How To Use Delayed Financing The Right Way

Delayed financing is something many people aren’t aware of. In fact, when I started investing in rental properties in 2019 I had never heard of it.

And delayed financing can be a fantastic tool in your real estate investing arsenal. But like most tools, there is a time and place to use it. 

There are two main situations that make sense to use delayed financing. 

And, if you’re doing some renovation work on a property there’s usually a tipping point where it no longer makes sense. Instead, it would be more prudent to wait the full seasoning period for a true cash out refinance.

If all that sounds confusing, fear not!

I am going to walk you through a couple common situations that call for delayed financing. 

I’m also going to show you a real example of when I personally used delayed financing and what I could have done better.

But first, let’s understand what delayed financing is and why it exists in the first place.

What Is Delayed Financing, Anyway?!

Delayed financing is the act of getting a mortgage (aka the financing) after completing a real estate purchase.

Instead of getting pre-approved with a lender, putting in an offer, having the home appraised, and then closing on the property you do all that on the back-end.

In essence, delayed financing is exactly what it sounds like. You are delaying the act of bank financing on your purchase.

You might now be wondering how you’re purchasing the property to begin with.

The answer is cash. All cash.

Delayed financing allows you to quickly pull that cash back out of the purchase so you can have a traditional mortgage instead of a boat load of cash locked up in your property.

When To Use Delayed Financing

The answer to this may seem obvious now. You use delayed financing after paying cash for a property, right?

Yes, but perhaps not always.

And, you might be wondering why you’d pay cash for real estate instead of getting a mortgage, or financing, upfront to begin with.

Let’s walk through some situations where it makes sense to use cash, and when delayed financing would come into play.

Be More Competitive With Delayed Financing

Buying a home has gotten competitive. 

This is both true for buying a primary residence or an investment property. 

In highly competitive markets it’s not uncommon to waive inspection, give concessions like rent back, or basically do whatever you can to make your offer stand out.

But one of the most powerful things you can do is make an all-cash offer.

When my wife and I sold our townhome in Walnut Creek we had 17 offers in the span of a few days. Five of those offers were all cash, with three of them being over our asking price.

We didn’t even bother looking at the offers that had financing contingencies (e.g. depended on a loan to purchase the home).

Why?

Without bank involvement, there is little risk that the transaction won’t close. The sale isn’t dependent on someone’s credit, income, or an appraisal. 

It’s simply cleaner and easier to work with cash offers and it gives sellers far more confidence in you as a buyer.

In short, all-cash offers have a massive leg up on the competition. Oftentimes sellers will choose a cash offer over a slightly higher non-cash offer.

It’s that powerful.

Delayed Financing After The Cash Purchase

You may hear a lot about large cash buyers and think there are swarms of people sitting on piles of cash in their bank accounts.

While that certainly might be the case in some situations, most people with large net worths aren’t storing it as cash at their bank.

These buyers might be borrowing the money from another property via a home equity line of credit (HELOC) or even borrowing it against stock and bond holdings in their brokerage account.

Heck, Interactive Brokers currently offers margin loans starting at 6.83%. That’s pretty good considering a 30-year fixed rate mortgage is pushing 8.0% today:

In these situations, the buyer will likely want to obtain traditional financing with a mortgage and repay the borrowed funds.

Even if they didn’t initially borrow the funds, they might not want a bunch of cash tied up in their newly acquired property.

This is when delayed financing comes in. It allows the buyer to immediately go out and obtain a mortgage with a bank.

As long as you meet the requirements for a delayed financing exception (which isn’t difficult to do) there is no seasoning, or waiting, period to obtain a mortgage.

While delayed financing is a great tool to allow you to be more competitive when purchasing your primary residence, it’s also a great tool for real estate investors.

Use Delayed Financing After Off-Market Deals

The best off-market deals require cash.

That’s a fact of life. 

Quite simply, you’re generally getting a fantastic deal because someone NEEDS to sell quickly, or because a property is too distressed for traditional financing.

In either of these situations, you need to be buying all-cash.

But even though you’re buying an off-market deal with cash does not necessarily mean it’s a candidate for delayed financing. 

Examples Of Delayed Financing

Remember, delayed financing is a tool. It is not our ONLY tool.

It’s easy to fall prey to learning something new and trying to apply it to everything. It’s the old, “If the only tool you have is a hammer, you tend to see every problem as a nail”.

We don’t want to do that!

So let’s look at some real-life deal examples that made sense to do delayed financing. I’ll even share a situation where I did delayed financing where I should have waited to do a cash out refinance instead.

Delayed Financing On My First Rental

In 2019 I purchased my first Detroit rental property for just shy of $44,000 cash.

I call this home The Great Greydale. It’s an awesome brick Tudor and you can see the performance of this rental with some more detail here.

I found the home on the MLS and it was tenant occupied with no immediate repairs needed.

The home was actually listed for $55,000 but we decided to come in lower, with all-cash and now inspection, so we could still present an attractive offer.

Our offer was accepted and we began the delayed financing process. 

The home appraised for $48,000 and we received a little over $34,000 back when we closed on the loan.

That left us $9,400 in the deal which is the equivalent to about 20% down since the home was appraised for $48,000.

Not stellar by any means, but it was a decent way to get started. And that home has been a fantastic performer for us ever since.

My Delayed Financing Fumble

We planned to run the same playbook with our second Detroit rental property, a great little bungalow.

This one didn’t go quite as planned for several reasons, but you can read all about it here.

Ultimately, we had to evict the tenant and do some cosmetic updates. Unfortunately, this all unfolded AFTER we’d already done delayed financing.

So all the money we put into the house after getting our loan was “stuck” in the home unless we wanted to refinance again.

In a perfect world we would have purchased the home, evicted the tenant, done the cosmetic updates, and then gone forward with a standard cash out refinance.

But I was overly optimistic about turning around a chronically late-paying tenant. Oops!

Recent Client Success With Delayed Financing

Luckily, I’ve learned a few things since my first couple deals in 2019.

One of the biggest learnings is that if you really want to pull off a perfect delayed financing deal you need two things: A deeply discounted off-market property, and very little required rehab.

Imagine if I was able to purchase The Great Greydale for $36,000 off-market. It would still appraise for $48,000 and I would get all of my money out immediately with delayed financing.

That’s exactly what we had two clients do recently.

They purchased tenant occupied homes that needed no immediate updates, both for $65,000. 

Both appraisals came back at $90,000 which gives them a loan in the amount of $67,500.

That means they got all of their money out during the delayed financing process.

Those are dream deals and hard to find!

If you’d like to work with me and our team to find deals similar to that, get in touch! 

The One Catch To Delayed Financing

Delayed financing is great because it allows you to circumvent the traditional seasoning period for a loan.

In other words, instead of having to wait 6 – 12 months to get a mortgage or do a cash out refinance, you can leverage delayed financing to do it immediately.

But there’s one catch.

You cannot receive loan proceeds in an amount greater than the sum of your original purchase price plus closing costs. 

Let’s go back to the examples above to better understand this.

Remember my property on Greydale… 

Instead of the appraisal coming back at $48,000 let’s say that it was $80,000

Obviously, that would be fantastic!

You would quickly do the math and realize that I could pull out 75% of this on a conventional loan, or $60,000.

That’s $16,000 more than I paid for the home. So I’d actually be getting PAID to buy the property.

Not bad!

But with delayed financing, that wouldn’t fly.

I’d be limited to a loan at a maximum of my initial $44,000 purchase price plus my closing costs (let’s call that $1,500). 

So the maximum I’d receive when doing my delayed financing would be $45,500

Bummer!

But that’s the price for speed. 

In this hypothetical I’m able to get all of my money back out of the deal immediately. To me, that would be a huge win.

But if I wanted to wait the six-month seasoning period (again, assuming the appraisal came in at $80,000), I’d be able to get the full $60,000.

That said, usually you aren’t getting properties THAT discounted that are already turnkey. 

Even the two client deals that I outlined above where they got all their money out with delayed financing are pretty rare.

But they do happen. And it’s an amazing feeling when they do!

When NOT To Use Delayed Financing

Delayed financing starts to lose its appeal when the deal you purchase requires some renovation work.

My bungalow example above, the second deal I did in Detroit, is a perfect example. If you buy a home for $40,000 and put $15,000 into a cosmetic rehab you’re left with $55,000 in the deal.

Let’s say you knocked the rehab out in less than a month. 

Should you do delayed financing?

If you do, the most you would be able to pull out of that deal is $40,000 plus your original closing costs.

Is it worth leaving $15,000 in the deal? Or should you wait five more months to do a traditional cash out refinance so you could pull out more capital?

It’s a personal question with no right or wrong answer. 

Some people will value the immediate access to the $40,000 while others might prefer to wait. It will likely depend on what you expect the home to appraise for. 

For example, if the home only appraises for $65,000 that means you would receive $48,750 back after the cash out refinance. You still have $6,250 left in the deal.

But with delayed financing you’re only getting your initial $40,000 back.

Is that extra $8,750 worth waiting 5 more months for?

On the other hand, if you expect the home to appraise for $100,000 that means you would receive $75,000 back after a traditional cash out refinance.

That means you recoup your entire $60,000 investment PLUS an extra $15,000.

To me, that’s definitely worth waiting for the full seasoning period.

Wrapping It Up

Delayed financing is a fantastic strategy in the right circumstances. 

Usually the deals that make sense for delayed financing are ones you’re able to obtain for well under market prices and require little added capital for repairs and improvements.

But as we discussed in the last section, that doesn’t mean that it’s a bad strategy for deals that require a light renovation.

It just depends on the numbers and how you’re personally valuing the speed in which you can access the capital required to purchase the deal.

What about you?

Have you pulled off a sweet delayed financing deal? I’d love to hear about it in the comments!