No Money Down Real Estate
No money down real estate is often looked upon as one of those things that is too good to be true. However, there are no money down deals being done every day. For some of these deals, you need to expand the definition of no money down to “none of your own money down.” But there are true no money down deals out there, too. Let’s go through a few of the most common no money down real estate deals.
Types of No Money Down Real Estate Deals
Borrowed Down Payment – There are a couple of ways to do this. First, you can actually borrow the down payment from someone. Many first time home buyers receive a “gift” from their parents or another relative of down payment money. Sometimes that money actually is a gift; other times it is quietly paid back.
Another form of borrowing the down payment is for the seller to hold a second mortgage for the down payment. The buyer makes payments on the first and second mortgages each month. Or the homeowner can take back a first mortgage for the entire sale amount.
The third way is to take cash advances off a credit card. This is an expensive form of money depending upon the interest rate your credit card company charges and is not to be done if it is going to put you in a financial bind.
100% Loans – 105% Loans -- These loans were popular during the boom and are scarce today. But lenders would loan up to 105% of the sale price of a property to the borrower, covering the down payment and the closing costs. It was a good bet for the lender because properties in many areas were appreciating by 10% - 15% per year. It became a very bad bet when the bubble burst and homeowners ended up underwater when values dropped even a small percentage.
Using hard money lenders -- Hard money lenders are the loan source of choice for many rehabbers. A hard money lender will loan up to 65% of a property’s After Repaired Value. If you buy right, you can finance the sale price, closing costs and fix up costs of a property. For example, you find a property that will be worth $100,000 retail after repairs have been made. It needs about $15,000 in repairs and you can buy it for $40,000. A hard money lender will give you up to $65,000 against the property. That will cover the sales price, fix up and closing costs as well as give you a little cushion should you need it.
Hard money lenders charge anywhere from 12% - 15% and usually 3 points. The loans are usually short term, anywhere from three months to a year, interest only with a balloon for the full amount. It is expensive money but as many rehabbers will tell you, it’s cheaper to pay 15% interest than to cut someone in on half the deal for putting up the money.
True No Money Down Real Estate Deals
What about a deal where you put no money down whatsoever? They are out there and in plentiful supply. Right now, roughly one-quarter of all American homes are upside down or “under water.” That means that the owners owe more money than the property is worth. This is an not ideal situation for a homeowner but it doesn’t have to spell disaster, either. In the short term, especially if people can afford their monthly payment and have no intention of moving for several years, people can work through an upside down scenario. Time heals many real estate wounds. A house that is upside down today may regain some of its value over time or the payments may finally amortize the balance to a break even or better.
But many people don’t have the option of keeping their home. They may have had a job transfer and need to sell their house. Maybe they have had a job loss and can no longer afford the monthly payment. If you can step in and take over their payments, and have a long term mindset, you can do many no money down real estate deals.
An owner doesn’t have to be upside down or in dire straits to make a no money down deal. People who own a property free and clear (about 30% of the properties in the United States are owned outright) are sometimes willing to take a series of payments without a down payment. Others will be willing to do a contract for deed or rent to own. Why? Simple. It’s a buyers’ market and it is very difficult to sell a house right now. Home sellers are competing with foreclosures and short sales. People are having a hard time qualifying for conventional loans. Fortunately for investors, home sellers are becoming more flexible the longer this situation lasts.
Don’t let a lack of funds hold back your real estate investing career. No money down real estate deals are real and are all around you, waiting to be tapped.