Ever buy with No Equity?

15 Replies

So, stupid question... Is there EVER a time when it would make sense to buy when there is no equity in a property? For example, a house is in very good condition, and the seller is motivated, but has no equity. Would even a subject to be a bad idea with you selling using a lease option?

There are two ways to look at a zero equity situation: is this your personal home or a rental property?

As a personal residence, equity is like a tightrope walker's net. It pads you against economic downturns; it can provide emergency cash through a HELOC and it allows lenders to give you better loan terms (or a loan at all). I see no reason to pay above market value for a home. Equity is created through two ways: mortgage pay down and market appreciation. If you can crystal ball a sizable market appreciation within 5 years and are willing to take the financial risk and can afford to do it - well... just weigh the pros and cons to other available properties.

As an income property, it is a little different. The primary concern should be cash flow. If you have a property that gives you good cash flow and creates a reasonable cash on cash return, zero equity is not such a concern.

Hope that helps but if you want to get a more specific answer, we would need to consider a specific scenario.

All these questions about no equity and sub2. It's like the late 90s again. Short sales are a drag. Time for everyone to put on their deal maker hats.

@Account Closed

Newbies better become transaction engineers cuz...

1. The big boys will muscle you out with their big marketing

2. The deals are harder to get for many reasons. Low inventory is a big one.

3. There is more competitive folks for wholesale deals than ever before (more people in the game).

4. People arent getting home loans any easier either, so Retailing is harder too.

Soooo, sub2, wraps- AITDs, seller carrys, cfds, all good to buy with. :)

Originally posted by @Brian Gibbons :
@K. Marie Poe

Newbies better become transaction engineers cuz...

1. The big boys will muscle you out with their big marketing

2. The deals are harder to get for many reasons. Low inventory is a big one.

3. There is more competitive folks for wholesale deals than ever before (more people in the game).

4. People arent getting home loans any easier either, so Retailing is harder too.

Soooo, sub2, wraps- AITDs, seller carrys, cfds, all good to buy with. :)

No kidding on the marketing thing. My markets are saturated with mail marketing by the rehab players, the ones that do 5-10 houses a month. They used to only buy at trustee's sale but now they have branched out. They pay more too because they work on much thinner margins. I'm working equity problems and legal problems they don't, but I need to find more.

Yes, once. And never again. Unless it's with some type of seller terms. But with my own money or with a bank loan? Never again.

Thanks for all of the responses @Simon Campbell , @Brian Gibbons , @k.

Kristine Marie Poe !

The question comes from some (almost everything) of the stuff I've seen and read where when looking for a property ideally you're looking to pay 70% minus Repairs of the ARV, so anyone looking for that passes on anything without any equity. From what you guys are saying there are ways to profit from a lead where someone if just bought a house, then soon after were transferred elsewhere and would rather not be a landlord, but they owe about market value, especially after a 5% - 6% Realtor commission might even have pay out of pocket. This would increase the number of potential deals then right? Can you guys give an example of either where you would, or have, done this sort of thing and made it work? Thanks in advance! My question is already doing significantly better than I had originally expected.

@Dante Nava - There are several strategies for making money with no-equity deals. Most involve some sort of seller-financing, and then involve some sort of income from an end-buyer. And the investor makes money in the middle. The difficulty that I see in these types of deals are this:

1. In most (if not all) of these strategies, the original seller still has some skin in the game in some fashion. Either they are still the legal owners on the deed, or they are still technically responsible for the mortgage (in the case of a sub2 deal). So, my question is this. When you or I come in as a middle-man investor and we creatively structure a deal where we get some type of interest in the property (sub2, lease-option, CFD, etc), and then we find an end "buyer" via some type of similar approach, then we make money on the spread of the monthly payments and/or the upfront assignment fee or whatever. But what happens when that deal goes sour? What happens when that end-buyer stops paying and they trash the place and won't move out? How is responsible for that $8000 in damages? Technically, the end-buyer is. But who do you think the original property owner will look to?

2. The other thing that I think about is the amount of time involved in working these types of deals versus the amount of profit that one might make.

I'm not saying that you or I should never do these types of deals, but there's a couple of things to consider. Maybe those who work these kind of deals regularly can chime in. I know one guru who promotes these kind of deals. I am not affiliated with him and not endorsing him, but I will send you his name if you send me a private message.

The issue with thin deals is that the thinner they get the more knowledge and experience you need. There is no room for slop or messing up. There is no room about misjudging the end buyer. You need to cut the normal expenses, like listing/Realtor fees. I've had buyers clean up a place to shave expenses.

The thinking that you would be buying at 70% less repairs in my market is far fetched, if that's your plan you better be carrying a 300+K property so you can live off your minor repairs profits for that year as that's about how many deals you'd get that year.

You really need to identify properties that can be improved to another level or change use or that will rent much higher than its carrying costs.

I, like most, got into the thought of doing just about anything that came along if I saw any money in it or thought I could build a profit. I'd solve a problem for a grand, sometimes as a favor for a Realtor (cheap advertising). Starting out many go here, thinking a grand is better than nothing.

Not exactly, it depends on what the deal is and the problem you get involved with. In reality, you can't make a good decision about what to get involved with unless you really have in depth knowledge of what can or could go wrong. Frankly, new investors won't know.

Every time you put your name on a contract you take on liabilities. The risks involved just aren't worth getting involved at a grand, for that I'd guide someone in a matter but never get involved. It takes 5K in hand as a minimum to be involved in any contract, IMO. If you're in business you must value your time. The interruptions and brain damage that some small deal causes, usually, is the same as a much larger deal. You'll find that buyers are not concerned about how thin your profit is, or the LTV held by a seller or much about the issues at hand, they are making a major purchase and be it retail or a flip to an investor, they will have demands of time and effort.

At 5K, everything needs to flow without a bunch of issues. A smooth transaction while being at risk as a seller or buyer or in a straw man position needs to isn't a valued use of time for less as a business. You may need $1,800 that month to live on and do something to meet your personal needs but that's not really being in business as much as it is scraping by.

In my area, if you get a hammer out, if you can't pull 20K more in a sale price, increasing the value, just keep moving on. That has nothing to do with how thin it may be, it's about increasing the value. It gets hard to pull 25% profits from improvements and at 20K you're getting about 5K. General rule in my area.

It's all about the market and location. You can pay retail for an 80K home, put 20K in it and sell for 135 or so or more.

The general rule for rehabbers buying at 70% is pretty much true as to cookie cutter deals, the thinner it gets the greater the knowledge required to increase the value side. Deals are made on the buying side, you can't really bring a property up to profit on the sale side, legally and ethically, without applying a greater degree of forced appreciation. :)

@Dante Nava

In general no equity deals are a no go, just like no cashflow is a no go.

There can be exceptions:

Assemblage of parcels for some bigger project where the future value is greater than the current value, think mall, office building or commercial use. There was a bank here that bought 4 adjoining properties that included apt building, small office building and 2 sfh. Tore them all down and built one new bank branch. To them it was worth it to pay market value because they wanted that corner location on a busy street.

Future appreciation of the property is extremely trick, nobody has a crystal ball and nobody knows what appreciation will be or what future events will unfold. Think Crimea. Even things that sound like sure bets like beach front property, water front property, or property in the path of development can be affected by future flood zone laws, future zone changes, future environmental laws etc. In one municipality they passed a law that said that in order to build on a single lot, you had to have 2 lots and one had to be kept vacant. Everybody who only had one buildable lot, overnight had zero buildable lots. In another municipality a 35 acre tract permitted 35 new houses to be built. A zone change restricted the use and no houses could be built and the notice requirement of the state did not require either notifying the owner or posting the property.

Pay attention to this, guys, this is GOLD:

"Deals are made on the buying side, you can't really bring a property up to profit on the sale side, legally and ethically, without applying a greater degree of forced appreciation. :)"

As a rehabber, you make all your money when you buy. Like Bill said, you can create value too, I like to buy small houses in areas that sell for $200+ sq/ft and do add ons that cost $85/ft to build. Those deals work even if you are buying at over 70% of CURRENT value because you are creating the value with the additional square footage.

If you are doing rentals, its a completely different ballgame. No equity deals are fine is certain markets. There is nothing wrong with buying a $50k house for $50k if it rents for $1,000/mo. The math works.

I think if/when interest rates get back to historical norms of 6%+/- that taking a no equity deal sub2 with a good loan (3%) and no equity will make sense. There is value in a good loan. Hell there is value in just about any loan to someone that cant get one. I've definitely bought a few well over the 70% mark, done a light rehab and sold them at 110% owner financed. Created a good monthly spread, and on the 20% or so that actually exercise the option I got a nice back end. That works well in an appreciating market. Depreciating one, not so much.

Some of my better deals have been low equity, good loan deals. I had a few interest only loans that cash flowed like crazy back in the day...There are other plays like Brian said on no equity deals, you just have to structure them right.

The gurus were/are teaching a L/O strategy with you keeping the option money. Basically you get a seller with no equity and find them a tenant buyer with a long term option and you keep the option money and possibly a spread on payments. Probably not in compliance with Dodd/Frank, but I'd still do it if one fell in my lap...

Originally posted by @Darrell Shepherd :

I think if/when interest rates get back to historical norms of 6%+/- that taking a no equity deal sub2 with a good loan (3%) and no equity will make sense. There is value in a good loan. Hell there is value in just about any loan to someone that cant get one.

There is always value in a good loan you can take over, even if you're eligible for other funding. I've never kept a sub2 property longer than a year, but looking forward to a longer term deal. But keeping a good loan in place for the rehab can be some cheap money. I'm making an offer on a property today where my offer is taking over a loan that is 50% of equity and is fixed at 3%. Keeping that in place even for as little as 4 months is a good deal. Low interest, no fees.

@Darrell Shepherd

I agree with 99% of what you said. The one little thing I don't agree with is 6% is norm for interest rate. It wasn't in 1972 when interest rates were 7%, in 1975 when interest rates were 9%, in 1981 when interest rates were 18%, etc. etc. etc. What is the new norm?

I would like to reiterate something:

Lease Option Assignments and

Sub2 purchase then renting or Lease 2 Own need CAUTION:

These aren't in the Wholesaling model below median prices.

These are houses

  • ABOVE the median
  • in good school districts
  • in safe neighborhoods
  • where demand for 3-4 bedrooms, 2 bath + houses is high
  • with fenced in yards
  • with 2 car garages with internal access

The existing financing is a low rate and fixed not an ARM

The Seller wants to do this because the alternative to renting out or selling with an agent is not attractive.

Get the house right, get the existing financing right, get the attitude of the seller right as to the risks if the tenant buyer does not get financing, get insurance in case of damage with a landlord tenant policy, etc.

This model has an educational component of increasing FICO with getting new credit references (secured installment loan, secure VISA, etc), how to get a home loan with either FHA or other low down payment, decreasing D/E under 43%, going through a mortgage broker with tenant buyer, etc. Like a Property Manager, staying on the the buyer to be as to the importance of keeping the priority of home ownership high. And assisting the Seller in managing the performance of the Tenant Buyer as to making rent on time and keeping them informed of the underwriting of the Tenant Buyer.

Low Equity Deals in desirable areas fill fast, non desirable areas are a nightmare.

Lot's of GREAT information here guys. Thank you SO much!

Here's what I've gotten from these (though with more detail of course), if I choose to "chase" these down, please correct me if I'm wrong:

  • Get it with favorable loan terms
  • There should be a spread between payment and rent
  • Resale of these must also be done with favorable terms
  • It's not worth the risk unless it's being done for $5K or more
  • In an ideal situation you're controlling the property instead of owning it, and are able to do things to it to drive up the appreciation ("creating equity)
  • Seller Financing should be in place (to buy and sell the property), probably with some kind of exit strategy involving a Lease Option.
  • It's primarily a cash flow strategy
  • The risk factor is pretty high, so it's best not to cut your teeth on it

Thanks again guys!

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