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.
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.
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.
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.
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.]