dangers of no money down and lease options? - Posted by CHARLIE

Posted by JPiper on May 06, 1999 at 19:23:01:

Finally had a few moments…took out my trusty “Smart Trust Deed Investment in California” by George Coats. Good book by the way.

Turns out I wasn’t exactly right in what I said…nor were you. But I’m more concerned about my mistake than yours.

Here’s what Coats says: “All purchase-money TD’s which are seller financings are forbidden collection of deficiency…” Further he says “With the exception of certain federally guaranteed loans, all third party purchase money lenders are also prohibited deficiency judgments–if the loan is secured by four or fewer residential units, one of which is occupied by the borrower. Subject to the aforementioned one action rule, all other third party lenders are free to pursue judicially the borrower’s assets for security deficiencies.”

Again, this is just in California.


dangers of no money down and lease options? - Posted by CHARLIE

Posted by CHARLIE on May 05, 1999 at 15:39:59:

what are the dangers of doing no money down deals? what are
the dangers of doing lease options? I’ve done my research
on many other websites and some people say that you can lose
a lot of money and you can become bankrupt if you buy with
no money down or if you use lease options. is it all true?

I’m living in a house that I L/O - Posted by Mike-DFW

Posted by Mike-DFW on May 05, 1999 at 22:24:59:

Took over the owners payments and got some equity to boot. Sold my old house on a L/O. Cleared 3700.00 upfront and 162.00 a month and 8k more on the back end.
Where is the danger?


No way to lose money at no money down deals - Posted by Sean

Posted by Sean on May 05, 1999 at 18:29:49:

I disagree with all the previous posters. There is no way to lose money at no money down techniques. After all, if you put NO money down there is nothing to lose.

You can, however, incur many sleepless nights and have your credit completely destroyed if you’re not careful and aren’t sure what you’re doing. There is a natural progression in real estate where people start doing the easy (and mostly unprofitable stuff) until they move up to doing the more complex and more profitable stuff.

So my basic advise is to be careful, but get involved. Learn as much as you can and move up the ladder.

Re: dangers of no money down and lease options? - Posted by matt

Posted by matt on May 05, 1999 at 16:10:18:

I have no experience with lease options but no money
down deals require you to take out a bigger mortgage
than you would have, usually with a higher interest rate. Which means bigger payments, and if the house sits vacant for a couple of months or the market won’t bear your raising rents to cover costs, you can get into a serious cash-flow problem. The good side: if the rent can cover expenses, you used none of your own money and everything coming in is pure profit! As in all investments risk is directly correlated to reward.
My advice: Go to the library and check out every book
on REI, Also check out all the sources on the web where you can get free information. The only real “danger” in REI is ignorance.

Re: dangers of no money down and lease options? - Posted by Don (Silicon Valley)

Posted by Don (Silicon Valley) on May 05, 1999 at 16:09:59:

Charlie…you say you’ve done your research on many other websites…have you done any of your research on THIS website? There’s a great section of How-To articles that address these issues, and they’re written by experts. I suggest you read them. It’s a great education, even though it’s free.

You say “some people”…who are they? Heck, I know people who’ve lost a lot of money and/or become bankrupt even after paying hefty down payments because they didn’t bother to educate themselves about basic cashflow management. You need to ask yourself, have these “some people” ever DONE a lease-option or a no-money down deal?

Oh, BTW, I bought my house for no money down…I didn’t lose a lot of money (didn’t lose any as a matter of fact), and I haven’t gone bankrupt. So no, it isn’t “all” true.

Good luck to you…

Re: dangers of no money down and lease options? - Posted by Randy -IL-

Posted by Randy -IL- on May 05, 1999 at 16:06:57:

First things first. You are on the right track by posting here. You’ll learn a lot about real estate here. Now on to your post.

I noticed from your earlier post that you have read J.T. Reed’s website. If you learn anything from John T. Reed’s website you’ll find that he is very closed minded about most ideas. In fact, he lists on his website that the last real estate he has purchased was 15 years ago. I consider that VERY outdated information. I choose to learn about real estate from those people I know that really invest in real estate now, not just sell books about what they did 15 years ago.

Yes, you can loose your shirt if you are not properly educated about certain aspects of investing. Risk in investing is everywhere (stocks, bonds, notes, and yes real estate). There are plenty of dangers out there. If fact too many to even attempt to list. Education can help reduce your risk.

The best advise that you can find is right here in this website. Read everything on this website. All of it, including the success stories, how to articles,and all the posts. Keep reading and you’ll learn a lot and feel much more comfortable about real estate.

Best of luck in investing,

Re: dangers of no money down and lease options? - Posted by PBoone

Posted by PBoone on May 05, 1999 at 15:50:33:

Yes the statements of “you can lose your shirt using no money down and /or lease options” is true. IF you purchase either at retail and or negative cash flow. The basic idea is to never pay retail and make sure the cash flow warrants the purchase. It is often said here and other TRUE investment arena’s “Make the money going into the deal or don’t do the deal”.

Re: No way to lose money at no money down deals - Posted by JPiper

Posted by JPiper on May 05, 1999 at 19:03:45:


You and I have been in too much agreement lately! But here’s an exception.

In many states lenders are able to pursue deficiency judgments. Once the lender has a deficiency judgment they could potentially pursue any asset to collect.

In California there is a “one-action” rule, which means that if the lender pursues foreclosure under a their deed of trust, and takes the house back, their remedy is limited to the house. But even in California a lender COULD foreclose non-judicially and get a deficiency judgment. (It’s not done often).

In my state, a lender can pursue foreclosure under the deed of trust, get the house back, AND pursue a deficiency judgment.


Re: dangers of no money down and lease options? - Posted by Steve Heller

Posted by Steve Heller on May 05, 1999 at 19:45:10:

Well said.

We usually agree. - Posted by Sean

Posted by Sean on May 06, 1999 at 10:45:23:

We just point up the disagreements.

Anyways here in California deficiency judgements are not possible on purchase money loans. Only on a hard money loan (refinance) can a lender pursue a deficiency judgement. Anyways it never happens because you can do a non-judicial foreclosure in 111 days here whereas it will take you at least 120 days just to get a court date.

I can’t speak for other states but I heard that 39 states out of 50 use the trust deed method originated in California.

To be certain if a person does a lease-option the most they can lose is their option consideration amount. Most land contract deals include a liquidated damages clause so there’s little/no risk there either. And anyways, aren’t we all taking title in the form of an LLC? This helps limit our liability too.

The way most people lose money in creative financing is to buy an alligator and start feeding it. Twelve months later they get tired of that and file bankruptcy or stop paying and incur a trustee sale.

Anyone who’s familiar with that John Behle substitution refinance thing should never need to incur negative cash flow anyways.

Re: We usually agree. - Posted by JPiper

Posted by JPiper on May 06, 1999 at 13:05:52:

I’d recheck the California law if I were you. Lenders may foreclose judicially, AND obtain a deficiency judgment, regardless of loan type. Again, it’s not common because it’s a lengthy process. This would be true unless there has been a change in the law, but I doubt that. And by the way, I never saw this done in California so for all intents and purposes it’s a moot point.

As to other states, the law concerning this MAY vary, but the fact that they are deed of trust states is not the overriding issue. My state is a deed of trust state?.but the law provides for deficiency judgments. In California, the key law is the “one-action” rule, which states that if the lender forecloses non-judicially they may not pursue a deficiency judgment.


Bleeding a Rock - Posted by Sean

Posted by Sean on May 06, 1999 at 13:37:43:

You can’t get blood out of a rock. The question was, can you lose money at no money down real estate.

My answer was no, but you CAN kill your credit. Even if these guys did try to get a deficiency judgement (unlikely) you can just file bankruptcy. Obviously foreclosures, liens and bankrupcies are going to make your credit smell for a good 10 years.

The best solution is to learn, learn, learn and do it right.