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Oleg Potiomkin (RA)
Internet Marketing Specialist
Call (808) 398-9987
Hawaii Real Estate
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Professional
Home Valuation |
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Oleg
Potiomkin (RA) Hawaii Realty Associates, LLC
Honolulu, Oahu, Hawaii
Direct:
(808) 398-9987 Fax: (808) 538-8081 E-mail:
info@hawaii-realty.com
Can
You Really Buy Real Estate
with No Money Down?
The late-night television airways
are full of “nothing down” stories. Are they true? And, if
so, is it possible to buy real estate with “no money down.”
Furthermore, does it make sense to buy real estate with no money
down?
Everybody wants to buy real estate
with no money down (especially if you have no money), since it is
the ultimate form of "leveraging." However, keep in mind
that there is nothing special about buying a property with no
money down. On the other hand, if you can purchase the property at
a substantially below-market price and with no money down, you
then have a good deal. This is buying 100% loan-to-purchase,
not 100% loan-to-value.
The problem with buying a property at a below-market price is that
lenders tend to "penalize" you with their loan
regulations. Fannie Mae conforming loan guidelines usually require
that an investor put up 20% of his own cash as a down payment. The
20% rule applies even if the purchase price is half of the
property’s appraised value. Thus, the loan-to-value (LTV) rules
are based on appraised value or purchase price, whichever is
less.
A common, but illegal, practice is for the buyer to put up the
down payment and for the seller to give it back to the buyer after
closing "under the table." An even dumber method is to
over-appraise a property, effectively financing a property for
100% of its value. People may get away with it all the time, but
these practices are loan fraud, punishable by a nice vacation at Club
Fed.
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SIDE NOTE - REFINANCING
YOUR EQUITY
Many investors
refinance every few years as property values increase,
using the extra cash to buy more properties, as
suggested in the best-selling book, “Nothing Down.”
While this process does increase your leverage, it also
increases your risk. There is nothing inherently wrong
with taking out cash in a refinance, so long as the cash
is used wisely. Spending the money as profit is not a
smart use. If you end up with high LTV and/or negative
cash flow on the property and housing prices fall, you
are in for a world of financial hurt.
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A Real-World, Common-Sense
“Nothing Down” Deal
As you can see, there are smart and
not-so-smart ways to buy “nothing down”. The following is an
example based on a real deal I helped a student of mine put
together:
Sandy is interested in purchasing a home to live in, but she
doesn’t have much cash. She just started her own business and
cannot not qualify for a conventional or FHA low-down payment loan.
Sandy finds a seller with a nice property, with very little equity,
but a low-interest rate loan. Sandy leases the property from the
owner for three years for $1,200 per month, with an option to buy at
$162,000. The house is currently worth $179,000. The seller agrees
to the discounted price because he saves a real estate commission
and can wrap up the deal quickly.
The agreement provides that the seller give Sandy a 25% ($300)
credit towards the purchase price for each rent payment Sandy makes.
Sandy also puts up $1,200 as a security deposit, which will be
credited towards the purchase price when she exercises her option to
purchase the property.
After 12 months, the property has appreciated in value to $189,000.
Or, if the property values do not increase, Sandy has made
improvements to the property that increased its value. In addition,
Sandy’s “equity” has increased because of the $300/month rent
credit. Thus, after 12 months, Sandy’s equity position is $31,800:
$162,000 original option
price
less $ 3,600 rent credit
less $ 1,200 security deposit
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$157,200 “strike price”
$189,000 market value
minus $157,200 strike price
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Equals $31,800 “equity”
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Sandy exercises her option to
purchase the property at the “strike price” (original option
price, less credits).
The Lease/Option “Refi”
In funding a loan to buy the property, most lenders would consider
this transaction a purchase, and base their LTV requirements on the
option strike price ($157,200), not the appraised value ($189,000).
So, if Sandy were to borrower 90% LTV, most lenders would have happy
to give her .9 x $157,200, which is $141,000 (which is actually
about 75% loan-to-value). In short, the lender is treating
the exercise of a purchase option the same as a home purchase,
effectively "penalizing" the buyer.
A small number of lenders will treat
Sandy's transaction as a refinance, in which case the LTV is based
on the appraised value, not the option strike price. So, a
90% LTV refinance would allow a lender to give Sharon .9 x $189,000
= $170,100, which would cover the strike price ($157,200) and the
loan costs (approx $4,000). In fact, Sandy would have enough cash
left over to buy new furniture. Or, Sandy could simply borrow less,
having a lower monthly payment. Either way, this is solid,
“nothing down” deal.
Note that a lease/option “refi” is not an ordinary transaction,
so be patient if you are looking for a lender that will fund in this
manner; it will take a lot of phone calls!
Thanks for visiting
!About the Author . .
.
William Bronchick, CEO of Legalwiz Publications, is a
Nationally-known attorney, author, entrepreneur and speaker. Mr.
Bronchick has been practicing law and real estate since 1990, having
been involved in over 600 transactions. Visit his site at http://www.LegalWiz.com
Excellent
Service, Outstanding Results!
Oleg Potiomkin (RA) Hawaii Realty
Associates, LLC
Ali'i Place, 1099 Alakea
Street, Suite 1520, Honolulu, Oahu, HI 96813
Direct: (808) 398-9987 Fax:
(808) 538-8081 Email: info@hawaii-realty.com
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