Over the years, I’ve heard a lot of questions from students about whether or not it’s really possible to buy real estate with no money down. The most frequently asked questions I receive are from mortgage brokers and real estate agents. Since mortgage brokers are, by definition, empowered to finance a loan based on bank requirements, such as 20% down payments, then by definition anything else seems beyond their reach. It has been my experience that many real estate professionals do not seem to understand the concept of “no money down offers”.

First, the definition of no down payment does not mean “no down payment.” It simply means none of YOUR down payment money. It could be Uncle Bob’s money, money from vendors, or a loan from Aunt Sally. It could also be a line of credit, a private investor, a hard money lender, or anyone else. It is very important to understand this concept. Now, if you were to buy a house and put up the 20% you borrowed from your relative, then you would have bought the house with no down payment. You can call it 100% financing or whatever you want to call it. As far as the bank is concerned, you put a 20% down payment. There’s a problem with that though, as many mortgage brokers will tell you, banks want to know where your funds are coming from. When they see that the funds are borrowed and that you have no “skin” (your money) on the deal, they will reject the loan.

So what is a cashless investor going to do to fix this problem? The solution is to borrow ALL the money to buy the house with cash. If you borrow all the cash from Uncle Bob, then he can be a cash buyer. Cash buyers are very rare today and if you are a cash buyer then you can buy bank owned REO properties at a substantial discount to market value. But Uncle BOB won’t feel comfortable lending you money to buy a house unless there is substantial security for him. Since banks lend money at a loan-to-value (LTV) ratio of 70%, Uncle Bob may be especially cautious and only agree to lend money at 60% LTV. Is this risky for him? Well, it’s less risky than conventional mortgages that are financed by banks. Why is it less risky? Well, first of all, a loan from conventional banks based on a mortgage application, credit score, and appraisal. But Uncle Bob is a bit smarter than your average bank. In fact, he can go to the property and inspect it himself. After all, if you don’t pay him, he will get the property since he has the first mortgage. So Uncle Bob will need to have enough real estate knowledge to feel comfortable that if he doesn’t pay him and gets your house, he’ll have a deal.

Uncle Bob will do his own calculations and will not rely on an appraiser. Uncle Bob is going to spend days or even weeks researching the property compared to 30 minutes for an out-of-state loan officer to look at a file. If Uncle Bob is convinced that his deal is good, then he will lend you the money. If you are paying him 10% interest and the bank is only paying him 2%, Uncle Bob will make more money lending on real estate compared to having his money in the bank. If Uncle Bob has done his homework, he will only fund a deal at 60% LTV or less. What this means is that if he thinks the house is worth $100,000, he will only lend you $60,000 and no more.

Your challenge 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 buyers competing with you will be looking to get a mortgage. It is very difficult these days to get anything other than an FHA or VA loan. Cash buyers can purchase 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 you know who has money. Then, once you have an investor lined up, start looking for wholesale real estate deals. When you find an offer, the mechanics will work like this:

House is worth – $100,000

You buy for – $60,000

Uncle Bob Loans – $60,000

Money out of pocket – $0

Now that you own the house, you wait 6-12 months for something called “title seasoning” and then you go to your mortgage broker and say you want to do a refinance. He wants to get a 7% conventional mortgage to pay Uncle Bob at 10%. The bank will require an appraisal, and if he was correct in his initial assessments, the appraisal should be $100,000. If the bank agrees to give you an LTV loan for 70% of the $100,000 appraisal, then they will lend you $70,000. He assumes that closing costs are $5,000, so after paying Uncle Bob the $60,000 back, he finds himself with the following scenario:

Home Value – $100,000

Bank loan – $70,000

Equity – $30,000

Leftover cash from refinancing – $5,000

You just bought a house with no money down. And now you have $5,000 in your pocket and $30,000 in home equity. This is called distressed real estate investing. Your challenge is not to find Uncle Bob. There are a lot of Uncle Bobs out there. They are called hard money lenders or private investors. Your challenge is to find a $100,000 house that you can buy for $60,000. That’s the hard part. To do this, you will need to find a distressed seller. If you can learn to do it, you won’t have a problem finding the money. Beginning and distressed real estate investors think that finding the money and having good credit are obstacles to starting investing in real estate. This is not true. The biggest obstacle is education. Learn and understand how and why you can buy a $100,000 home for $60,000. Understand and know what a distressed seller is and why you would sell a home for less than its current value. Then go out and start looking for a deal. When you find one, call me. Maybe I’ll buy it for you.

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