There is an entire mini-industry (books, tapes, seminars, etc.) founded on the notion of buying real estate with (little or) no money down.
I can understand the theory behind all this, but it begs the question – Does It Actually Happen?
Are there documented, verifiable instances where a piece of real estate has been bought for no cash out of the purchaser’s pocket? I am looking specifically for examples where the appraised value of the property exceeds the purchase price, and the loan obtained (usually 80% of the appraised value) is equal to or exceeds the purchase price.
(Mods: if this is better suited to IMHO, please move it, thanks)
I asked this same question a month or so ago, and after encouraging responses, I’m now in the process of buying a condo with only a $250 earnest payment, and the seller is covering all of my closing costs.
It’s all going very smoothly and the nice lady from the bank seemed not to find it out of the ordinary.
But I’m not paying significantly less than its appraised value. It’s a place to live, but I’m still skeptical of the people on television who seem to imply that I could do this and make a living at it.
One can get a VA loan, if a veteran, for 100% of the purchase price and of course if the seller wishes to finance the purchase, those terms are between the seller and the buyer.
Those TV ads selling those get rich quick financing methods are probably largely nonsense. If the systems really were that possible, wouldn’t it be more profitable for the company to spend their time using the system, rather than selling books about it?
I talked to a guy who does investments in real estate and he says he has done it, but usually by finding a motivated seller or by taking out a loan to cover the down payment (which is technically no money down since you aren’t paying a lump down payment of your own money).
I always thought (and have been told by a few folks “in the know” with real estate) that the system DOES work, BUT (and you knew that was coming) it only works in a few very specific instances. The infomercials make it look like that type of property almost grows on trees, when in reality finding such a deal takes hard work and good luck.
I would therefore imagine that it would be far more profitable for Carleton Sheets to sell his “system” using one or two informercials than it would be to hire a slew of real estate agents nationwide to find such deals.
That’s actually a loan for 103% of the purchase price if you want. But, in lieu of PMI, you pay the 2.5% to 3% funding fee, depending on loan amount.
I’m eligible for V.A. – bought my current house that way, with zero expenses. I got a check at closing, in fact!
But… if you have the credit, you can very easily get an 80/20 loan and have the seller pay costs – we’re in the process of negotiating that right now for our next home. No PMI, no VA funding fee, no cost out of pocket. I expect to have my good faith deposit refunded, too.
But… what I suspect all those infomercials are selling isn’t that at all. They want you to find foolish sellers who will carry back a home equity loan on the “down payment” part of a conventional deal.
There are zillions of “creative financing” schemes. Many of them have to do with “seller financed” schemes (buying “on contract”). Let the seller beware, read the small print, over and over again.
One thing you have to realize is that when you buy a property for “nothing down” that the down payment and closing costs have to come from somewhere. Typically, the trick behind the magic is that the seller pays the closing costs and simply charges you more. The seller gets the same amount of money either way so they aren’t out, and in the end you end up financing the money that you would have spent in closing costs over the life of the loan.
A typical example would be if you are buying a $150,000 house and there are about $10,000 in closing costs to be paid. You take out a loan for $160,000, the seller gets $160,000 and pays out the $10,000 in closing costs, so the seller ends up with the $150,000 they were asking for in the first place, and you get your property with no money down. The extra $10,000 in your loan ends up costing you an extra $30,000 or so in interest by the time the loan is paid off.
The real estate agent’s commission is higher since it is based on the sale amount, and the bank gets more money from you in the long run, so I imagine they are all pretty happy to do it this way.
One criticism I’ve heard of “no money down” real estate investing is that while it is potentially profitable, it is also often unethical- at least the types of deals that the Carleton Sheets types endorse.
The way the unethical no-money-down schemes work is like this. Find a motivated seller and get them to sign over ownership of the property to you ** but keep the mortage in the seller’s name.** The way you get them to do this is that you promise to make the payments on the mortgage. However, if you default on the mortgage payments, the original seller is on the hook.
Why would people sign away their house and keep the mortgage in their name? Usually because they’re desperate to sell. Maybe they lost their job or can’t make the payments for whatever reason and they need out as soon as possible. It’s really taking advantage of the original owner since they keep the big liability of the mortgage without having the title to the house.
I didn’t mean to imply that this doesn’t happen, or that people that do this don’t know exactly what they’re doing – I suppose the chances are good that some people don’t know what they’re doing. On the other hand, with mortages hovering at 6% for good credit, or as low as 3.3% for excellent credit and variable rate, it’s really to the buyer’s advantage not to throw their own money away… unless the alternative is keeping their own money in a cheap money market at only 1%!
Another thing to consider is, this is a buyers’ market, at least here in the Detroit suburbs. There are a huge amount of houses for sale. So it’s likely that you’ll be able to have the seller contribute while not raising the price (remember, at 100% you still have to pass the CMA/appraisal!).
Of course on the of the big reasons to sell is to move up to a better house or neighborhood. So the seller has another reason to pay closing costs out of the proceeds – he can expect the person from whom he’s buying to do the same for him.
I imagine if you keep going up the scale, you’ll come to Donald Trump who’s not looking to move up, but willing to provide seller concessions just to unload the property and not have to file for bankruptcy.
That’s how I bought my first home last year. I had no cash available for a down payment, and my rent was bleeding me dry so fast that I could never have saved enough. I actually had negative cash flow for that period.
So I got an 80/20 loan, and got the seller to pay $2500 out of $3000 in closing costs. I had paid a $1000 earnest money deposit, and got $500 back at closing (after paying my small portion of the closing costs). There’s no PMI, since the first mortgage on the house is only 80%, and so it’s a cool little loophole around the PMI part of conventional financing.
But Balthisar is right, it takes good credit. Significantly higher requirements than conventional of FHA financing. But it was the best option for me at the time.
