Posted by John B. Corey Jr. on March 22, 2005 at 12:05:38:
One specific way using hard money.
If you are buying a place at a very low price compared to the true value…
Seller agrees to sell place for $50K. It needs work. It is a REO and the lender needs it off the books.
The appraisal comes it at $100K based on the as-is condition.
Conventional HML will go to 65% of as-is appraised value.
Before closing costs you could have up to $15K on the table that you can walk away with.
These deals are not common and require some good hunting. They do happen. I have even funded some with full disclosure of what was going on (I being the direct, HM lender).
Many other deals that result in more then 6% cash back credit from the seller involve fraud or a very understanding lender if everything is disclosed.
One other variation that is legal if the lender knows…
Sale price of $100K. 65% LTV new first. Seller agrees to a second of $50K and effectively leaves some of the proceeds of the first on the table. They have a position that is exposed. If the funds are left in escrow for repairs and the repairs get done the ARV is assumed to be some figure much greater then the CLTV so the seller is then protected.
The motivation here is to get a property can have a serious amount of work sold and the work financed by the seller without the seller needing to come up with the cash. The seller’s position is only protected if the work is done and done well plus the property has seen a large jump in value post the rehab.
John B. Corey Jr.
Chelsea Private Equity LLC