Re: Strawman…could someone explain. - Posted by Dave T
Posted by Dave T on April 07, 1999 at 22:05:29:
I have not done this so my explanation will only attempt to clarify Bill Brochick’s presentation at Dallas. If I have it wrong, then I trust that someone will correct my understanding.
Assume that you find a $100,000 property that the seller will let go for 80% FMV, or $80,000. Your banker will only give you a first mortgage for 80% of the purchase price, or $64,000 in a non-conforming loan.
You arrange for an intermediary, your “strawman”, to buy the property for $80,000, then sell it to you for $100,000. Settlement of both transactions to occur in a simultaneous closing.
Now you go to your bank for an $80,000 loan (80% of your $100,000 purchase price) which then passes through the strawman to the seller and you take ownership. The $20,000 difference between the bank mortgage and the $100,000 contract price is refunded to you by your strawman after closing title.
With this technique, you get 100% bank financing for a purchase at 80% LTV with no money out of pocket except closing costs. The property must appraise for the higher purchase price to make this work. I believe that Bronchick also said that the strawman should be an unrelated party.
I am not clear why this has to be a non-conforming loan. Perhaps someone could answer this for me.