I have heard many questions over the years from students about whether or not it is really possible to buy real estate with no money down. The most frequent questions I get are from mortgage brokers and realtors. Since mortgage brokers are by definition trained to fund a loan based on bank requirements like 20% down payments, then by definition anything else seems to be beyond the scope of their possibilities. It has been my experience that many real estate professionals including real estate agents and mortgage brokers do not seem to understand the concept of no money down deals.
What Is No Money Down?
Firstly, the definition of no money down does not mean no money down. It simply means none of YOUR money down. It could be Uncle Bob’s money, the sellers’ money, or a loan from Aunt Sally. It could also be a credit line, a private investor, hard money lender or anyone else for that matter. It is very important to understand this concept.
Now, if you were to purchase a house and put down 20% which you borrowed from your relative, then you would have purchased the house with no money down. You can call it 100% financing or whatever you want to call it. As far as the bank is concerned you put down 20%. However there is a problem with that since as many mortgage brokers will tell you, banks want to know the source of the funds. When they see that the funds are borrowed and that you have “no skin” (your own money) in the deal then they will reject the loan.
So, what is an investor with no cash going to do to get around this problem? The solution is to borrow ALL of the money to purchase the house for cash. Paying all cash means you will be able to buy the house at a substantial discount. And if your discount is more than 20% below market value then you will be able to pay off the borrowed money when you refinance and then you will own a property with no money down.
Let’s assume that you can borrow the money from your rich uncle Bob. If you borrow from Uncle Bob all of the cash to pay cash for a property then you can be a cash buyer. Being a cash bash buyer is very rare and by being a cash buyer you are able to make offers on bank owned REO properties at a substantial discount to market value.
Using Other People Money
But Uncle BOB is not going to feel comfortable loaning you money to buy a house unless there is substantial security for him. Since traditional banks loan money at loan to value (LTV) ratios of 70% – 80%, Uncle Bob might be especially cautious and only agree to loan money at 60% LTV. Is this risky for him? Well it is less risky than conventional mortgages that are funded by banks. Why is it less risky? Well firstly, conventional banks loan based on a mortgage application, a credit score and an appraisal. But Uncle Bob is a little smarter than the average bank. He can actually go out to the property and inspect it himself. Banks don’t do this. They hire appraisers. And we all know how well that turned out for them in the last financial crisis. What is Uncle Bob’s risk if he loans you the money at say an LTV of 60%? Well not much really. If you don’t pay him then he can file a foreclosure lawsuit just like the banks do and he can get the property back from you. Now if the property is really worth $100,000 and he only loaned you $60,000 then he should be quite happy to own a $100,000 property for $60,0000. So like I said. Not much risk to Uncle Bob.
But Uncle Bob is going to need to have enough knowledge of real estate to feel comfortable that if you don’t pay him, and he gets your house that he will have a deal. Uncle Bob is going to do his own comparable sales comps and is not going to rely on an appraiser. Uncle Bob is going to spend days or even weeks investigating the property compared to the 60 minutes that an out of state loan officer looks at a file. If Uncle Bob is convinced that your deal is a good deal, then he is going to loan you the money. If you are paying him 10% interest and the bank is only paying him 1% then Uncle Bob will make a lot more interest loaning you his money to buy real estate than he will leaving his money in the bank. If Uncle Bob has done his homework and understands private lending then he will only fund a deal at 60% loan to value ratio or less. What this means, is that if he thinks the house is worth $100,000 he will only loan you $60,000 and no more.
Your challenge as an investor will be to find a $100,000 house that you can buy for $60,000. Being a cash buyer will make your job much easier because 99% of the buyers that are competing with you will be looking to purchase a home with a mortgage and will not be able to make a cash offer. Cash buyers are able to 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 else that you know that has money who could be your private lender. Then once you have an investor lined up begin looking for wholesale real estate deals that you could purchase for cash. Typically these deals are going to be either bank owned properties or short sales that the bank is willing to sell quickly at a discount to a cash buyer.
When you find a deal the mechanics will work like this:
House is worth $100,000
You purchase for $60,000
Uncle Bob loans $60,000
Money out of pocket $0
Profit From A “No Money Down” Deal
Now that you own the house, you can wait 6 to 12 months for something called “seasoning of the title”. Then you can go to your mortgage broker and you tell them that you want to refinance your loan. Your goal is to pay off your private lender and get a conventional loan from a traditional bank. You want to get a conventional mortgage at say 5% to pay off your loan to Uncle Bob at 10%. This is called a refinance since you are refinancing your interest rate from 10% down to 5%. Now for the refinance, the bank will require an appraisal. If your original assessment that the house is worth $100,000 is correct then your appraisal should come in at $100,000. If prices are rising then your appraisal might even come in higher since 6 to 12 months have elapsed since you purchased the property.
If the bank agrees to give you a loan for 70% of the $100,000 appraisal, then they will loan you $70,000. Assume closing costs, points and fees are $5,000 so you will net $65,000. Since Uncle Bob has a first mortgage on the property he will be paid off on his $60,000 loan and you will have a new loan for $70,000. After paying Uncle Bob back the $60,000 you are left with the following scenario:
House value $100,000
Bank Loan $70,000
Cash left over from refinance $5,000
You just purchased a house with none of your own money down. AND you now 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 finding an Uncle Bob. There are many Uncle Bob’s out there. They are called hard money lenders or private lenders. I loan money to investors every day to purchase real estate. Your challenge is to find a $100,000 house that you can buy for $60,000. That is the hard part. That is the challenge. To do this you are going to need to find a distressed seller. If you can learn how to do that then you will have no problem finding the money.
Beginner distressed real estate investors think that not having cash, finding access to capital, or not having good credit are obstacles to their beginning to invest in real estate. This is not true. The biggest obstacle is training and education. If you know how to find $100,000 houses for $60,000 then do you suppose that investors like myself might pay you a fee of $5,000 or $10,000 to buy that property? Of course they will. Investors will have no problem paying you a finders fee to find them good deals that they can buy, fix and flip or buy, fix and rent.
This concept of selling houses to other investors for a fee is called Wholesaling. And it is the best place for you to get started especially if you are a new investor who has never flipped a house before. That is why our Partnership Program is so popular with new students who are looking to learn how to get started wholesaling and flipping properties. Getting paid to find deals for other investors is hands down the easiest way to get started. And that is what we teach in our Partnership Program.
If you can learn and understand how and why you can buy a $100,000 house for $60,000 then you can find many cash buyers who would be willing to pay you a fee to get that property. If you understand and know what a desperate seller who is motivated to sell looks like, and why they would sell their house for less than what it is worth then you can literally find unlimited deals. And each of those deals can be wholesaled to another investor for a profit.
A few weeks ago, Adina who is one of my coaching students put out some bandit signs with her boyfriend Henry. A landlord who was sick and tired of owning a rental property and dealing with her problem tenant called my student from that bandit sign. My student offered her $45,000 to buy her house. Less than a week later Adina found another investor who was willing to buy this property for $55,000. Her profit on this deal was $10,000. After paying for closing costs and fees her net profit was $8,109. Her money invested in this deal was zero. She structure this deal and then came to me and asked me if I would fund her purchase of $45,000 so she could buy the house before reselling it to the other investor for $55,000 which I agreed to do.
This is yet another example of no money down real estate. She purchased and flipped a property using my cash and created a profit of $8,109 without putting any money down at all.
So if you want to do this, learn and understand how distressed real estate works. Invest in your training and education and figure out how to find a wholesale deal at a wholesale price from a desperate seller. And if you can find a private lender then you too could be doing no money down deals.