Selling No Money Down - Posted by Phil (CO)

Posted by Darin on April 01, 2002 at 16:46:11:

Phil, go to www.johntreed.com. he helps a lot.

Selling No Money Down - Posted by Phil (CO)

Posted by Phil (CO) on April 01, 2002 at 13:43:17:

It seems to me that there are a lot of people out there who can’t afford to buy a home to live in simply because they haven’t got the cash for the down payment and closing costs. They have good credit and can afford the payments.

I recently watched a video on buying foreclosures where a guy buys and rehabs properties, and his exit strategy is to sell “no money down” to buyers. He claimed that when he talks to the buyers that he agrees to write them a check to cover the down payment and closing costs. They get a bank loan for the balance. He cashes out at closing for a nice profit.

I orginally got very excited because it seemed like a way to tap into a group of buyers that is probably pretty large. Then I realized that it didn’t make sense.

When the buyer applies for their loan, don’t they have to account for all of the cash that they bring to the deal? I know that they can’t show it coming from the seller.

This sounded like a great approach to find buyers, but now I’m not sure that it’s practical.

The video came with a course that I purchased from one of the nationally-recognized gurus, so I am assuming that I’m missing something.

Maybe it is a great approach and I just don’t understand how to structure it properly.

What am I missing?

Try this company for down payment grants… - Posted by Mike

Posted by Mike on April 01, 2002 at 23:57:28:

www.alphaassistance.com

Re: Selling No Money Down - Posted by Kent C

Posted by Kent C on April 01, 2002 at 16:23:37:

I see 2 issues here. The first John adressed well. The issue of finding a way to “get” money into the hands of the purchaser can be handled in ANY situation. Even if the lender says they CANNOT borrow one dime on their down…you can legally pay these people an amount of money for other “things”. You can hire them on a contract to perform some kind of services payable on a given date that can coincidentally be the closing date. Or you can contract to purchase an item from them.

The other issue hasnt been addressed. Its EASY to find a way to get a person into your house. WHO are you letting in???!! There is a reason you (like bankers) want something invested on the part of the buyer (or a tenant). People behave better when they have money up they can loose. I mean behave in both respects: Pay more timely and BEHAVE better, as in, tear up less property.

Think about the game you are playing. From what I have heard about the lease/option game, quite a bit of the money is in renewing your option money every 12 months when 75% of the optionors default. If this is your game and you get no money down and you know 75% will bail. What you have really done hear is the equivalent of rented with no money down to cover the inevitable repairs.

If your game is to actually have someone pay off the house to you or buy it on installments I see 2 problems. 75% (or more) of these poor credit people are not going to change their behavior and will default on your agreement. Also, habitually selling houses on installment programs labels you as a “dealer” in the IRS’s eyes. Thus creating a tax situation upon recieving the first payment…you must pay ALL taxes this year as if you had sold the house even tho you wont receive all the money for “whatever” years.

So what am I suggesting? Im not sure. I am still at the opint in my life I am pondering this very question (having held rentals for years but now looking into new games). JohnBoy and others have MUCH more experience here. I ride on their shoulders of experience. Scan their posts in the archives.

My gut says 2 things:

  1. Get SOMETHING down from them as quick as possible even if this couple grand down is over a years payments or trade for a boat or car.

  2. Dont sell on installment notes. It triggers a tax situation and gives them the chance to win money from you later in court for equity gain they feel they have earned when they bail (75% chance IS closer to a “when” than an “if”). Instead do a Lease/Option. This gives you money, boot or swap up front as option consideration, that is not taxable until they bail on the contract or excorsise the option. If you need to evict a leasee, it is a simple eviction vs a foreclosure.

Good Luck,
Learn to Help, Help to Learn

Kent C

Re: Selling No Money Down - Posted by JohnBoy

Posted by JohnBoy on April 01, 2002 at 13:53:06:

If the buyer has good credit then they can get 100% financing. Some programs allow 103% and 107% financing where they can use the extra 3% - 7% towards closing costs.

Some lenders allow the down payment needed to be “gifted” to the buyer.

Some lenders allow the seller to pay up to 6% towards the buyer’s closing costs.

Some lenders allow the seller to carry back a second where the buyer can get 100% financing, as long as their debt ratios are in line.

There are many programs out there that allow buyers with decent credit to get financing with no money down.

This where a GOOD mortgage broker becomes worth his weight in gold! Find a GOOD mortgage broker to work with that has lots of programs available and you can get all kinds of buyers financing that lack down payment money or closing costs funds.

Re: Selling No Money Down - Posted by Phil (CO)

Posted by Phil (CO) on April 01, 2002 at 16:49:16:

Kent,

Thanks for the response, I appreciate it.

I agree with just about everything that you said. My original question, however, was for an exit strategy where I cash out of the deal. They put no money down, but I get my cash from their bank. So the issue of getting GOOD people into the house is not my problem, it’s the bank’s. In order to make this strategy work, I would need to find buyers with no cash, but good credit. Believe me, there are tons of these people, thus the reason for my question in the first place.

I agree 100% with your other comments - when the buyer will still owe money after closing (e.g. L/O or and installment sale) always get money up front.

Finally, the way I plan to do business for now is to buy and sell quickly. Thus I already know that the IRS will treat me as a dealer. I’m trying to build working capital, so I am doing this all as a C -corp to minimize taxes. When it comes time to start accumulating rental properties, I’ll do it as a separate business entity so that I can avoid dealer status for that business.

Thanks again for your feedback - it keeps me on my toes!

Re: Selling No Money Down - Posted by Phil (CO)

Posted by Phil (CO) on April 01, 2002 at 13:59:39:

JohnBoy,

Thanks for the response – it makes a lot of sense. My guess is that finding that GOOD mortgage broker is probably a big challenge, but I’ll start my search now!

Thanks again,
Phil

Sorry Phil - Posted by Kent Cheatham

Posted by Kent Cheatham on April 01, 2002 at 17:10:42:

Sorry Phil, I got side tracked. I saw you as carrying the note. You are right-on with your usage of multiple entities. Something I am just now doing. I currently do “holding”, not selling.

You then, have nothing to worry. If your people are only B credit FICO’s of 550-620, they can get a loan at varying rates. I see your delima now. You just need to legally get funds into their hands. It has been addressed better on the financial forum.

There is the America’s Dream (can I say that JP?) outfit that legally gifts money to your buyer and you legally gift money to the foundation. I know…but it is legal…I checked. I would start with finding a lender that didnt care if you paid most of their part, of held a 2nd mortgage. But you can always (and it is the easiest) just pay them for something…buy soemthing from them…or buy a service from them. I have doen this and FHA didnt even blink! Sat down at close, bank paid 97% (yes I did live in this for a while, thank you) to seller, seller slid me a check for performing maintenance on a property of his, I slid a check to the banker for down. I was NOT allowed to borrow and the banker was very strict on that. The bank had to have a verifiable contract before close of the sellers intent to make good on the money he owed me in lieu of having cash in the bank ahead of time. A true zero downer. I had watched no late night TV and it was my first purchase 20 years ago. The seller was very green too. Maybe he was in your shoes and just winged it as you might have…dunno…but it worked for me and got a young kid in a house…and high risk that I was…I never missed a payment.

Kent C