Real Estate Investing Tips, Issue #002 -- No money down

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Real Estate Investing Tips, Issue #002 -- No money down
June 09, 2004

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Today's Topic: No Money Down
Issue #002
June 9, 2004

No Money Down Real Estate

No money down houses is really a misnomer.

There really aren't no money down houses. The term is actually a marketing ploy for the mostpart to lure people into real estate transactions, or to sell courses, seminars and books.

The reality is that any time you buy a house there is cash involved. Let's break that down a bit and look at some variations on the 'no money down houses' theme.

Using Other People's Money

What the term really means is that the buyer can buy the houses with other people's - rather than money out of her own pocket.

But in reality, cash - even in the form of equity or a credit line - has to come from somewhere to close any transaction.

The ideal source is from the equity in the property itself. In a 4 sale by owners situation, buyers can couple owner carry back financing or use a lease option to buy real estate - and depending on the buyer's credit score - from the proceeds of a new loan.

Flexibility Is A Function of Motivation And Necessity

Owners who really need to sell a home fast are often more flexible and willing to help with closing costs or carry a junior deed of trust and participate with the buyer to enable the transaction.

The creativity comes from combinations of the above.

Many times no money down deals work for both parties because of the situation.

In this type of case, no money down houses may work because, it's actually cheaper for the home owner to do the transaction this way.

The cash to complete this transaction may actually come from:

a third party buyer who puts up some money to get into the transaction - subject to the underlying financing or

from a third party who is willing to loan the money necessary to fund the transaction on the buyer's behalf. In other words, the 'buyer' borrows the money from a 3rd party and with that money pays closing costs perhaps reinstates late payments on the existing loan and then leases - or lease options - the house to a new '3rd party buyer'.

This enables a buyer to create a profit, enable the seller to get out with little or no cost and gets a new third party buyer into a house they like.

In any case, it almost always takes some cash to grease the wheels and get the deal done, but experience, creativity by the buyer to structure a deal that works for both parties. The deal must satisfy the needs of the seller but it also requires flexibilty on their part.

In reality, real estate transactions almost always require some cash. Putting deals together that work are actually very interesting and challenging.

Actual Examples Of 'No Money Down' Deals

Here are three of the 'no money down' deals we have in process at this time.

Example 1: One is a pre foreclosure property where the down payment, closing and renovation costs are being provided to fund a short sale by a third party. In this particular case, the individual providing the funds is also participating in long range ownership.

After the renovation is complete, we will get a new appraisal, refinance the existing loan and pull out the cash to repay the third party funds as well as additional cash as profit.

This property will be held in our portfolio as a rental house in an up and coming little college town.

Example 2: We borrowed funds to bring another property (we have under contract) current, reinstate the foreclosure and then break off an adjacent lot and sell both the house and the lot. This is not a keeper.

Example 3: A third no money down house we have under contract is quite interesting. It is a 'haz mat' house that had a former meth lab in the garage - created by the owner's son.

We crafted a solution to the seller's problems.

There are lots of liens against the property - like 19 of them.

We located private funding to be placed into escrow that will be used to pay off the 'haz-mat' contractor and all additional liens after each of the lienholders has signed unconditional release of liens with the escrow agent.

After the title has been cleaned, there will be a $40K first deed of trust against the property to the benefit of the third party funder - plus $10K cash for the seller at closing.

At that point, we will bring in another 3rd party into the deal who will fund the payoff of the $40K 1st out of the proceeds of a new 1st on the property, provide all renovation funds to upgrade the property, and pay the seller the balance of the proceeds after expenses have been paid.

When it is all said and done, there will be about $50K equity, a clean title and a completely renovated property.

The coolest part about this deal is that everybody in the transaction wins. The seller, us, two funding sources and all of the lienholders.

Pretty cool, eh?

You Can Invest In Property Using OPM And Simultaneously Limiting Your Own Liability

We have other deals in progress that are 'no money down' that aren't nearly as interesting.

But the point is that in all cases - we have very little of our own money involved in any of these or other pending transactions - and have limited our personal liabilty to almost nothing.

Bear sure you use an escrow company or closing attorney and always get a title report before you put out any cash or sign a contract.

See you next time.

Best regards,

Michael Barrett

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