House Flipping

Copyright © 2008 Lex Levinrad

I have heard many questions over the years from students about whether or not it is actually possible to buy real estate with no money down. The most common questions that I do are of mortgage brokers and realtors. Since mortgage brokers, by definition, trained to finance a loan based on the requirements of the Bank and the 20% share, then by definition everything else seems to be beyond the scope of its possibilities. It has been my experience that many real estate professionals do not seem to understand the concept of “no money down deals”.

First, the definition of no money down does not mean “down payment”. It simply means that none of their money down. Could be the money of Uncle Bob, money from the sellers, or a loan from Aunt Sally. It could also be a line of credit, a private investor, hard money lender or anyone else for that matter. It is very important to understand the concept.

Now if you were to buy a house and left the 20% that you borrowed from your family, then you would have bought the house without a down payment. You can call 100% financing or you name it. In regard to the bank that left 20%. However, there is a problem with that because, as many mortgage brokers will tell you, the banks want to know the source of funds. When they see that funds are borrowed and has no “skin” (your money) in the agreement then the loan is rejected.

So what is an investor out of cash going to do to fix this problem? The solution is to borrow the money to buy the house for cash. If you borrow from Uncle Bob all the money then you can be a cash buyer. Cash buyers are very rare nowadays and if you are a cash buyer then you can buy bank owned REO properties a substantial discount to market value.

But Uncle Bob is not going to feel comfortable lending money to buy a home unless there is security important to him. Since banks lend money to loan to value (LTV) of 70% Uncle Bob could be especially cautious and only agree to lend money at 60% LTV. Is it dangerous for him? Well, it is less risky than conventional mortgages, which are funded by banks. Why is it less risky? Well first, conventional lending banks based on a mortgage application, credit scoring and evaluation. But Uncle Bob is a bit smarter than the average bank. He can actually go out and inspect the property, and himself. After all, if they do not pay, then he will get the property because it has the first mortgage.

So Uncle Bob will need sufficient knowledge of real estate to feel assured that if they do not pay, and put your house going to have an agreement. Uncle Bob will do his own compositions and will not rely on an appraiser. Uncle Bob is going to take days or even weeks researching the property in 30 minutes compared to a loan officer looks at state of a file. If Uncle Bob is convinced that his treatment is a good deal, then going to lend money. If you pay interest at 10% and the bank pays only 2% of Uncle Bob will make more money in real estate loan as opposed to having their money in the bank. If Uncle Bob has done his job then an agreement will only finance 60% LTV or less. What this means is that if he thinks the house is worth $ 100,000 that will pay him only $ 60,000 and no more.

Their challenge will be finding a home for $ 100,000 that can be purchased for $ 60,000. Being a cash buyer will make their job much easier because 99% of buyers competing with you will be looking to get a mortgage. Currently it is very difficult to get anything other than an FHA or VA loan. Cash buyers can purchase property directly to the banks for as little as 50 cents. This is a once in a lifetime opportunity.

So start looking for “Uncle Bob” or someone you know you have money. Then once you have an investor lined up to start looking for offers wholesale real estate.

When you encounter a mechanical arrangement works like this:

House worth $ 100,000

You buy for $ 60,000

Uncle Bob loan of $ 60,000

The money in your pocket $ 0

Now that you own the house, wait 6 to 12 months for something called “seasoning of title” and then go to your lender and tell them you want to do a refinancing. You want to get a conventional mortgage at 7% to pay Uncle Bob at 10%. The bank will require an assessment and if they were correct in their initial assessment of the evaluation should come in $ 100,000. If the bank agrees to give a 70% LTV loan of $ 100,000 valuation, then you pay $ 70,000. Suppose that closing costs are $ 5,000, so after paying Uncle Bob back the $ 60,000 that was left with the following scenario:

Home value $ 100,000

Bank Loan $ 70,000

$ 30,000 Equity

Refinancing cash surplus of $ 5,000

You just bought a house with no down payment. And now you have $ 5,000 in his pocket and $ 30,000 equity in the house. This is called distressed real estate investment. Their challenge is not finding Uncle Bob. There are many Uncle Bob’s out there. They are called hard money lenders or private investors. Your challenge is to find a $ 100,000 house that can be purchased for $ 60,000. That’s the hard part. To do this you will need to find a distressed seller. If you can learn how, then you will have no trouble finding the money.

Beginner distressed real estate investors believe that finding the money and have good credit, are obstacles to their home to invest in real estate. This is not true. The biggest hurdle is education. Learn and understand how and why you can buy a $ 100,000 house for $ 60,000. Understand and know what a distressed seller is and why a house is sold 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 from you. For more information about property seized and the Distressed Real Estate Institute please visit http://www. lexlevinrad. com