Me – Do you want to buy a house, either to live in or as an investment?
You – Yeah!!!
Me – How’s your credit?
You – A prolonged sigh…
Me – Do you have 20% cash for the down-payment?
You – No…tears start coming on…
Me – Do you have any savings?
You – $2,000 is all I‘ve got to my name.
Rules of Engagement
In this article I am making the assumption that the buyer (you) has bad credit, which means that a short-term refinance will not be possible. Thus, I will only consider options which would allow you to get into a house with at least a 5 year horizon, which should be enough time to either sell for a profit or to improve your credit enough to be able to refinance.
I will not be discussing houses that you can buy for $2,000 using your credit card – only houses that are worthwhile to own; only houses that you would want to live in yourself if need be. Just cause it’s cheep – don’t make it good!
Many of you know from listening to Podcast 14 that I do not do very many deals – perhaps one or two per year. Partially this is because I buy almost exclusively undermanaged multiplex properties which take time to bring into good working order. But also because I pull the trigger exclusively on those deals which accommodate a very creative financing package that requires me to contribute very little money to the purchase. Those kind of deals don’t come along every day, which reflects why I do so few deals.
I tell you this because even though every technique I am about to discuss is doable, do not expect to find it easily and everywhere. In this article I am not talking about building a business model, only how to buy 1 house.
Also, I am assuming that you do not have 100k of cash stashed under that mattress, nor do you have a primary residence in which you own significant equity that you could bridge via a HELOC. If you have one or both of the above items, you don’t really need to read any further – write a check and buy a house and be done J. However, if you got nota, then keep reading…
Lastly, I will not be discussing techniques such as Taking the Deed subject to underlying financing (Sub2) or wrap mortgages. Most conventional mortgages include the Due on Sale and Acceleration clauses which comes with a possibility, be it a slight one, that the underlying lender will accelerate the pay-off. I do not feel comfortable advocating these techniques for this reason.
And with this, let’s dig in.
The best game in town has always been and will always be owner-financing for several reasons. As a generalization it would not be wrong to say that when dealing with an owner in lieu of an institutional or even a private lender – everything is negotiable, including the price, down-payment, interest rate, amortization, monthly payment amount, and everything else.
Also, all of the qualifying standards put forth by Fannie Mae, Freddie Mac, and the primary originators are not in play with owner financing. This means that while the owner will want to know your credit score, he will likely be a lot more understanding of the blemishes that may be there. And as to down-payment, you need to understand the following:
Owners sell on contract by and large because they’ve tried but could not sell for cash. Specifically with single family residences, it is not wrong to say that the owner will usually choose to participate in financing only as a last resort, having tried everything else. This means that you, the buyer, have more negotiating power than you’d think…
Thus, owner financing the house with $2,000 is possible and even probable if you find the right deal, and by that I mean the right owner. Don’t believe me?
Here is something I found in my e-Mail in-box not too long ago:
(I) secured my first deal within 3 weeks! I found a private seller desperate to relocate and she agreed to seller finance the ENTIRE purchase price. And get this: at 0% INTEREST! I will pay $300 per month for 5 years for a total purchase price of $18,000. NO BANKS INVOLVED. I have the property rented out for $600 per month and I am looking for my next deal…
WOW!!! How many of those do you need to be in a different place in life? Good job dude – you know who you are!
Now let me ask you – do you think the MLS is the best place to find owners willing to play the bank? Hint – that’s not what he did and it sure isn’t what I do…just saying.
2. Private Money
If owner-financing is out of the question, and in the absence of a line of credit, the next best thing is to finance the acquisition fully with private money. The question is this – if someone has significant capital sitting in the bank drawing 0.2%, why wouldn’t they chose to lend it to you at 5,6,7 or even 10 percent?
Well, there are many reasons why they would NOT, all of which you’ll find out as soon as you start asking. But, you should know that the main reason why they are not going to give you the money is because you are a dummy – you don’t know what you’re doing – you think real estate game is sexy and fast like your high-school girlfriends. Private lenders flat out don’t trust you…Harsh? Oh yeah – but honest. Get educated and give people a reason to take you seriously!
3. Private Money & Owner
OK – let’s say you are in fact able to find someone who’ll give you the money, but because you are such wildcard, they do not want to give you any more than 60% of the purchase price.
In this case, you could structure the deal whereby the private lender gets a note and mortgage (deed of trust) in first position, while the owner takes back a note in second place. This technique will allow you to close many more opportunities than straight 100% owner-financing, because done the owner can only finance the equity he owns. Therefore, 100% owner-financing requires you to only look for free and clear properties. However, bringing the private money into the deal allows you to cash out an existing mortgage with the owner financing whatever equity he owns. This is not easy to put together, but it certainly can work with under $2,000 out of pocket.
4. 50/50 Partner
One of my philosophies in real estate and life in general is:
With this in mind, to make the deal attractive to an equity partner, why not give the money guy 50% of the deal? As a partner, as opposed to a lien holder, however, the money will have a voice in the deal, thus remember to choose your partner carefully, and remember the following:
Money is an amplifier. It brings out and exaggerates what is already there. When dealing with a good and honorable person, money entering the equation will make them even more so. The opposite, however, is also true! Be wise as to who you chose for a partner; often enough the profit is just not worth it!
This is not a favorite tool of mine for the purchase of real estate for many reasons, which is a subject for another article. However, if there is no possibility of owner-finance or private money, then in lieu of doing nothing at all, a lease-option can get the job done.
Let’s say that there is just no way that you can convince this owner to participate in financing with $2,000 – he wants more money down, but you simply don’t have it and have no access to it. Here’s what you do:
A lease-option involves two separate contracts – a lease, and an option. The lease contract is just like any other lease whereby you gain tenancy. The option contract, just like it sounds, gives you the option to purchase the house during a certain period of time (option window) and at specific price. As part of the option, you will be needing to pay an option consideration fee, which is usually non-refundable, but typically not excessive. Thus, $2,000 may be enough to get this done.
Now – an option does you no good unless you have a way of exercising this option. At the end of the option window you must be able to pay off the seller. But, it gives you time to work on your credit, and to bank some money toward the down-payment. It’s not a good way in, but it is a way…
I am sure that there are 50 more ways to get into a property, but hopefully this is enough to get you thinking in the right direction. Before I finish, I want to address the issue of that $2,000 down-payment. There is a reason I used this figure – $2,000. I believe that it is achievable for most people! I am going to get your mind going in the right direction by asking you a set of questions. But, I won’t provide the answers – that’s on you…
- Do you have $2,000 in the bank?
- Are you living on a budget?
- Can you put away $30/week for a year and a half?
- Do you own stuff that you can sell to generate $2,000?
- Do you have a family member that you can borrow from?
- Do you own a boat that you can sell?
- Do you own a vehicle free and clear or have significant equity in? You don’t have to sell…
- Do you have a credit card? (Be very careful with this one!)
- Can you pick up a part –time job for a while?
I never said this game does not require sacrifice – It Does!
What do you think? What’s the cheapest you’ve ever paid for a property? Or which strategy above do you wanna try? Leave your comments below.