I had an interesting discussion with a student via email today. Since the name of my Home Study Course is called “Millions in Real Estate With no Cash and No Credit” ™ this student wanted to know how they could buy real estate with no cash and no credit. That is a fair enough question. And here is the answer.
My Home Study Course starts out by showing the real life scenarios of the first ten houses that I purchased all with no money down. People often are confused by the concept of no money down thinking that indeed there is “no money down”. While that would seem to be the case it is not and this is an incorrect assumption.
No money down simply means “none of your own money” down. You could use Uncle Bob, Aunt Sally or your next door neighbor to put the money down. If it is not your money then it is no money down (as far as you are concerned).
There is a lot of confusion on the concept of no money down because people look at it conventionally like they would look at a mortgage. Since a mortgage usually requires a 20% down payment and in the giddy days of easy mortgage lending some companies were offering almost 100% financing many people think that this is the same thing as no money down. However it is not. It is an entirely different thing.
Let me show you an example:
Assume a house is in move in condition and needs no repairs
Assume that this house is worth $100,000 and would appraise for $100,000
If you could buy that house for $100,000 using a conventional mortgage you would usually be required to put down 20% or $20,000. If you had good credit you could probably get a mortgage for the other 80% or $80,000. The bank would loan you $80,000 if you put down $20,000 as long as you could show capacity to pay.
But what if you could but the same house for $60,000? And what if the only thing that the seller wants is cash? What if they don’t want to wait for you to get approved for a mortgage? Maybe they can’t wait for whatever reason – it could be divorce, foreclosure or a variety of reasons. So the sales price is drastically reduced to $60,000 but they insist that it must be cash and they want to close quickly like next week.
Now if you went to the same mortgage broker for the same house as in the example above and now told him that you wanted to buy the house for $60,000 cash and wanted a loan for all of the $60,000 what would he tell you? The first thing that he would tell you is that there is no way that he can get you a loan in a week. The second thing that he would tell you is that you need to put down 20% regardless of the purchase price. If you put down 20% the bank will give you the other 80%. In other words if you were buying the house for $60,000 if you put down $12,000 they will give you the other $48,000.
What if you could buy this same house for $40,000? The bank would tell you the same thing. Put down $8,000 and they will give you the other $32,000. However in reality you would now be below their $50,000 loan minimum so ironically they would not give you the loan.
So regardless of how cheap or below actual market value you can buy this house, the bank will still go by the same formula. This formula says that the bank will loan you 80% of the purchase price which is the amount on the purchase contract. Notice that the purchase price has nothing to do with the value of the house!
The bank loans you the money based on the purchase price and your capacity to pay and their loan is not based on the value of the house (only on one appraisers opinion). The bank uses an appraisal as a fail safe measure to make sure that they don’t mess up and loan you too much if your purchase price is too high for the house.
So how did that work out for the banks over the past few years? Not so great I think you would agree! Well the banks have not learned. Now with real estate prices at record lows the bank will still not lend money to most borrowers. This is kind of strange if you consider that when prices were high they were loaning money to everyone with a pulse. If you think about it this makes no sense at all. Or maybe it does. I speak to asset managers in California arguing with me about the value of a property in Florida and they have never even set foot in the state! How would they know? Their valuation model is computer based at is mediocre at best.
So in a scenario like this if you could actually buy this house for $60,000 what do you do? Well if you have the cash then there is no problem but what if you don’t have any money? The answer is simple. Borrow money from someone that does. You should preferably borrow money from a family member or someone that you know that will lend you money at a reasonable interest rate. I would consider 8% to be a reasonable interest rate from a family member. They would get a much higher return from you than they would in the bank and you get to leverage their money without being charged an arm and a leg.
As an example, let’s say you could buy this $100,000 house for $60,000 cash. Let’s say you go to your Uncle Bob and ask him to borrow $60,000 to buy the house. You tell him that you will pay him back in less than 12 months by refinancing the house (assuming you have decent credit). You also tell him that you will sign a promissory note and secure the note with a mortgage (just like the bank does) so that if you don’t pay him then he can take the house away from you.
You also point out to him that the house is worth $100,000 and you are only borrowing $60,000. In other words the loan is secured by a property and there is collateral (the house). Now Uncle Bob is a business man and he knows that loaning you $60,000 at 8% interest sure beats the less than 1% interest that he is earning right now in his checking account. He does some research on the value of the house and being the businessman that he is he decides to loan you the money.
Fast forward 6 months and you order up an appraisal on the house. The house appraises for $100,000 just like you thought it would. You go to your mortgage broker and ask him for a loan in order to refinance your mortgage with Uncle Bob. After all Uncle Bob wants his money back within 12 months as promised and why pay 8% interest if you can refinance and get a mortgage with the bank at less than 4%?
So you get the house appraised and the appraisal comes through at $100,000. You call up the mortgage broker and tell him you want to refinance your mortgage and what does the mortgage broker tell you? The bank will loan you 80% of the appraisal amount or $80,000.
When the mortgage comes through the first mortgage to Uncle Bob is paid off and Uncle Bob gets back his $60,000. But the bank is loaning $80,000 so there is still $20,000 left over. Now the bank holds a new mortgage against the property as collateral and replaces Uncle Bob. What happens to the extra $20,000? After Uncle Bob is paid off there is $20,000 left of which $5,000 goes to the mortgage broker for closing costs and fees. The $15,000 that is left over goes to you.
So at this point let’s analyze this deal. You now have $15,000 cash in your pocket (from the refinance) and you also own a house that is worth $100,000 with a mortgage of $80,000. This means there is $20,000 in equity in this house. Add the $15,000 cash from the refinance to the $20,000 in equity and your net worth has increased by $35,000.
And how much did you spend of your own money to buy this property? Zero, zilch, nadda! You bought this house with no money down meaning none of your own money down. You used Uncle Bob’s money. And that my friend, is how no money down deals happen.
So the big question is can you really do this? Yes you can! I show you the first ten houses that I did in my Home Study Course that I purchased just like this. You can do this too.
All you need is two things. The first is a private lender like uncle Bob. The second is the ability to find great houses at way below market value like in the example above. To find private lenders start going to your local monthly real estate investor association meetings (ours are on the first Tuesday of every month at 7 p.m.).
To learn how to find great houses below market value get some training like we offer at our Distressed Real Estate Boot Camp.
The hard part is not finding a private lender. The hard part is finding a $100,000 house for $60,000 cash. In today’s market you are most likely to find that this kind of deal will be a short sale or a bank owned property. If you find a house like that we can find you a cash buyer for it and you can make a quick profit selling it. Do that a few times and you will have no problem finding private lenders.
How easy is it to find a $100,000 house for $60,000? Well it does take work – and if you are afraid of working a little then this is not for you. But it can be done. I have trained hundreds of students how to do it. I even trained a 21 year old kid who was working at Wendy’s for $6.75 how to do this. He has flipped 8 houses this year. I can train you too!
To your success in real estate!