How does Cash Back at Closing Work?

General Real Estate Investing
1

I was reading an earlier post by PropertyManager. He was saying that he will sometimes do a cash back at closing. I don’t understand this concept and have not come across it (to my knowledge) during my REI research or reading material.

Can someone take a moment to tell me what this is and why you do it.

Thanks,
Debra

2

There are several ways to get cash back at closing, one is the bank is loaning more than the sales price of the house. For example:

$100,000 House apprases for
$80,000 The bank will loan 80% of the value of the house.
$50,000 The sales price is (which goes to the seller)
$30,000 You get the difference at closing

That is simply how it works. In actuality you will probably get the $100k house for $50k because it needs a lot of work, so it will probably be a double close that will be a first purchase of the house for $50,000 (goes to the seller) and a second loan for fix up which would be $20,000 (goes to your contractor) and after the house is fixed up you refinance the $70,000 for 80% of the $100k value which is $80,000. In this example $70,000 goes to pay off the existing loan and you get $10,000 cash back at closing.

3

Well, that makes perfect sense. I didn’t realize that the remaining unencumbered funds from the lender would be called cash back - I was thinking it was a rebate of some sort.

Thanks Bluemoon.

4

You may be right about the terms. My broker has been calling it cash out. I don’t know if my terms are accurate or not.

5

There other ways of getting cash back at closing also. When you close on a multi family property you get pro-rated rents transferred to you at closing.

If you close the first week of the month that can be a significant amount of coin.

Since your mortgage and utilities won’t be due until after your next month’s rent is due from your new tenants, those pro-rated rents could be spendable cash.

It may sound lame but it is what it is. A five family multi 100% financed could have 3500.00 in pro-reated rents.

Jeff

6

Also, you can put in the contract set-asides for certain items, i.e., $2,000 carpet allowance…$1,500 painting allowance…$3,500 decorating allowance…these will be paid at closing.]

Keith

7

Keith,

I wonder if you could clarify your last comment…

Why do you say…put it in the contract…these additional allowances?

You’re putting it in the contract with the seller?

Wouldn’t you just be requesting a higher mortgage amount to cover these additional fixer-up expenses.

I’m just wondering why you say…put it in the contract. Is there an advantage to doing that?

-Mike

8

The topic is cash back at closing…

You can use this as leverage for a lower price or negotiate to get the money back at closing.

Keith

9

[Box]…[Outside the Box]>Cash out at closing

I need to some more reading on this… :slight_smile:

Thanks,
-Mike

10

don’t most banks balk at giving back more than 3-5% of the loan amount to the buyer?

11

<<don’t most banks balk at giving back more than 3-5% of the loan amount to the buyer?>>

If you are dealing with a plain vanilla $100K house, 3% is $3,000 and 5% is $5,000…I think my examples were pretty much in-line with that…

Keith