Idea for pulling out tax-free cash on rehab loan - Posted by Tyler

Real Estate Investing Real Estate Financing
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Posted by Tyler on May 05, 1999 at 01:41:11:

My post said:

“My broker got the idea from the lender who will be funding the loan with private investor money.”

The lending institution is loaning the money of a private investor. The “lender” is a different person than is actually funding the deal. I’m assuming it is the investor who will not allow the cash to be pulled out in the loan on this program he is funding.

The lender who has access to the funds, suggested this to my broker, and my broker to me. In reality, the lender is a middle man here, as well.

I’ll tell you one thing…if this whole “lien” thing is illegal, I won’t touch it. My broker is an extrememly ethical man, and I would not expect him to suggest anything crooked. One small deal like this is peanuts compared to what he’ll get out of me long term. No reason to weasel around.

NT

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Idea for pulling out tax-free cash on rehab loan - Posted by Tyler

Posted by Tyler on May 04, 1999 at 24:18:29:

This may be old school for many of you… but this is a new one to me. Tell me what you think:

52,000 Price
8,000 rehab

90,000 ARV

I’m getting a construction loan, which will give me up to 95% LTV of ARV of home (85,500).

They will pay off the 52,000 at closing, less my 5% (2,600).

They will put the remaining 33,500 in escrow for repairs (85,500 - 52,000).

I pull out money with the contractor invoices for the 8,000 in repairs.

There is now 25,500 left in escrow (33,500 - 8,000).

I have my partner put a lien on the property of 25,000. At the closing of the final loan, the lender will issue a check to the lienholder (my partner).

My partner cashes the check, and gives the money to me. (I take my partner to a nice dinner)

I have effectively pulled out 25,000 from a deal, tax free, and have the property leveraged at just over 95% (the origination pts and fees were wrapped into the loan as well).

Has anyone ever done this effectively? My lender says this will work like clockwork…

From here, my plan is to do a L/O with the property getting another 3-5,000 option money, decent cash flow, and a sales price of closer to 100,000.

Net result:

25,000 tax-free
-2,600 5% put down
4,000 option money
apx $200/mo positive CF (or more if down payment assistance)
11,000 back end profit on sale

TOTAL:
37,400 profit
200+/mo passive income

Boy, I could do these all day!!

Am I missing something here??

NT

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Re: Idea for pulling out tax-free cash on rehab loan - Posted by JPiper

Posted by JPiper on May 04, 1999 at 09:11:39:

If the lender will loan 95% of ARV, then why the charade with the note by your partner? Could it be that if you went to the lender and said, “Look, I’ve got this property that’s worth $85,500. It only needs $8K in repairs and I can buy it for $52K?.so you loan me 95% of $85K, pay the seller his $52K, pay the contractor his $8K, and I’ll put the balance in my pocket”, that the lender would not go for this? (By the way I get $23,825 before fees).

Whether the subterfuge above is legal I’ll leave to someone else. Is it so much different than having your “partner” issue a phony repair bill to the bank for the money?

This doesn’t look like a “tax-free” deal to me. When the “partner” gives you your cut of this money, how will you report this? It looks like either a gift or income to me?.both taxable. When your partner puts a “lien” on the property for $25K?.but advanced no money?.and then receives a payoff of $25K?.that looks taxable to me as well. But I’m no tax expert?run it by your CPA for his opinion.

JPiper

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Re: Idea for pulling out tax-free cash on rehab loan - Posted by Tyler

Posted by Tyler on May 04, 1999 at 16:48:47:

The property is worth 90k. The 85,500 is 95%.

The lender will loan the 95%, but not allow you to pull out cash…that would be too good to be true.

The lien idea is the only way the lender saw to pull out any cash, other than padding contractor invoices.

The lien thing is new to me. I don’t even know the details of how difficult it would be to put the lien on, or what kind of explaination would be needed to do so. This was a suggestion from my lender, and I was hoping to get some details from someone who had done this before.

I think you’re right about the tax thing. I think it would be different than pulling out the cash in more of a refi situation (like if they did let me pull out the cash directly at close).

Could you just let the loan close at the end of rehab, at 66% LTV (52,000 + 8,000/90,000 ARV), then refi at 95% six months into my L/O (required seasoning for my lender)? This way, that money would be tax-free, although I’d eat a couple points.

Just some different twists…

NT

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Re: Idea for pulling out tax-free cash on rehab loan - Posted by JohnBoy

Posted by JohnBoy on May 04, 1999 at 20:12:41:

When you say “your lender”, are you talking about the actual bank loaning the money OR are you refering to a “mortgage broker” when you say “my lender”?

This sounds more like the mortgage broker talking than the actual bank.

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From the lender - Posted by Tyler

Posted by Tyler on May 05, 1999 at 24:40:24:

My broker got the idea from the lender who will be funding the loan with private investor money.

No banks.

So, yes, it came from the lender.

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Re: From the lender - Posted by JohnBoy

Posted by JohnBoy on May 05, 1999 at 01:26:08:

If this is coming from the lender then none of this makes any sense. You say your broker got the idea from the “lender” which is a private investor lending the money. You say the “lender” will NOT allow you to take out any cash.

So if the “lender” will not allow you to take out any cash, then why would the “lender” give your broker the idea about having you get a third party to file a lien against the property so they can get the cash out to just turn around and hand it over to you?? That would be the same thing as the “lender” allowing you to take cash out of the deal. The only difference is having you jump through another hoop by setting up a third party as a front man for no valid reason. That doesn’t make any sense at all to be coming from the “lender” to suggest this to your broker.

What makes sense here is that your broker came up with this idea to get around the lender without him/her knowing you will get any cash out. The broker gets paid a percentage of the loan amount. The more the broker can get you, the more the broker stands to make. If this is the “lenders” idea, then ask your broker to put this plan in writing on how you will need to structure this and have him SIGN IT! If the “lender” knows about it, which according to your broker he does, then he wouldn’t have a problem with putting this in writing and signing it. If he has a problem with this, then guess what? Your “broker” is LYING to you! That means the “lender” knows NOTHING about this and would NEVER agree to this if he/she did know about it.

Now I don’t know the broker or the lender in this deal your trying to do, but based on your post “common sense” says, the broker is not getting this idea from the “lender” at all. Common sense says, the broker got this idea on his own without the lender knowing anything about it. Otherwise you wouldn’t need to set up a third party to file a lien against the property by getting the lender to release funds to that person just to turn around and hand it right back to you! Think about it??? Does that make ANY sense at all that the “lender” is giving the broker this idea after the broker already told you the “lender” will NOT allow you to take any cash out??

If the “lender” ever found out about this after you did it, guess who’s going to be liable? YOU ARE! The broker will deny everything and claim he knew nothing about this. Ask him to put it in writing and sign his name to it and then see what he tells you?? My guess is he will come up with excuses why he couldn’t do that. The real reason is because he could get into BIG trouble over this if he was to get caught!

Don’t take my word for it, just ask your broker to put it all in writing and sign his name to it so you can have a copy for your records! Then you will know for sure if this idea came from the “lender” or not.

Good Luck.