The Housing Scene

Cash Back for Cash Buyers

A good number of buyers have been robbing their piggy banks lately, hoping that paying cash will help them beat out the competition for any decent houses still left on the market.

According to ATTOM Data Solutions, a national property database, the percentage of cash sales reached its all-time high of 42 percent in the first quarter of 2010. That’s compared to 28.2 percent in this year’s second quarter. In 2017’s third quarter, ATTOM says that cash buyers accounted for 27.2 percent of all single-family home and condo sales -- up from 26.7 percent in Q3 2016. It was the second consecutive quarter with a year-over-year increase following 15 consecutive quarters of year-over-year decreases.

Black Knight Financial Services sets the high-water mark even higher: 45.4 percent in Q1 2011, compared to 28 percent in Q3 2017.

Lots of people have been raiding their bank accounts, stock portfolios and even their IRAs at a pretty good clip. With a little-known program from Fannie Mae, however, cash buyers can reclaim a good hunk of their money. It’s called the Delayed Financing Exception. It’s “a widely undiscovered, yet very useful, program because it provides buyers with a broader range of financial choices,” says Chris Carter, a loan officer and real estate agent with Geneva Financial in Naples, Florida.

Normally, cash buyers have to wait a minimum of six months to refinance their purchase and retrieve some of their money. But with the Delayed Finance Exception, you can refinance right after closing -- no six-month wait required.

Carter says the exception “works best when done within three months.” That’s because the Internal Revenue Service has a 90-day limitation for you to claim the loan as “property acquisition” financing. Without it, you won’t qualify for the deduction for mortgage interest.

As of this writing, the mortgage interest write-off is still deductible when itemizing. But it could be trivialized under tax reform proposals now being considered in Washington.

There are plenty of reasons why you might want to pull your cash back out of the house. One is that a house is a relatively illiquid investment. Sure, you can buy and sell real estate, but doing so often takes months. Stocks and bonds, on the other hand, can be bought and sold in a matter of seconds.

Also, any money you have tied up in the house is not available to make other investments.

Another reason is leverage. A basic principle of investing in real estate is to use borrowed money to own property, putting less of your own cash at risk. The technique increases the rate of return on your money.

And then there’s diversification, another basic investment primer, which allows investors to spread their money among different investments, again reducing risk.

Delayed financing can be used for personal residences, vacation homes and investment properties. The loan amount must comply with loan-to-value ratios of other cash-out refi programs, typically 70-80 percent of value. And it can include closing costs and prepaid fees, as long as the loan-to-value limit is maintained.

The interest rate must be compatible with that of other cash-out refi loans with similar ratios and transaction specifics.

But there are rules:

-- The six-month time frame begins on the closing date of the original cash transaction and ends on the funding date of the delayed funding refi. “This means that the full application, underwriting and final approval must take place” during that time frame, according to Carter.

-- The original deal must have been an “arm’s length” transaction: Buyer and seller cannot be related, either personally or in a business sense, and must have acted in their own individual interests.

-- The closing statement from the cash deal must show that no financing whatsoever was used.

-- Funds for the cash purchase must be fully documented, sourced and “paper-trailed.” If any part of the purchase price comes from a deal on another property, that loan must be paid off first from the proceeds of the delayed funding.

-- There can be no outstanding liens. Any lien must be paid off before closing.

As you can see, this isn’t simple. That’s why Carter suggests working only with loan officers who understand delayed financing, have done several deals and can get you to the finish line well ahead of time.

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