Is it really possible to buy real estate with no down payment?
Over the years, I’ve heard a lot of questions from students about whether or not it’s really possible to buy real estate with no down payment. The most frequently asked questions I receive are from mortgage brokers and real estate agents. Since mortgage brokers are, by definition, trained to finance a loan based on bank requirements, such as 20% down payments, then, by definition, anything else seems beyond the scope of their capabilities. It has been my experience that many real estate professionals don’t seem to understand the concept of “no down payment offers.”
First of all, the definition of no down payment does not mean “no down payment”. It simply means none of YOUR down payment money. It could be Uncle Bob’s money, vendors’ money, or a loan from Aunt Sally. It could also be a line of credit, a private investor, a hard money lender, or anyone else. It is very important to understand this concept. Now, if you were to buy a house and put down the 20% you borrowed from your relative, then you would have bought the house with no down payment. You can call it 100% financing or whatever you want to call it. Regarding the bank, you put a 20% advance. There’s a problem with that, though, because, as many mortgage brokers will tell you, banks want to know where the funds are coming from. When they see that the funds are borrowed and that you don’t have “skin” (your money) in the deal, they will decline the loan.
So what is a cashless investor going to do to fix this problem? The solution is to borrow ALL the money to buy the house in cash. If you borrow all the cash from Uncle Bob, then he can be a cash buyer. Cash buyers are very rare nowadays and if you are a cash buyer then you can purchase bank owned REO properties at a substantial discount to market value. But Uncle BOB won’t feel comfortable lending you money to buy a house unless there is substantial security for him. Since banks lend money at 70% LTV, Uncle Bob can be especially cautious and only agree to lend money at 60% LTV. Is this risky for him? Well, it is less risky than conventional mortgages that are financed by banks. Why is it less risky? Well, first of all, a loan from conventional banks based on a mortgage application, a credit score, and an appraisal. But Uncle Bob is a little smarter than the average bank. In fact, he can go to the property and inspect it himself. After all, if you don’t pay him, he’ll get the property since he has the first mortgage. So Uncle Bob will need to have enough knowledge of real estate to feel comfortable that if you don’t pay him and he gets your house, he’ll have a deal.
Uncle Bob will do his own calculations and won’t depend on an appraiser. Uncle Bob is going to spend days or even weeks researching the property compared to 30 minutes an out-of-state loan officer looks at a file. If Uncle Bob is convinced that his treatment is good, then he will lend him the money. If you are paying him 10% interest and the bank is only paying him 2%, Uncle Bob will make more money lending on real estate compared to having his money in the bank. If Uncle Bob has done his homework for him, he will only fund a deal at 60% LTV or less. What this means is that if he thinks the house is worth $100,000, he will only lend you $60,000 and no more.
Your challenge will be to find a $100,000 house that you can buy for $60,000. Being a cash buyer will make your job a lot easier because 99% of buyers competing with you will be looking to get a mortgage. These days it’s very difficult to get anything other than an FHA or VA loan. Cash buyers can buy properties directly from banks for as little as 50 cents on the dollar. This is a once in a lifetime opportunity. So start looking for “Uncle Bob” or anyone you know who has money. Then, once you have an investor lined up, start looking for wholesale real estate deals. When you find an offer, the mechanic will work like this:
House is worth – $100,000
You buy for -$60,000
Loans from Uncle Bob – $60,000
Out of pocket money – $0
Now that you own the home, you wait 6-12 months for something called “title seasoning” and then go to your mortgage broker and tell them you want to refinance. He wants to get a conventional mortgage at 7% to pay Uncle Bob at 10%. The bank will require an appraisal, and if he was correct in his initial assessments, the appraisal should be $100,000. If the bank agrees to give you an LTV loan for 70% of the $100,000 appraisal, then they will lend you $70,000. He assumes that closing costs are $5,000, so after paying Uncle Bob back the $60,000, he comes across the following scenario:
House value – $100,000
Bank loan – $70,000
Equity – $30,000
Cash left over from refinance – $5,000
You just bought a house with no down payment. And now you have $5,000 in your pocket and $30,000 of equity in the house. This is called distressed real estate investing. Your challenge is not to find Uncle Bob. There are a lot of Bob guys out there. They are called hard money lenders or private investors. Your challenge is to find a $100,000 house that you can buy for $60,000. That’s the hard part. To do this, you will need to find a struggling seller. If you can learn how to do it, you won’t have a problem finding the money. Distressed beginning real estate investors think that finding the money and having good credit are obstacles to starting to invest in real estate. This is not true. The biggest obstacle is education. Learn and understand how and why you can buy a $100,000 home for $60,000. Understand and learn what a distressed seller is and why they would sell a home for less than its current value. Then go out and start looking for a deal. When you find one, call me. Maybe I’ll buy it for you.
