How to Buy Real Estate with No Money Down

Can you Buy Real Estate with No Money Down?

The most talked about topic on the news and late night TV infomercials is real estate. There are more real estate investors than ever before. More and more average people just like you want to become real estate investors. In the last couple of years, due to the increase in real estate appreciate, there are lots of people buying and selling real estate and making large profits. The following information will show how it's possible to buy real estate with No-Money-Down.

Are you dreaming about becoming a real estate investor and making lots of money in real estate without having to use your own money? The late-night-TV real estate gurus certainly do make it sound easy, as if there are no-money-down deals around every corner just waiting to be acquired. For only $49, the real estate gurus will reveal everything you need to know to get started NOW . . . what a deal - all this valuable information for an incredible low cost investment! So the question is, "Are there actually no-money-down deals out there that would allow you to make a big profit?" The answer is "Yes, there certainly are no-money-down deals that can earn a big profit for you immediately." But before we discuss finding those deals, let's take a look at what "no money down" means.

What Is A No-Money-Down Deal?

In a no-money-down deal, you're basically looking to control a piece of property without any money coming out of your pocket.

To gain this control it will require the cooperation of a properly motivated seller who is willing to finance your purchase, hold a second mortgage in lieu of a down payment, or provide you with an option to purchase the property at a later date. Then, once you've secured his or her cooperation, you can go out and find your own buyer or seller. The idea is to control the property for a short time before flipping it to another buyer and collecting the spread between what you paid for it and what you sold it for.

Finding No-Money-Down Deals

There are plenty of no-money-down deals out there just waiting to be snatched up. But this comes with a warning. No-money-down deals are much more difficult to find if you spend all of your time just looking for that type of real estate investment. I realize that this may sound a little strange, but think of it this way: No-money-down deals are like love -- they are extremely difficult to find if you're looking for them, yet they have a way of falling right into your lap as soon as your attention is distracted. What this means is that you should learn what a potential no-money-down deal looks like and how to put it together, but at the same time, you should be chasing down other types of deals, like foreclosure and tax sale properties, and cash acquisitions of distressed houses. Then, when a no-money-down deal presents itself, you can grab it.

Cast A Wide Net to Find Property

In addition to the fact that you are more likely to come across profitable no-money-down transactions while you're in the process of seeking out other types of real estate investments, if your focus is solely on no-money-down transactions, you will almost certainly be forced to walk away from prime deals that you come across because you have no access to cash. So, keep a list of prospective investors handy; that way, you'll be prepared for deals that require a cash investment, as well as no-money-down transactions. An additional advantage is that you will be establishing relationships with your money-people.

Search For No-Money-Down Deals

The most important ingredient for putting together a no-money-down deal is a motivated seller. You want to identify a homeowner who-for real or imagined reasons-HAS to sell his or her home, someone who feels the pressure to get the deal done quickly. Another important element is that the seller has to be in the financial position to participate in a no-money-down transaction. If he or she needs immediate cash out of the sale, that could be a problem for you, although there are ways around that, as I'll show you a little bit later. From a financial perspective, the best prospect for a zero-cash deal is someone who owns his or her home free and clear.

How And Where To Find Prospects

There are lots of ways to knock prospects out of the bushes. You just have to invest some time and effort. Sources for prospective no-money-down sellers include:

• For Sale By Owners. They are selling on their own either because they don't want to pay a real estate commission or because they think they can do a better job than a Realtor. Either way, their frugality and/or self-confidence may make them willing to listen to out-of-the-box thinking. They've already proven that they're not afraid of going against the grain.
• Current landlords who are looking to exit the rental business. Who knows the importance of cash flow better than someone with firsthand experience? Another benefit of buying from your peers is that they are more likely to view the transaction as an unemotional business decision than a homeowner who has lived in the house for any length of time.
• Homeowners with "For Sale" or "For Rent" ads in the newspaper classifieds. Their intentions are pretty clear, but if they've been running into any trouble finding buyers or tenants, they may be willing to listen to creative ideas.
• People whose jobs have been transferred out of town. You can find these motivated sellers by networking with the relocation departments of any large companies in your area.
• Retirees who are looking to move or downsize their home. This group is the most likely to own a property free and clear, an important distinction, as you'll find out later in the chapter. Additionally, they are the group who are usually hit the hardest by the tax consequences of the large lump-sum capital gain a home sale could bring.
• Prospects who respond to your own classified ads. Desperate sellers will respond to any lead they believe might give them a chance to unload their home. Your ad could read something like: "Trying to sell or rent your property? Let us end your landlord headaches. We buy and lease-option properties on a long-term basis. We put together deals on the most difficult-to-sell properties in the marketplace. Your property not selling? Let us come up with a creative plan that will get the job done!"

Structuring The No-Money-Down Deal

Once you find a motivated buyer, what should you do? Well, that all depends upon which approach you want to take and the unique situation of the homeowner. The following are some of the most effective techniques for putting together no-money-down deals.

Lease-Options

A lease-option provides you with a rental lease of the subject property, and the option to purchase the property by some later date at a predetermined price. There are a few ways you can use the lease-option to make money. The least complicated is to sign the lease, move into the property, and buy the property before the option expires. From an investment standpoint, this approach really only makes sense if you are purchasing a multiunit building such as a duplex or triplex, or if you intend to move into the house, fix it up, and then make money by either selling or renting it as you upgrade to your next home.

Another way to profit from a lease-option is to create a spread for yourself by becoming the middleman in a pair of transactions. In the first one, you negotiate a lease-option with the homeowner. Then, in the second deal, you turn around and negotiate another lease-option on the same property with a buyer. For example, let's say that a motivated seller has his or her home listed FSBO for $100,000. You negotiate a two-year lease at $850 a month, with an option to purchase the house at $92,000 anytime before the end of the lease. Then you go out and find a tenant who wants to eventually own a home and sell him or her a two-year lease-option on the same property for $1,100 per month, with a $100 monthly credit toward the purchase price of $100,000. Then, instead of collecting a security deposit, you convince your tenant-buyer to pay a nonrefundable option fee of $1,500 that will be applied to the purchase price if he or she exercises his or her option and buys the house.

What did you just do? You collected $1,500 in cash from your tenant-buyer, and you'll receive $250 cash flow every month. Then, if your tenant-buyer takes the full length of the lease before exercising his or her option, you will receive an additional $4,100 at the closing. That $4,100 comes from your tenant-buyer's purchase price of $100,000, minus your buyer's option fee of $1,500, minus the $2,400 in rent credits he or she earned during the lease, minus your purchase price of $92,000. That makes a grand total of $11,600 ($1,500 option fee + $250 a month for 24 months + $4,100 at closing) put in your pocket over the course of the deal. And what if the tenant walks away without buying the house? Or even without fulfilling the lease? Then you've made $250 a month plus the $1,500 option fee, just for putting the deal together. Now you can choose whether to purchase the home at $92,000, walk away with the money you've already earned, or find another renter to finish out your lease.

The fact that you don't actually have title to the property during the two-year lease has positive and negative attributes. On the plus side, you don't have to pay any taxes or insurance since you don't own anything. Negatively, if anything should happen to the house-fire, flood, etc. you won't be in a position to collect anything for your interests. Another problem is that because the original owner still holds title to the property, he or she can cloud the title without your knowing it, by taking out a lien on the property or failing to pay property taxes. Also, if you choose your tenant-buyers poorly, they could easily do serious damage (much more than the $1,500 option fee you collect from them) to the home and then disappear, leaving you holding the bag.

Of course, the biggest question about lease-options should be, "Why the heck would a homeowner agree to such a deal in the first place?" The answer is that you have to convince a seller that this is an appealing arrangement. If a seller is not sufficiently motivated to get rid of his house, a lease-option can be an extremely tough sell. Even if he is highly motivated, it's still not easy, but you can change his perspective by explaining the tax benefits of owning a rental property for a couple of years, which would keep him from capital gains taxes on any lump sum he would pull out of the house. You might also tell him that the depreciation of the house might also allow him to offset some of his actual income. If the homeowner needs the money he would get from a sale to cover the down payment of his next property, suggest that he take out a home equity loan on the rental property to cover his next purchase. In addition, the monthly rent you pay him may be sufficient to cover his monthly mortgage payments on a new property, and possibly even offer him some positive cash flow.

Lease-options are a hard sell and difficult to put together, but you can see the profit potential they present. And they remain a good way to get into the real estate investing game when you don't have much money.

Seller financing

Some sellers may be willing to finance your purchase themselves. Basically, this means that instead of your getting a mortgage note with a financial institution, the seller acts as the bank. An agreement similar to a mortgage (depending on your area, it may be called a land contract, deed for trust, or simply seller financing) is drawn up that calls for the buyer to make monthly payments to the former owners of the property. Interest, contract length, and amortization are all figured the same way as in a mortgage. From the buyer's standpoint, it is really no different from traditional financing. From the seller's viewpoint, he is forgoing a lump sum payoff in exchange for regular income. This has some of the same tax advantages for the seller as the lease-option we discussed earlier.

Because this is a transfer of title, the former owner can't really cause you problems by putting additional liens on the house without your knowledge, providing that you record your land contract at the county Register of Deeds office. Unfortunately, recording the land contract can cause other problems if the former owner didn't own the property free and clear. A homeowner who is still paying off an existing mortgage cannot sell his or her home through seller financing without permission if the existing mortgage has a "Due on Sale" clause. This means the entire outstanding balance on that original note becomes due and payable as soon as the property is sold. Unfortunately for you, almost every non government mortgage written today contains one of these clauses. So although you would be protecting yourself when you record your land contract, you could also be killing the deal, because once the bank activates the Due on Sale clause, someone will have to come up with the cash required to pay off the remaining balance. Seller financing is a bad idea in a case like this, if the seller is unwilling or unable to pay off the balance of any liens.

No matter how much you want a certain property, don't ever consider trying to sneak a seller-financed deal through without the bank's knowing; otherwise, you could be putting yourself in great financial peril. Sooner or later you will have to record your land contract, and the bank will find out. At that point, the bank will be looking for its money. Another danger you face by not recording your land contract in an effort to keep the bank in the dark is that you could be dealing with an unscrupulous seller who, knowing that you didn't record your land contract, may load up the property with liens and mortgages.

Even if you can escape the Due on Sale trap, there's still the not-so-small matter of persuading a seller to enter into this agreement with you with no down payment. If you have a good credit history, you may be able to satisfy the seller with copies of your credit report and solid character references. If your credit isn't stellar, the task becomes more difficult. If the sellers have been trying to sell for some time with little success, offering a premium above and beyond the purchase price could be enough to convince them to take a chance on you. For example, if they are willing to sell the house for $100,000, you could offer to pay $110,000 in exchange for them providing no-money-down seller financing. You could also consider raising the interest rate so they get a better return on their money.

Seller-carried second mortgage

Another approach to buying a property with no money down is to get bank or seller financing for all but the down payment, and then persuade the sellers to carry a short-term mortgage note for the difference, the latter being the seller-carried second mortgage. For instance, let's say you come across a motivated buyer who agrees to sell you his home for $100,000. When you go for financing, the bank requires you to put down 20 percent, or $20,000 (20 percent because you're buying it as an investment property). You ask the seller to accept a five-year mortgage note from you for the $20,000.

It is much easier to get the seller to agree to this kind of arrangement than to the land contract or lease-option deals, because if a seller has more than 20 percent equity in his home, he will receive cash at the closing, and in addition to the cash up front, he will also get five years' worth of regular monthly income.

The biggest hurdle you'll need to overcome with this kind of transaction is the fact that most mortgage lenders won't do the deal if they know that you're not actually putting up any money in the transaction. There are a few ways around this. One way to show the down payment is coming from you is to have friends or family provide you with a gift of the $20,000. Or, you could "sell" some personal property, such as a car, computer, or furniture, for the $20,000 with the verbal agreement that you will buy it right back after the transaction is completed. Once the $20,000 is deposited in your checking account, you can write a check for that amount and turn it in at the closing. Then once the seller-carried second mortgage is signed by everyone, you can close on it and get the $20,000, which you can then use to buy back any personal property or gift money back to people who had given that amount to you previously.

The other way to keep from putting money down through a seller-carried second mortgage is to seek out sellers who have assumable mortgages-notes that don't contain Due on Sale clauses. As I mentioned previously, it's quite rare to find a conventional loan that is assumable. Government loans, however, are all assumable. Buyers looking to take over a VA or FHA loan can do so rather easily. They must pass a credit check mandated by the government and pay for title transfer, recording, and other closing costs. If you assume an FHA loan, you will most likely be required to use the property you purchase as your primary residence. Your goal is to assume the loan and have the seller carry a mortgage note for the balance of the sale price. You can get the property with little or no cash of your own.

Line of credit

It is easier to do deals without any money coming out of your pocket when you can find properties that are significantly under-valued. If the seller is especially motivated and/or the house needs extensive repairs and renovations, you may be able to acquire properties for as little as 40 or 50 percent of its market value when in top shape-although 60 to 80 percent buys are more plentiful. The key to these deals is to be ready to jump on them when they come along. You can be sure that if you hesitate, another investor will swoop in and steal the property from you.

Once you find the property, you can pay for it with a line of credit, such as a small business loan, or even your credit cards if the property is an exceptional deal. You could secure your line against your personal property or other real estate. The interest rate on this money isn't really important because, as you will see, you will be flipping it into another loan rather quickly. The idea is to use your credit line to acquire the property at least 70 to 80 percent below market value and to pay for necessary repairs and renovations. Then, while the repairs are underway, you can start the process of refinancing the house info regular mortgage note. When financing an investment property, the bank will likely require that 20 to 30 percent equity be left in the house when the mortgage note is signed. If you've done your homework properly and handled the repairs within your budget, you should be able to close the new mortgage and pay off the line of credit funds without any money coming out of your own pocket. In the best deals, it's even possible to walk away from the closing with a check made out to you. If you buy a house for $45,000 on a line of credit and then put $15,000 into it for repairs, you are into it for $60,000. If that house is worth $100,000 when fixed up and you get an 80 percent mortgage on it, that means in addition to paying all your bills, you will walk away from the mortgage closing with $20,000 in your pocket.

The other source of funding that you can tap for a highly undervalued property is hard money, which is high-interest funds that lenders provide to investors for real estate deals. A hard money loan is typically a short-term note that's designed to allow the investor to get the funds necessary to handle repairs and renovations. Because this kind of loan will probably be paid back in a year or less, borrowers are more willing to pay up front fees and higher interest rates.

This approach to investing in real estate also works with friends, family, acquaintances and other investors who are willing to provide you with capital. Use their funds to acquire and repair the property and then refinance it into a normal mortgage, the equity you've earned in the house canceling out the need to put up a down payment.

VA Mortgages

If you are a veteran, the Veterans Administration will provide you with a no-money-down loan on a house. The only stipulations are that the property can contain no more than four units and you have to live in one of the units after the deal is closed. Call the VA office nearest you for details on the programs they provide.

What it Takes to Succeed in No-Money-Down Deals

To be successful and make a profit in no-money-down transactions, you obviously don't need money. What you'll need instead is patience and persistence. Every time you feel like quitting, you'll have to keep at it a little bit longer. You will eventually find the deals if you just stick with it. Have some sales and negotiating skills will be helpful. Chances are that prospective sellers will need some serious convincing before they agree to do your deal. With you having no financial stake in the property, the owners will quite naturally believe that they are taking on all the risk in the transaction. Knowing how to present the deal in a manner that points out the benefits to the sellers will be highly important if you want them to agree to close the transaction.

As you seek out no-money-down deals, don't become obsessed with them to the point where you start believing that a deal is good simply because you don't have to put up any money. Carefully analyze what the future cost will be and what kind of a profit you are likely to make on the property.

Know When To Call In The Experts

I strongly recommend that you consult with a real estate attorney when putting any of the practices into action when you first start out. As I've said several times, real estate laws vary widely from state to state. What might be perfectly legal in one area could be illegal in another. Another benefit of hiring a lawyer is that he or she will help you draw up documents, paperwork, and contracts that will protect you in case a transaction goes sour. If you don't seek out legal counsel, you are operating entirely at your own risk-and that risk could cost you the price of a house or more. Is it really worth that kind of exposure to save a few bucks? At the least, have an attorney help you put together some fill-in-the-blank contracts for each type of no-money-down deal you plan on doing.

Other experts you would do well to hire are a professional appraiser and a home inspector. You should do the same careful research in these areas as you would if you were putting your own money into the transaction, and the insights of these experts are a valuable tool that will be worth the investment.

Summary

There really are no-money-down deals that can earn a big profit for you, but they are much more difficult to find if you spend all of your time just looking for that type of real estate investment. Sources for prospective no-money-down sellers include FSBOs, current landlords trying to sell, and retirees looking to downsize, to name a few. Once you find a motivated buyer, some of the most effective techniques for putting together no-money-down transactions include lease-options, seller-carried second mortgages, and seller financing. And in order to succeed in no-money-down deals, what you'll need instead of cash is patience and persistence.

If you are selling real estate be sure to check out information on how to sell your house and save thousands in real estate commission.