No money down - really?

Financing, Hard Money Lenders, Private Money
1

I need help getting started but these questions are holding me back…

I just got involved in real estate investing less than two months ago. After spending thousands and thousands of dollars for real estate education and programs, I’m finding that I am tapped out of money and credit cards now to the point that I can’t do any deals. I don’t have rich friends or relatives to help me out either. I have a fairly good credit score but my debt to income ratio is way above 41% and it won’t even allow me to refinance my own home let alone purchase an investment property. I hear from all the real estate instructors that you don’t need money to purchase real estate. If that is truly the case, what about these costs that are generally required to do a deal prior to close (I understand you can get some of these costs back after the deal but I’m talking about before the deal is done)?

The hard money lenders I’ve spoken to only lend to corporate entities, so you’ll need an LLC setup prior to your first wholesale double-close (A-B-C transaction) deal. Where do I get the money for setup costs, business licensing and filing fees to form the LLC?

To make the contract with the seller legally binding, you will need earnest money (at least $500-$1000). Even if you put the earnest money into an escrow account while you are submitting offers it will still need to be REAL money. Within 48 hours of seller acceptance that money has to be there, so where does that money come from?

Before CLOSING a deal and even before signing a contract with your buyer, you need to look at the property and determine what the repair costs would be using an inspector or contractor in order to run the numbers for an ARV price. You’ll also need to have an appraisal done. What about the appraisal, inspection and contractor fees and how do I pay those costs prior to selling the property to my buyer/investor?

Everyone suggests using a local attorney to verify the contracts and addenda you or your RE Agent writes in to ensure they are legally binding in the property’s location/state - at least the first time around. Where do I get the money for that?

If I want seller financing using a sandwich lease option for a pre-foreclosure, there are typically repair costs and other costs prior to an assignment to a “rent-to-own” lease option buyer. For example: paint, carpeting, fixtures as well as bringing the seller up to date on back taxes and late mortgage payments. All of these costs together can equal several thousands of dollars. Where does this money come from?

If you are doing a wholesale A-B-C transaction and you are dealing with a motivated seller, they may not have the money for closing costs and the hard money lenders will only pay up to 100% of the purchase price - not ARV or closing costs. As the buyer, where do I get the money for the appraisal, origination and processing fees, pre-paid interest between the time I buy versus the time I sell, pre-paid insurance, flood certification fee, tax servicing fee, credit report fee, recording and notary fees, and title insurance? As the seller, if I used a real estate agent, won’t I be required to pay their fees as well? Where does this money come from?

What about bird dog fees? If someone finds you a motivated seller and the deal falls through because your buyer falls through, does that mean the bird dog is out their fee? If you pay them anyway, where does that money come from?

Tested and proven strategies that answer these questions from investors that have actually done it is highly appreciated as opposed to just theory.

Looking forward to doing my first deal!
Thanks in advance,
John

2

As a seasoned investor and consultant of many investors around the country, it is suggested that you look simply for a transaction that you CAN do…not ones that you cannot or that might be problematic in putting together.

One might look for private financing from the seller in the form of owner financing the full amount, a lease purchase, or perhaps a seller second where most any credit risk could get a 50% to 60% no doc loan and the seller takes back balance.

Also, to lighten your concerns about no money down deals…I’ve done hundreds of them…in fact, many ‘don’t wanters’ will write you a check to take over their bad position just for the asking. Think about it…a seller has an empty home…they’ve moved and are not paying two house payments…they are getting pressure from the insurance company about a vacant house…perhaps they are already out of town…they are nervous and do not see an end in sight.

Your offer to take title ‘subject to’ or a lease purchase for them paying a fee to stop their bleeding is a very level headed move and an easy decision…they might be thinking…I’m paying $1500/month on this with no end in sight…if I pay this investor $7k, it is over…their decision is easy if they have the confidence in you!

Hope this helps.

Rob in Atlanta.

3

I agree with Rob.

Look for deals that fit you, not ones that don’t.

Also, Rob’s financing suggestion is really excellent.

I would just add that you want to find a mortgage broker who knows the lenders that will lend on Rob’s scheme.

Maybe, having the seller carry a second, secured by your own house, until you get a loan to buy his house, and then moving the note back to the house you’re buying, would work as a “no down” deal?

That’s exactly what Robert Allen suggests in one of his “no down” books.

The issue is, you need some operating capital. There’s ‘no down payment’ investing, and then there’s “no money” investing.

The “no money” strategy is reserved for unicorn chasers.

It takes money to chase deals, if nothing else; gas, postage, letters, classified ads, etc.

Meantime, a few sellers, as Rob has informed you, will pay you to solve their debt burden. It’s all on how well you present yourself, and how motivated you find them to be.

I’m dubious that any seller would give you money, if you didn’t fairly demonstrate (that’s fake it, until you made it), that you were a responsible, honest, reliable person to give money to…

I mean, if you demonstrate how reliable, trustworthy, and credible you are, sellers will agree to all sorts of things, including giving you money to solve their problem, that they wouldn’t dream of doing with someone else.

I share on my blog how I demonstrate credibility, and how anyone can, even if they haven’t so much as invested in a rake, much less a house before.

Meantime, focus on solutions, not obstacles. Solutions make you the big bucks. Obstacles do the opposite.

4

First, I would recommend focusing on reducing your personal debt. It will free up some cash that is not being spent on credit card payments and it will increase your purchase/loan potential.

Second, there are “no money down” options but that does not mean that you will not spend some money.

If you want to earn a little extra money each month, find a place to rent where the rent is below market and then make sure that the rental contract will allow you to sublet. This means that you can turn around and re-rent it out for more. Finding cheap rent helps. For example, you rent a house for $600. You then find someone to rent it for $675. Every month you make $75. Of course, if they do not pay the rent then you have to cough up the $600. So find a good tenant. Now, do not spend this money. Save it to invest again.

Another option is to rent to own. For a time you pay rent and an additional rent premium which is used as the down payment on the home. After 2 to 5 years, you then use this equity to go get a bank loan to purchase the home.

The other method is to buy on land contract. Because mortgage rates are so low, this is not always the cheaper option but it keeps you from going to get a bank loan. In a land contract, the owner plays the role of the bank but he will charge you a rate higher than the bank, especially if your credit is poor. You put a little money down, let’s say $1,000 - $5,000, then you make monthly payments to the property owner for generally a period of 3 to 5 years. At the end of the payment period, you have to pay the remaining amount in one lump sum. That is when you get a loan. By then, you have equity and hopefully a higher credit rating. Meanwhile, you rent out the property for at least what you are paying.

Third, if you wholesale houses and assign the contract, you can effectively do no money down. You enter into a P/A with the seller that has a contingency that allows you to assign the contract (this does not work with REO homes). The EMD is the standard amount, “payable upon partner approval.” This allows you to find an end buyer and they pay the EMD. You transfer the contract for a fee that is paid to you at closing. End buyer pays all closing costs and handles all inspections.

Just a few ideas.

5

See my comments below your questions:

Welcome to the board! You are seeing the less-than-steller side of this industry. REI Gurus that take your hard earned money to teach you the “secrets of no-money down deals” that don’t actually exist. There will ALWAYS be some out-of-pockets costs for a buyer whether it be Earnest Money, Appraisal Fees, Assignment Fees, closing costs what have you. There are however some options available to you. Like some of the previous posts you should focus first on reducing your credit card debt. If you can scrap together $500 - $1000 you can start finding deals to assign to wholesalers and make 2% or more when the deal closes. Check out this article on Birddogging or flipping: http://www.reiclub.com/articles/bird-dogging-101

The hard money lenders I've spoken to only lend to corporate entities, so you'll need an LLC setup prior to your first wholesale double-close (A-B-C transaction) deal. Where do I get the money for setup costs, business licensing and filing fees to form the LLC?

I don’t know where you live but there are many HMLs that will loan to individuals. Look at the first link on the left under Investor Resources. Many of those HMLs don’t require you to have a corporate entity.

To make the contract with the seller legally binding, you will need earnest money (at least $500-$1000). Even if you put the earnest money into an escrow account while you are submitting offers it will still need to be REAL money. Within 48 hours of seller acceptance that money has to be there, so where does that money come from?

That money will need to either come from you or a financial partner. I would recommend that you save up the $500 - $1000 yourself and then start wholesaling until you build up a sufficient amount of capital to start rehabbing properties.

Before CLOSING a deal and even before signing a contract with your buyer, you need to look at the property and determine what the repair costs would be using an inspector or contractor in order to run the numbers for an ARV price. You'll also need to have an appraisal done. What about the appraisal, inspection and contractor fees and how do I pay those costs prior to selling the property to my buyer/investor?

It always irritates me when these so-called gurus’ fail to prepare their students for these exact circumstances. The good news is that if you are wholesaling or assigning out your deals in the beginning these costs are borne by the rehabber not you. Work with a good Realtor and they can help you determine ARV based upon sold comps. Spend some time a Home Depot or Lowes and find out what materials cost. If you don’t own your own home find a friend that does and then have some trades come bid on painting the house or remodeling the bath or kitchen. You don’t have to actually have the work done but you can get a better idea the cost of that type of work then apply that knowledge to the houses you look at.

Everyone suggests using a local attorney to verify the contracts and addenda you or your RE Agent writes in to ensure they are legally binding in the property's location/state - at least the first time around. Where do I get the money for that?

I am not sure who “everyone” is that you are referring to but this is bad advice. Every state promulgates real estate contracts for use by the licensed real estate agents. In most cases those some contracts can be used buy the general public. If you are use a Realtor to write up your offers then they are trained to complete these contracts correctly.

If I want seller financing using a sandwich lease option for a pre-foreclosure, there are typically repair costs and other costs prior to an assignment to a "rent-to-own" lease option buyer. For example: paint, carpeting, fixtures as well as bringing the seller up to date on back taxes and late mortgage payments. All of these costs together can equal several thousands of dollars. Where does this money come from?

These are more of the funds that you or your financial partner are responsible for.

If you are doing a wholesale A-B-C transaction and you are dealing with a motivated seller, they may not have the money for closing costs and the hard money lenders will only pay up to 100% of the purchase price - not ARV or closing costs. As the buyer, where do I get the money for the appraisal, origination and processing fees, pre-paid interest between the time I buy versus the time I sell, pre-paid insurance, flood certification fee, tax servicing fee, credit report fee, recording and notary fees, and title insurance? As the seller, if I used a real estate agent, won't I be required to pay their fees as well? Where does this money come from?

I would like to know the name of the class you took so others can avoid it. They left so many of the basic questions un-answered. Again these are costs that you are expected to cover. Most HMLs wil lend based upon ARV. Some up to 70% of ARV. if you are buying right (purchase pric and cost of rehab not exceeding 70% of ARV) then the closing costs shoud not exceed 5% - 6% of the loan amount.

What about bird dog fees? If someone finds you a motivated seller and the deal falls through because your buyer falls through, does that mean the bird dog is out their fee? If you pay them anyway, where does that money come from?

it used to be that birddoggers would be paid when the deal closed with only their out-of-pocket cost (earnest money) being paid up front. That way they don’t lose any money of the deal doesn’t close but also you are not out any money if the deal is bogus or can’t close because of title issues. Again this is why some capital is needed to get started rehabbing but much less is needed to start birddogging or wholesaling.

Tested and proven strategies that answer these questions from investors that have actually done it is highly appreciated as opposed to just theory.

Looking forward to doing my first deal!
Thanks in advance,
John

Hope these answers help. They are most likely not what you wanted to hear but they are the realities. If have been lending on deals ans a HML since 2001. I have also personally rehabbed Several millions dollars of real estate over the years.

Good luck!
Rob