Buying a Property with No Money Down Using a Credit Union??

Question

Has anyone else been able to use the difference between the sales price and appraised value of a property as a down payment, as mentioned by the guest in episode #440 of the BP podcast? He mentioned finding a credit union that allowed him to do so. If you have any experience or information on this type of financing, please share.

John Warren · Answer

@Leonard Spicer I believe transactional lending may be referring to when you pay cash but immediately get a loan on the same day/next day? I haven't used this strategy, but I know some folks who have. The issue, of course, is you have to have the cash to start with!

Kerry Baird · Answer

When we use hard money lenders, they may lend at 65% LTV, and if you find a fixer where you can get the purchase price lower than that 65% it works like way you stated.  Hard money lenders also lend the renovation funds in a similar situation, where there is room between the purchase price and the after repaired value.

I bought a house that way, where I expected it to close as a move in ready house, but it was hit by hail during the contract period. Windows were knocked out, the roof was trashed and we had holes in the pool enclosure screen.  I switched from the conventional loan to a hard money loan, and worked with the seller to reduce the purchase price.  The lender did an appraisal based upon the after repaired value of the house.  How the renovation piece worked is that I did some work on the house using my own money.  They inspected that the floors were in, windows were done, screen replaced etc. and gave me a draw based upon the funds I spent.  I then refinanced into longer term lower interest mortgage when it was done.

Hard money loans are short term (can be 3 months, 6 months, a year) and a high interest rate (12%).  I find my hard money lenders at my local REIA.

Leonard Spicer · Answer

Thank you for your input. Do you know what this type of transaction/lending is called? Whenever I search for this or speak with lenders they keep thinking I'm talking about a Heloc or Cash-out Refinance.

Leonard Spicer · Answer

The sales price needs to be lower. But it seems the bank agreed to give the loan based on the appraised value, not the purchase price. On the podcast, the guest mentioned he was able to use the spread in the sales price ($130,000) and appraisal ($150,000) as his down payment.

Kai Kopsch · Answer

Lenders prefer an easy transaction. In this case, you never know what the actual difference between the appraisal and closing price is. How do you calculate the deal before the appraisal? I'm sure if you have an awesome relationship with your Credit Union, this could be done in some rare transactions

Eliott Elias · Answer

Is this scenario with the sales price being higher or lower than the appraised value?

John Warren · Answer

@Leonard Spicer I have been investing for eight years in the Chicago area, and I have been working as an agent during the same period of time. I have yet to find any lenders that are interested in this type of deal, but I think that in times when money is easy you may be more likely to find things like this for brief periods of time. All of my lenders are actually tighter right now as they are being more conservative (which means higher down payments for us).