No Money Down – Really?
No money down may mean no down payment. That’s what most people think it means. A seller actually agreeing to get nothing at closing is rare, though. Most sellers need something as a down payment. They want a little bit to show for the sale, and may even need it just to cover their closing costs, like paying the real estate agent.
Also, most banks won’t finance the entire purchase price of a property. This is especially true of real estate that is purchased as an investment. The bank won’t loan you 100%, and the seller needs something as a down payment, so how do you buy real estate with no money down?
By understanding what the parties involved really want, and giving it to them. The bank wants a secure investment, meaning the property is worth more than what they are loaning on it. The seller may want enough money to move, or may want a to finance the property to get a good return on his equity. He may just want all of his money out of it now. The point, then, is to find a way to give him (and/or the bank) what he wants, while putting none of your own money into the deal.
You see, no money down just means that the down payment won’t come from your own money. Where will you get it? Anywhere you can. Time to get creative.
A No Money Down Example
Recently, an investor told me that he had found a fixer upper, but couldn’t arrange financing. What did he do? He assigned the contract to another investor who was at our real estate club meeting, for $6,000. All he ever had into the deal was a $500 “good faith” deposit, and this could have been from a cash advance on a credit card. The other investor saw the potential to make $20,000 on the property, so he was happy to pay $6,000 to take this man’s “position.” This is called “flipping.”
The new investor had the ability to finance the deal, so the seller got his cash. The bank had a good loan, especially considering that the home value would be improved with the rehabilitation.. The key here was that the first investor knew how to find a good deal, and he included in his offer the right to assign the contract to another investor (or take on a partner) if he wanted to.
More No Money Down Ideas
Suppose you wanted to complete the purchase, renovation and sale with zero down, and none of your own money invested? One way would be to find a partner. We were recently talking to an investor who wants to use our money to complete the profitable renovation of a property. We would like a share of those profits. If a deal is good, there are people who want to bring their money into it.
Here is another example. Suppose you find an owner who is tired of being a landlord. He wants $80,000 for his run-down house. With $6,000 worth of clean-up and repair it could sell for $116,000. Your total costs (including closing and holding costs) would be around $11,000, leaving $25,000 potential profit in the deal. That sounds good, but what can you do with no money?
You could offer the seller more than he wants. For example, offer $85,000, using a $500 credit card cash advance for a good faith deposit. Your offer, however, is for $5,000 down, with no monthly payments, and the entire remaining balance to be paid within one year, with 7% interest. Why should he agree?
As you would carefully explain, he’ll get more than he wanted – and a few thousand in interest too. His collateral will be safe, since unlike his renters who ran the place down, you’ll be pouring money into fixing it up. He’ll have a first mortgage on a home that will soon be worth much more than what he is owed.
Okay, so he agrees (if not, find another seller and another until one does agree). Now how do you find the $5,000 for the down payment, plus the $11,000 for repairs and holding costs? Find an investor who has about $16,000 to put into the deal. No money down for you, and half the profits for him. Complete the house quickly and on budget, and you’ll get over $10,000 profit each.
Notice that the seller gets more than he is asking, and the other investor gets a great return on his investment. You make more than $10,000 without investing a penny. Find out what everyone wants and create a way for them to get it. This is the surest way to make a deal work with no money down.