Backwards Financing for Real Estate: Buy First, Borrow Second

Private Money Blog | Private Money Loans | Sonoma County

Imagine this…

Buy an investment property today, and apply for a cash-out refinance tomorrow.

It may sound a little weird, but it’s exactly how smart real estate investors can get an advantage in securing a good (or great) deal in a Seller’s Market when the inventory of homes is low.

We are back to the market of multiple offers on a single property.

Just this past weekend, one of my Realtor contacts told me that his out-of-town investor client was outbid on a property. The competing offers were coming in at $50,000 over the seller’s asking price.

This particular buyer was submitting offers with 50% down payment and a private money loan through ARC Capital. That’s 50% Down, way over the asking price, and he still got shut out by another buyer.

That’s nuts!

It just goes to show you the state of our current market. (Finally a good time to sell šŸ™‚ )

A Change of Strategy

This financing strategy is not a secret, but I can tell you that most people may not know it’s an option for them.

Many people may not be able to take advantage of this opportunity financially, so it certainly creates an advantage for investors with access to large amount of cash.

Lots of cash.

Delayed Financing

Delayed Financing is the technical term for buying a property all cash and then securing a loan right after the purchase.

It’s easier to explain it in this scenario:

  • You find a property
  • You make an all-cash offer to purchase the property with no loan.
  • You actually ‘buy’ the property all cash.
  • Once you the escrow closes and you take legal ownership, you apply for a mortgage loan to get back some of the cash you put into the deal.

How it Works

Let’s suppose you have $250,000 cash available and you’re looking for rental properties in the $200,000 range. However, you only want to invest $100,000 cash towards an investment because you have other plans for your money.

Perhaps you’re looking to make some real estate investments in the near future so you don’t want to tie up all your cash in one property.

In this situation, you may set up a delayed financing transaction like this:

  • A home is priced at $200,000.
  • You buy it for $200,000 with a really fast closing time. (No loan needed)
  • Now you own the property Free & Clear.
  • Immediately after closing, you start the loan process with a mortgage lender for a $100,000 loan.

The loan process may take up to a month, but you would get your $100,000 cash back in the form of a loan secured by the property.

The end result is that you still technically purchased the property with a 50% down payment.

($200,000 purchase price with a new loan of $100,000)

The difference is that your loan transaction was done after you purchased the property. The loan was not necessary to close the deal.

As you know, negotiating a great real estate deal is a combination of price and terms. I hope this gives you some insight that can help you structure better terms that can create a win-win scenario to help you find and close more deals.

A word of caution:

If you plan to pursue the Delayed Financing option through your bank or credit union, please speak with a licensed mortgage loan officer first. There are specific requirements you may have to meet for the bank to approve the refinance transaction.

Otherwise, you may have to wait 6 months before you’re eligible for a Cash-Out Refinance.

On that note, a private money loan may also be an option if your conventional bank or credit union isn’t able to offer Delay Financing for your specific situation.

 

 

2 Comments

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