The Great Myth of Nothing Down Real Estate

We all hear stories (many of them from people trying to sell you seminars, books and tapes) about buying a house for nothing down.

What they mean by this is that the owner is so desperate to sell the house that he will GIVE it to you if you just take over responsibility for his payments.

Does this ever happen?

Realistically no. But sometimes yes…when the house is so over-financed that it CANNOT be sold. What I mean is that a house is worth $100,000 and has financing against it for $100,000 (or close to it). Often this is a high interest loan.

How are you going to make any money with this house?

You probably won’t be able to sell it for a profit, because just like the former owner you still have to pay off the loan. And while waiting for a sucker who will pay you more than the house is worth, you still have the payments to make.

How about renting it and holding it till the loan is paid down and property appreciates enough?

Maybe. But it is going to be almost impossible to get enough in rent. A $100,000 home will typically rent for about $800 a month.

A $100,000 loan for 360 months at 7% p.a. interest has principal and interest payments of $665.30 a month. Plus property taxes and insurance.
You also have vacancy, maintenance etc.

So it’s going to take YEARS of feeding negative cash flow before you get to make a dime.

And most of these houses have other troubles as well, repairs needed, unpaid taxes etc. and it takes CASH to fix these problems.

And don’t forget that when you took title to this house you probably violated the “due on sale” clause in almost every modern mortgage. That means, if the lender finds out there is a new owner, they can ask for all their money back at once.

So how do you REALLY buy nothing down. With no money out of your pocket. The only good way is to find a distressed property that you can buy for CASH at way below market price. Then get a hard money mortgage, fix it up and sell it for a profit.

Does this ever happen in real life? let me give you a recent example.

Someone in Tampa Florida asked us for a loan of $53,000 to buy a property that was in foreclosure. The property was worth about $100,000 as-is. The first mortgage on it was only $40,000, BUT there was also a second mortgage of over $100,000 (the home owner had pledged the house as security against a commercial deal that went wrong). On top of that there was a lien from an oil company for about $50,000. Same bad commercial deal.

Our borrower, the investor, got the second mortgage holder to release their mortgage on this property for only $1,000. They got a similar deal with the oil company. Now they could close on the house, pay off the first and the releases and also give the homeowner $10,000. They then had the house under contract now for $100,000 and were looking to clear some $45,000 without investing a dime of their own money. Now that’s a smart investor!

And who’s the fool? The lender who held the second mortgage. They should have refused to release the property and let it go to sale. It would probably have fetched close to $80,000 on the courthouse steps and they would have got the excess over the first mortgage payoff.