I've made almost all of my real estate purchases with little or no money down. I don't think I've put more than $3,000 down on anything I've ever bought. I've done this by working with sellers. There is no way you can negotiate a good deal unless you find a person who is motivated and has a desire to sell. Finding motivated sellers is essential; the more motivated they are, the better bargain you can 
work out.

Several years ago I found a place on The Strand where the seller wanted $20,000 down. I was really anxious to buy it, but I didn't have enough money for the down payment he wanted. So I kept talking to him and told him what the advantages were to taking a second mortgage, including monthly payments without any tenant problems, a higher interest rate than he could get from the bank, and the sale of the property, which he was anxious to accomplish because the market was dead.

After a while, he got tired of it. There weren't many buyers around in those days, plus you couldn't rent anything. It was driving him nuts. Eventually, I got him to take a third trust deed on the property so I would only have to pay $3,000 down. It worked out well, but we probably negotiated for nine months.

Another way to get around a large down payment is by putting a second mortgage on another piece of property in which the purchaser has equity, which the seller can accept as collateral-property pledged as security for a debt. When you are desperate to sell your $500,000 apartment building. The buyer could go to an institutional lender and find a loan for 80 percent of the property's market value, or $400,000. This leaves the buyer $100,000 that he has to come up with. Assume he doesn't have that kind of money, but that he has a valuable house somewhere. You can accept a $100,000 mortgage on his residence in lieu of cash payment and the lender will most likely agree to the deal because the apartment building the lender is loaning on will have a $100,000 equity cushion to protect the loan.


A "no money down" transaction is a form of seller-assisted financing. It basically entails taking equity in one piece of real estate and trading the paper on that equity to the seller in lieu of cash. No money down plans usually torn out to be schemes because the lender is defrauded by not being informed that the seller-not the buyer-is really the person putting up the money for the down payment. Some banks still don't require this disclosure, but frequently some element of fraud is involved.

There are several drawbacks to no money down plans. First of all, you have to do them in an up market. Values have to be appreciating at a good clip. If there is a leveling off or if the market's dropping like it is today, no money down schemes are difficult. A lot of people try this who don't understand the problems and end up losing their shirts.

Another disadvantage to no money down transactions is that they typically result in a balloon payment of the principal balance at the end of the financing period. I think it is important to avoid balloon payments at all costs. I call them "debt bombs" because they explode in your face at a time when you least want them to. With a balloon mortgage, you are compelled to refinance it at the will of the note rather than when you decide is the best time. That's constraining in itself. You might not be in a position to refinance when the note comes due or the market might be such that interest rates are at 20 percent, which could take all of your profit away from you.

If you do have a balloon payment, you always want an out. One escape clause that can be written in the note to postpone the satisfaction of a balloon payment may read: If the buyer is not able m pay off the loan in full when due, the loan will be extended for a period of time at a higher interest rate.

To illustrate how this would work, say you buy a property and the seller insists on a five-year due date for payment of the loan in full, and he gives you 10 percent interest. You could offer to pay 12 percent interest if he could extend the loan for one year, or 14 percent for two years, or 16 percent for three years. A 14 or 16 percent interest rate is still a lot cheaper than losing your investment. The market changes every three or four years anyway, so paying a little higher interest will buy you some crucial time to work on your investment and wait for property values to rise.

Most of the time, people who sell for no money down are desperate. Their property either is a dog or they are about to be foreclosed on. Several "no money down" gurus went broke when the real estate market started to flatten out. A few authors of "no money down" books even had to file bankruptcy because they weren't able to prove their chalkboard theories in the real world of profit and loss. They kept floating paper, but it never panned out for them in dollars and cents.

 

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