There’s really no excuse not to always do no-money down deals. For example, on BiggerPockets alone you have an incredible amount of resources to teach you how to never put money down on properties.
But one of the most confusing things for new investors is how to handle the no-money down situation when it comes to subject-to deals. I don’t know about you, but all of the time I come across a seller who’ll let me do a subject-to but they have a good amount of equity and they want some of it. In fact, I’ve heard stories about a seller wanting $20,000 to do a subject-to, since they had so much equity in their house, and the investor actually gave them the $20,000 by taking out a loan.
If you ever take out a loan to give cash to a seller, you’re nuts. We are creative real estate investors and we make the rules. When I’m dealing with a subject-to seller it is never an option for them to get cash from me and I let them know this upfront.
So how exactly do I handle a seller who wants $10,000 or $20,000 for the deal?
Well, not too long ago this happened to me and the seller wanted $20,000. He had a decent amount of equity in the house and when the negotiations were all done I had agreed to give him $10,000. However, I did not give him cash.
What I did is give him a promissory note that says in 5 years he will get his $10,000. I chose a 5 year time frame with this seller only because that’s what we agreed upon. If you can get a seller to give you 10 or 15 years go for it.
The beauty of this is that you never put down any cash. I’m a firm believer that cash is king and I always keep my cash as a safety measure. Sure, I could easily stroke a $10,000 check today to give to a seller, but I’d be a fool to do it. Because then I might be tempted to write another $10,000 check to the next seller I meet with, and before I knew it I would be out several hundred thousands dollars and broke. (I’ve seen this happen. I know investors who were members of the lucky sperm club and had their parents give them a ton of cash. They never learned how to do creative real estate and burned through the money quickly and are now stuck).
Also, just like all creative investing, this only works if you believe it will work.
I’ve told investors at REIA meetings about never putting money down and how I just give a note, and then when I sell the house down the line, I get my money and so does the seller. A lot of investors tell me they could never do it, or sellers in their area wouldn’t agree to it. Of course, you and I know that’s not true. They just lack the necessary confidence to dictate to a seller how they will do business with them.
Even if you’re rich and have a lot of money I would still make it your goal to never put money down on deals. It’s not necessary and one of the secrets of rich people, as you know, is to always use other people’s money.