Author Topic: Borrowing against stock to be all cash buyer for house  (Read 988 times)

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Borrowing against stock to be all cash buyer for house
« on: May 03, 2021, 07:59:00 PM »
Hi all,

We have been outbid once now by an "all cash" buyer. We are trying to buy a house in Spokane in a very competitive market. We sold our house in CA in November and were renting month to month here as we watch the housing market rocket upward. We have $300k-$340k cash sitting in a bank account for a down payment from sale of our last house, and plan on taking out a $300-400k loan. I have $850k stock at Ameritrade in a taxable account (this is mostly in Apple stock that I've had for about 20 years, if I sell it will be almost 100% capital gain) We also have about 200k in retirement accounts, late 30s early 40s, only one income now, about $80k with pension and job security. Income will increase, I was making $90k before I left my job but might not make that much here.

I read the MMM article about buying on a house with money on margin against stock, I think it was through etrade? Could we give ourselves the advantage to be the all cash buyer by transferring the stock to trade and borrowing against it and then refinance the $300-400 k portion? It would only be 1-2 months of borrowing against the stock before refinancing. We would need to transfer the stock to an online broker that would allow us to borrow cash on margin (Ameritrade does not, I called).

Any thoughts or options would be appreciated.

maizefolk

  • Walrus Stache
  • *******
  • Posts: 5750
Re: Borrowing against stock to be all cash buyer for house
« Reply #1 on: May 03, 2021, 09:20:07 PM »
Be careful about the minimum margin requirements. Assume you're somewhere with a minimum margin of 50% and you pull out $400k on margin from your account with a $850k balance.

At that point anything more than a 6% decline in the value of your account (essentially a 6% decline in Apple stock) would be enough for your broker to start liquidating your shares, both locking in your losses and triggering a bunch of capital gains at the same time.

In the last year (250 trading days), Apple has moved more than 6% in a single day three times. More meaningfully: Apple has moved 6% or more in 146 of 227 one month intervals in the last year which started on a day when the market was open.

The_Dude

  • Stubble
  • **
  • Posts: 203
Re: Borrowing against stock to be all cash buyer for house
« Reply #2 on: May 03, 2021, 11:49:02 PM »
I just went through this including losing out to all cash buyers. I didnít end up using the margin route as the interest rate was too high. But I wanted to point out some things I learned.

Traditional cash out refinance loans require you to wait a minimum of 6 months after purchase. And they typically cost 50 bps more in the interest rate and often have higher fees. Additionally, the interest expense is not tax deductible.

The type of loan you would want if you do a cash purchase is a delayed financing loan. Make sure your broker or lender offers it and find out the requirements.


Fishindude

  • Magnum Stache
  • ******
  • Posts: 2810
Re: Borrowing against stock to be all cash buyer for house
« Reply #3 on: May 04, 2021, 06:00:03 AM »
Why not simply sell the stock so you have the cash to do the deal?

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #4 on: May 04, 2021, 07:37:39 AM »
Be careful about the minimum margin requirements. Assume you're somewhere with a minimum margin of 50% and you pull out $400k on margin from your account with a $850k balance.


Thanks for pointing this out. We were planning on spending $550-$650k on a house, which would mean we would only really need 300k, unless we talk ourselves into spending more. Houses that were 550k last December are now going for 700k, it is so frustrating.

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #5 on: May 04, 2021, 07:42:19 AM »
I just went through this including losing out to all cash buyers. I didnít end up using the margin route as the interest rate was too high. But I wanted to point out some things I learned.

Traditional cash out refinance loans require you to wait a minimum of 6 months after purchase. And they typically cost 50 bps more in the interest rate and often have higher fees. Additionally, the interest expense is not tax deductible.

The type of loan you would want if you do a cash purchase is a delayed financing loan. Make sure your broker or lender offers it and find out the requirements.

In MMM article I thought he said he borrowed at 1% but it was variable? Did you find that it was a higher percent when you looked into it? Thanks for pointing out the loan differences, I'll look into it.

We have sold two houses now in competitive markets. The first we had an all cash buyer, we accepted even though there were other equal bids and they ended up dropping out anyway. The second time we had an all cash buyer but we were wary and countered both them and the next offer and they dropped out.

I'm including a "family letter" and picture with offers.


mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #6 on: May 04, 2021, 07:44:32 AM »
Why not simply sell the stock so you have the cash to do the deal?

My cost basis is almost 0 on this, so I would be paying taxes on anything I sell. At <3% interest rates right now I'd rather leave the money to grow in the market and borrow.

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2299
Re: Borrowing against stock to be all cash buyer for house
« Reply #7 on: May 04, 2021, 07:45:06 AM »
Isn't it amazing that houses in Spokane are $650,000?   I did read that the market is super hot there.  We are north of Spokane toward Chewelah and it is somewhat cheaper, but still pretty expensive for essentially the boonies.

srad

  • Stubble
  • **
  • Posts: 234
Re: Borrowing against stock to be all cash buyer for house
« Reply #8 on: May 04, 2021, 10:18:06 AM »
If you have 50% down available you are basically a cash buyer. If i'm selling a house and i have a cash offer of 600k and a person who has a 50% down payment at 615k, i'm taking the 615k all day long.  However, if you are both at 600k though...  you are probably going to lose.

You probably already know this but buyers want to be sure you will close the deal.  Waive the finance\appraisal contingency and set your closing for as quick as the bank says they can close, which is hopefully 45 days.  Waiving this won't be an issue for you because your down payment is so high.  If you barely had enough for a 20% down payment that's when the appraisal/financing contingency comes into play.  If the home appraised for 40k less than the purchase price you'd need to bring the additional money at close.  A lot of people wont have that money and will have to back out.  But at 50% down a 40k less appraisal is nothing, you were already bringing additional money to the table.

Maybe add an escalation clause to your offer as well.  I despise escalation clauses, lost out on many of them over the years.  But on a property i just purchased, I finally relented, put an escalation clause in going 25k over what i wanted to spend on the property.  I figure best thing to do is get accepted, then we can negotiate and if they don't come down I can walk away during inspections.  Home is a fixer and i saw a few things i knew i could come back on, which we were able to do, and i got the price down that 25k.   

And yes, i was a cash buyer and i was less than the highest offer (who was financing it).  So i feel your pain.

PMJL34

  • Bristles
  • ***
  • Posts: 283
Re: Borrowing against stock to be all cash buyer for house
« Reply #9 on: May 04, 2021, 10:31:57 AM »
OP,

You will be able to buy without going all cash.

Reali is a California based company that a buddy of mine found that puts together an all cash offer for you. I haven't used them so can't say anything good or bad. But my understanding is they charge you a fee/higher rate, but your offer is all cash and you mortgage with them after closing.

In reality, you are an excellent buyer with strong down payment. You will get a house. After calculating the fees and costs of all these "cash" options, it's probably cheaper and easier to just offer a higher amount on the purchase price.

Best of luck!

FINate

  • Handlebar Stache
  • *****
  • Posts: 2176
Re: Borrowing against stock to be all cash buyer for house
« Reply #10 on: May 04, 2021, 10:45:25 AM »
As others have stated, you're already in a good position to make a strong offer without going all-cash.

I'm mostly here to comment on the following.

...I have $850k stock at Ameritrade in a taxable account (this is mostly in Apple stock that I've had for about 20 years, if I sell it will be almost 100% capital gain)...

Yikes, you have almost $850k in a single company! My risk radar is flashing all kinds of warnings. I get that you don't want to pay taxes, but you should really consider diversifying your holdings. Depending on your income, you may be able to implement a capital gains tax harvesting strategy by pulling out a chunk every year to pay 0%. Even if you cannot avoid taxes altogether, I would still consider diversifying a chunk every year.

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #11 on: May 04, 2021, 12:07:58 PM »
Isn't it amazing that houses in Spokane are $650,000?   I did read that the market is super hot there.  We are north of Spokane toward Chewelah and it is somewhat cheaper, but still pretty expensive for essentially the boonies.

It is a lot, but I think the relative prices here will increase as Spokane is climate change resilient and we will see more and more people fleeing CA and other states that are feeling the horrors of climate change already. Spokane was relatively cheap compared to other western cities, which is partly why we moved here, but I guess we didn't do it fast enough.

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #12 on: May 04, 2021, 12:09:56 PM »

Maybe add an escalation clause to your offer as well.  I despise escalation clauses, lost out on many of them over the years.  But on a property i just purchased, I finally relented, put an escalation clause in going 25k over what i wanted to spend on the property.  I figure best thing to do is get accepted, then we can negotiate and if they don't come down I can walk away during inspections.  Home is a fixer and i saw a few things i knew i could come back on, which we were able to do, and i got the price down that 25k.   


We've been waiving the appraisal contingency and will use an escalation clause. It's interesting you were able to get it back down.

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #13 on: May 04, 2021, 12:12:53 PM »
As others have stated, you're already in a good position to make a strong offer without going all-cash.

I'm mostly here to comment on the following.

...I have $850k stock at Ameritrade in a taxable account (this is mostly in Apple stock that I've had for about 20 years, if I sell it will be almost 100% capital gain)...

Yikes, you have almost $850k in a single company! My risk radar is flashing all kinds of warnings. I get that you don't want to pay taxes, but you should really consider diversifying your holdings. Depending on your income, you may be able to implement a capital gains tax harvesting strategy by pulling out a chunk every year to pay 0%. Even if you cannot avoid taxes altogether, I would still consider diversifying a chunk every year.

Ha ha, I knew someone was going to comment on that. We have about 200k in retirement funds and 340k in home equity so at least it's only 60% of our net worth? I will look into that link though, thank you! I would like to start to diversify.

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #14 on: May 04, 2021, 12:14:22 PM »
Thank you all for the encouragement. We should be strong buyers with our percent down, it was just so defeating to see a house we wanted slip away and watch the market go up quickly. Not a fun time to be a buyer.

Daisy

  • Handlebar Stache
  • *****
  • Posts: 2224
Re: Borrowing against stock to be all cash buyer for house
« Reply #15 on: May 04, 2021, 01:44:52 PM »
I just did this. I got an Investment Line of Credit from my local bank which has a brokerage arm. They could possibly offer you the same deal, the banker said he is interested in my FI friends contacting him. PM me if interested and I can give you the information.

In my case, it is a consumer loan, at prime rate - 0.5%, which currently is at 2.75%.

See my thread where I discussed this.
https://forum.mrmoneymustache.com/investor-alley/investment-line-of-credit-a-clever-way-to-finance-buying-real-estate/new/#new

srad

  • Stubble
  • **
  • Posts: 234
Re: Borrowing against stock to be all cash buyer for house
« Reply #16 on: May 04, 2021, 03:19:34 PM »

Maybe add an escalation clause to your offer as well.  I despise escalation clauses, lost out on many of them over the years.  But on a property i just purchased, I finally relented, put an escalation clause in going 25k over what i wanted to spend on the property.  I figure best thing to do is get accepted, then we can negotiate and if they don't come down I can walk away during inspections.  Home is a fixer and i saw a few things i knew i could come back on, which we were able to do, and i got the price down that 25k.   


We've been waiving the appraisal contingency and will use an escalation clause. It's interesting you were able to get it back down.

Like i said, once accepted you are able to negotiate with them, alone.  And i forgot, we actually did walk from this.  They countered back as 5k, we said its 25k or we walk, they said no, I called their bluff and signed the cancelation papers.  Next day we got a call from our agent, they reconsidered and took our offer.  Now I'm about about 50k in on a 150k renovation, fun times.

And a note, don't put a cap on the escalation clause, just say $3500 (or whatever you feel is best) over the highest offer. That way you get to see what the highest offer is.  Remember, you don't have to accept the offer you just want to know what it is and then decide if you want to overpay by that much more :)

Good luck and get ready for more losses.  Its incredibly hard to get a home right now at least you have a strong down payment you have a better shot than a lot of first time home buyers..

jeromedawg

  • Magnum Stache
  • ******
  • Posts: 4157
  • Location: Orange County, CA
Re: Borrowing against stock to be all cash buyer for house
« Reply #17 on: May 04, 2021, 04:16:40 PM »
Curious but what, if any, advantage is there going this route vs just doing a delayed finance loan? I'm in a similar situation and was wondering how I could leverage our capital while still keeping most of it invested...

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2299
Re: Borrowing against stock to be all cash buyer for house
« Reply #18 on: May 04, 2021, 05:00:18 PM »
It is a lot, but I think the relative prices here will increase as Spokane is climate change resilient and we will see more and more people fleeing CA and other states that are feeling the horrors of climate change already.

Isn't Spokane at risk of wildfires just like California? (I'm just curious what you meant with this comment)

I was thinking she meant if the icecaps melt and the ocean level rises 300 feet Spokane will still be nicely protected because it is at 1800 feet above sea level.

srad

  • Stubble
  • **
  • Posts: 234
Re: Borrowing against stock to be all cash buyer for house
« Reply #19 on: May 05, 2021, 09:13:10 AM »
Curious but what, if any, advantage is there going this route vs just doing a delayed finance loan? I'm in a similar situation and was wondering how I could leverage our capital while still keeping most of it invested...

I assume you are asking about my all cash offer?  Its simple. i had the cash...  Plus it was an estate that was selling the house, the family didn't want to do anything to the house they just wanted it sold.  So we made a very solid offer pricewise with a quick close and they took it. 

Just to be clear,  10 years ago i could not of made this play, shoot 5 years ago i couldn't of made the play.   I've been doing the live in flips for a while now, along with rentals, and regular investing in the market, so i'm well diversified and have grown a decent stash. I'm about to make out like a bandit on my current live in flip that i bought a year and a half ago, i'll be getting a solid 6 figure, tax free check when i sell it to move into the one i just paid cash for.  And the new one I'm working very hard to have move in ready before i move into it, I'm done living in full blown renovations.  So its good i can pay cash for houses now.. 

Once my new place is finished, i can do a cashout refi if i want my money back for something else.  So all i'm out is the cash till the home is finished, so say 1 year max out of the market.  If the stock market goes up 30 percent next year then yeah, i'm going to lose with my cash purchase.  But i'm willing to take that risk.  The numbers i'm running for my new live in, if it was finished and were to sell today, I would clear 20%, and that's tax free 20% profits.



jeromedawg

  • Magnum Stache
  • ******
  • Posts: 4157
  • Location: Orange County, CA
Re: Borrowing against stock to be all cash buyer for house
« Reply #20 on: May 05, 2021, 09:34:19 AM »
Curious but what, if any, advantage is there going this route vs just doing a delayed finance loan? I'm in a similar situation and was wondering how I could leverage our capital while still keeping most of it invested...

I assume you are asking about my all cash offer?  Its simple. i had the cash...  Plus it was an estate that was selling the house, the family didn't want to do anything to the house they just wanted it sold.  So we made a very solid offer pricewise with a quick close and they took it. 

Just to be clear,  10 years ago i could not of made this play, shoot 5 years ago i couldn't of made the play.   I've been doing the live in flips for a while now, along with rentals, and regular investing in the market, so i'm well diversified and have grown a decent stash. I'm about to make out like a bandit on my current live in flip that i bought a year and a half ago, i'll be getting a solid 6 figure, tax free check when i sell it to move into the one i just paid cash for.  And the new one I'm working very hard to have move in ready before i move into it, I'm done living in full blown renovations.  So its good i can pay cash for houses now.. 

Once my new place is finished, i can do a cashout refi if i want my money back for something else.  So all i'm out is the cash till the home is finished, so say 1 year max out of the market.  If the stock market goes up 30 percent next year then yeah, i'm going to lose with my cash purchase.  But i'm willing to take that risk.  The numbers i'm running for my new live in, if it was finished and were to sell today, I would clear 20%, and that's tax free 20% profits.

The question was in comparison of delayed financing vs the money on margin against stock route.

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 911
  • Location: SF Bay Area
Re: Borrowing against stock to be all cash buyer for house
« Reply #21 on: May 05, 2021, 09:54:41 AM »
jeromedawg,

if you sell the stock to create the cash offer and then mortgage it after to replenish the stock
- you have to stomach seeing your investment balance go low
- you have a taxable event. in the OP's case the shares sold have a very low basis and most of the money is capital gains and therefore will cause a large tax bill the next year.

if you get a line of credit secured by your portfolio then mortgage after to pay it off
- you can choose to mortgage right away to get a fixed rate and repay the debt
- you can choose to leave it alone, but again, do you have the stomach for seeing debt against your investment account, and for a floating interest rate?
- you avoid the taxable event

depending on the account balance the second option may not raise enough money to complete the sale. Schwab, for example, sets the credit limit to 70% of the pledged account value. It would be unwise to go that high. In contrast with option 1 (selling) you have access to 100% of your account value.

both are a good way to "be a cash buyer" as for as the seller sees you. if a person wanted to waive all contingencies and close the sale in one week, both methods above allow you to do that.
both are unvonventional/risky/advanced approaches to personal finance.

another idea is to apply for a mortgage, and use a standard 30 day close, but in the offer you waive the financing and appraisal contingencies. this assures the seller the deal will not fall through from the mortgage process, which neutralizes one reason they might have otherwise preferred a cash buyer to a mortgaged buyer. If you do this, you are betting the mortgage will close on time but you are committing that if an issue or delay comes up you will execute one of the plans above.
« Last Edit: May 05, 2021, 10:03:07 AM by cchrissyy »

mominca

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Borrowing against stock to be all cash buyer for house
« Reply #22 on: May 05, 2021, 10:00:17 AM »
It is a lot, but I think the relative prices here will increase as Spokane is climate change resilient and we will see more and more people fleeing CA and other states that are feeling the horrors of climate change already.

Isn't Spokane at risk of wildfires just like California? (I'm just curious what you meant with this comment)

Spokane is (and is projected to stay) at a much, much lower risk of wildfires. My husband works in forest ecology and fire ecology. Where we were in CA we got twice as much rain as Spokane, but condensed into a short rainy season. This means rampant growth of shrubs and undergrowth each year, and the a dry season that is predicted to keep getting longer as the rainy season becomes shorter and more intense with climate change. Also wind events are most likely at the end of the dry period, so an extension of the dry period greatly increases fire risk. Wind events are also expected to increase in severity and occurrence with climate change. It is very hard for CA to manage for wildfire risk since there are people everywhere and vegetation grows so quickly- plus making people treat their property is a touchy issue for personal rights. Places that burned 4 years ago in Napa burned again last year.

Our fire insurance was $200/month there- not home insurance but a secondary fire insurance only policy, provided by the state because insurance companies were dropping so many properties. We were in town and had a fire hydrant in front of our house and were less than a mile from the nearest fire station. Plus our power was turned off maybe 5 times a year for 1-4 days during wind events to prevent wildfires.

My favorite climate change info comes from Daniel Swain at Weather West https://weatherwest.com.

Dee_

  • Stubble
  • **
  • Posts: 178
  • Location: Podunk, Midwest
Re: Borrowing against stock to be all cash buyer for house
« Reply #23 on: May 05, 2021, 10:03:44 AM »
@srad got it. Waive the financing contingency, and it's functionally the same to the seller, and much less risk.

Also holy guacamole, diversify yesterday. I wouldn't be able to sleep with holdings like that in a single company.

haflander

  • Bristles
  • ***
  • Posts: 365
  • Age: 30
  • Location: Dallas
Re: Borrowing against stock to be all cash buyer for house
« Reply #24 on: May 05, 2021, 10:07:08 AM »
Take this all with a giant grain of salt, because I'm a first-time home buyer looking for a house right now.

However, I'll give you the rundown of what a couple lenders have told me. I'm prequalified for the range I want to buy. This is easy; everyone is prequalified and it doesn't mean much. However, I'm going through the process to be preapproved. This is taking at least a week (as of now), more likely 2. I've given 2 lenders everything they need to go through the underwriting and approval process (much more stringent than prequal).

According to my realtor and lender, this makes the closing process much quicker. Your offer will look much stronger than others who will be only prequalified. One lender even throws in a 5k guarantee: if the deal doesn't close due to mortgage/lending issue, he'll give the seller 5k. Obviously, he'll only do this if you've already went through preapproval and underwriting and everything.

Something to consider. They're telling me this makes your offer "basically all cash" because sellers don't have to wait the standard 30 days for buyer financing to develop. Now, whether sellers would agree with this or if my realtor/lender are teaming up against a naive FTHB to benefit themselves is TBD.

ETA: bold for emphasis
« Last Edit: May 05, 2021, 10:11:36 AM by haflander »

PMJL34

  • Bristles
  • ***
  • Posts: 283
Re: Borrowing against stock to be all cash buyer for house
« Reply #25 on: May 05, 2021, 08:39:41 PM »
Haflander,

Yes, a pre-approval is stronger than pre-qualified.

Other than that, your post is completely wrong and I advise you to edit/delete because it's just factually wrong.

Pre-approval is nothing like a cash offer. It's actually a bare minimum for most competitive markets. Without it, they won't even let you put in an offer.

I know you meant well and best of luck on your home purchase.