty heavy this week after skimming some books and asking some questions on a gambling posting forum?

Brilliant!

Click to expand...

Don't dog a man for going for it...sounds like he already found a deal. It is hard to get a distressed seller to sell before they go to foreclosure...they are often in denial.

WC Bias said:

Iceman...you will also help yourself immensely if you can get on the MLS, or find an agent/broker friend that will allow you to peruse theirs at your convenience. You want to know going in what comps in that area are selling for. I know guys who have made millions doing what you are getting into. But it is a lot of work and you won't see the true fruits of your labor until the market makes a significant jump.

But remember...Leverage, Leverage, Leverage

Click to expand...

I have studied this neighborhood/city for 3 years and the houses all fall in the 120k rage, EASILY. This partiuclar home I talking about is listed for 110k and if would easily go for 120k with minor improvements. My only fear is does the appraiser say well he bought it for 95k so no way he can get it 120k. The key is to hope the seller will sell for 95k. Actually trying to take advantage of a down market and a distressed seller (I assume) as home is vacant. These figures are not far off base (IMO).

There is no prepayment penalty on these.

Iceman said:

I have studied this neighborhood/city for 3 years and the houses all fall in the 120k rage, EASILY. This partiuclar home I talking about is listed for 110k and if would easily go for 120k with minor improvements. My only fear is does the appraiser say well he bought it for 95k so no way he can get it 120k. The key is to hope the seller will sell for 95k. Actually trying to take advantage of a down market and a distressed seller (I assume) as home is vacant. These figures are not far off base (IMO).

There is no prepayment penalty on these.

Click to expand...

There are appraisers that do that, particularly residential guys because they make their money on volume so they don't really pay attention when they appraise a house that just sold.

A good residential appraiser is hard to find. You want to get an agent on your side that knows who is good and who doesn't give a shit. A lot of residential guys are easily influenced by upfront payments...at least they tend to listen a bit better. Be prepared, have your comps to show him, detail what you did and how much you spent to get it to the level of the other comps, and you shouldn't have a problem.

buddyboy said:

you're going to get in the Real Estate business pretty heavy this week after skimming some books and asking some questions on a gambling posting forum?

Brilliant!

Click to expand...

I have read or skimmed thru 15 books in past month. I have been to Borders a dozen time in that span. I have spent hours and hours talking to agents, apparsairs, accountants, contractors, etc... I have reserached the internet all day long for weeks. I have put together a pretty decent plan with all the numbers behind them. This has consumed me for a month and something I have thought about for a few years.


I read about this last nite and was throwing it out there for a few others to look at before I appraoched my loan officer about it.

Believe me I am as prepared as I can be. I can promise you that. Unless you have lived with me I am sure you have no idea. There most likely will not be a stone unturned on my end when this is over as I am a nut case when it comes to being orgainized and prepared.

Here is what we know, a 110k house doesn't sell in a 120k neighborhood.

You want to buy it for 95k, and sell it for 120k.

That leaves you 25k gross profit.

Closing costs=?
Interest=?
Improvments=?
Capital Gains Tax=?

buddyboy said:

Here is what we know, a 110k house doesn't sell in a 120k neighborhood.

You want to buy it for 95k, and sell it for 120k.

That leaves you 25k gross profit.

Closing costs=?
Interest=?
Improvments=?
Capital Gains Tax=?

Click to expand...

Where did he say sell...he said refinance, huge difference. He gets his equity out to go buy another house and do it again. He's going to have to find a renter to cover the mortgage, but $105,000 mortgage is not much in rent. If the market turns, that's when he makes his profit.

This is the classic 0 money down way of getting rich. It ain't easy, it is risky, but it can be done.

Iceman,

I will assume your numbers are accurate for reply purposes.

First, you don't EVER have to pay PMI. Huge misconception by people. You can finance 100% without paying PMI. to do it, you have a first of 80% and a second through an equity line or straight second mortgage of 20%. The seconds are more expensive than the first and typically have shorter amortization periods if you get an amortizing loan. So, while you don't necessarily have to pay PMI, it may be more expensive to do it in the manner I have outlined. That is without getting into the tax consequences of PMI v. a mortgage/equity line.

Secondly, you have to go through something called seasoning. Generally speaking, most banks won't recognize appreciation in a home (I am assuming homes and not apartments) until you have owned it for 1 year. There are banks that recognize this, but you have to search to find them and their pricing may or may not be as good. Thus, if you buy for $85, put money into it and try to refi 4 months later, you are unlikely to be able to pull any money out. You likely have to wait a year to do so.

Generally speaking commercial loans on single family homes do not have pre-payment penalties. However, be sure it doesn't. There are 1000s of them that do not so you should have no problem finding one.

Legally speaking there is nothing wrong with what you want to do. Now, where people deviate from legally permitted activities is to get a personal residence loan (better pricing) and not an investment property loan simply b/c the place is a single family home. IP loans generally a lower LTV and higher interest rate. That said, people do it all the time. Probably 98% in the situation you are describing. however, it is technically loan fraud. Just thought I would advise on that.

Practically speaking you have to make sure the improvements are ones that add value. Someone mentioned adding sf, that is one way, the other main ones are kitchen and bathroom. Unfortunately, those three are the most expensive ones as well. Other practical concerns are maintaining equity. There is no guarantee your place won't go down temporarily or long term and if you then try or have to refi in a down market, you may have to come out of pocket to get refinance. Additionally, I wouldn't advise pulling money out just for the sake of it. Pulling money out for a specific purpose (i.e., buying another rental place) may be a wise move. But pulling it out to put in the bank and earn 4% when you are paying 5-6% is foolish.

If you can find distressed sales, great for you, but they sound like a great thing in theory but rarely come along in practice. Anyone can afford a $120k house, so there will be plenty of buyers/investors for a $120k house at $100k.

Flipping is another entirely different issue, but I don't believe you are inquiring about that. Buying rental properties are a great thing IMO. I own a mobile home park (don't laugh, cash cows and low maintenance) and have owned an apartment building, both with nice returns.

He gets his equity out to go buy another house and do it again.

Click to expand...

if he can find a lender to do that for him in a short time frame, more power to him.

If you're gonna try to make money by borrowing $$$ and investing it, at this time you'd be better off opening up a margin account and buying stocks.