Q We have seen commercials from people like Carleton Sheets promoting no-money-down real estate courses on radio and TV, and it sounds too good to be true. Does that stuff really work? Can I really buy a house with zero down payment? Can you make money that way?
– T.A., Bothell
A I get this question a lot. It’s human nature to try to get something for nothing, and the lure of buying real estate for no money down has a strong appeal. The get-rich-quick real estate gurus have been selling this same pitch for many years. They first gained popularity in the late 1970’s and early 1980’s. Many dropped out of sight during the roaring stock market boom of the 1990’s, but after so many people lost money in the 2000 to 2003 bear market, real estate is once again a very popular investment.
Can you really buy a house for no money down? Sure.
If you have served in the military and qualify for a VA loan, the government will help you buy a home with zero down payment. Often, veterans get the sellers to pay the buyer’s share of the closing costs, allowing them to buy a home with absolutely no cash out of pocket. This is called a double zero down VA deal.
But you don’t even have to be a veteran anymore. In the last few years, mortgage lenders have started offering zero-down purchase loans. If you have good credit, virtually anybody can qualify for a zero-down mortgage today – typically a combination of a first and second mortgage.
The trade-off is that you have to pay a slightly higher interest rate for a zero-down loan than if you made a down payment of at least 5 percent of the purchase price. So, with many lenders now offering zero-down loan programs, buying a home with no money down is not the big deal that it used to be.
But these are not the kinds of deals that the hucksters are promoting. To qualify for a zero-down mortgage, you must have documentable income and a good to excellent credit rating. The get-rich-quick guys like to target people with little income and poor credit by promising an easy way to make money. Their course is based on buying using seller financing. Here are a couple of examples:
1) Buy a free-and-clear home with the seller carrying a contract for the entire purchase price. In other words, if you paid $200,000 for the house, you would make payments to the seller on a $200,000 private note.
2) Assume the mortgage on the house with the seller carrying a private second mortgage for the equity. For example, if you were purchasing a $200,000 house with an existing $150,000 mortgage, you would assume the underlying mortgage and the seller would carry a $50,000 note for the remaining equity. You would then make two loan payments each month, one to the mortgage holder and one to the seller on the private note.
In many cases, the first mortgage is not assumable, so the purchase is made subject to the existing mortgage. That means the buyer makes the payments on the underlying mortgage but does not assume liability for the loan. This puts the seller in a very risky position, but it’s a great deal for the buyer.
There are many other more complicated schemes for buying homes with no down payment, but as you can see, you have to find a very motivated seller to accept such an offer. That’s what separates the real world from the hype promoted by the hucksters on late-night TV. The get-rich-quick gurus make it sound like you can walk down the street tomorrow and buy all the real estate you want for no money down.
Believe me, it’s not that easy. I’ve seen several of the home study courses. They all rework the same ideas. Don’t spend hundreds of dollars for the books and tapes offered on TV. You can get most of the same information from real estate books at your local library or bookstore. Many of these books were published during the 1980’s and are now out of print, so try browsing through used bookstores.
Before you get too excited about the prospect of buying real estate for no money down, stop and ask yourself what you will do with the property once you get it. If you are buying a house for your primary residence, a zero-down loan works great if you have lots of income but little or no money saved in the bank.
But if you are buying a rental house with no money down to hold for investment, you are guaranteed to have a hefty negative cash flow every month. It is virtually impossible to generate enough rental income on a house to cover the loan payments when you are financing 100 percent of the purchase price. You’ll have to write a check every month just to hang on to your investment. Real estate investors call negative cash flow properties “alligators” because they can eat you alive.
My advice is to stay away from any rental property investment that doesn’t at least break even and carry itself from day one. Even if you are buying a home for your primary residence and you’re not concerned about the monthly cash flow, be careful of no-money-down deals you see advertised in the newspaper. Typically, these houses are being sold by investors or sophisticated home sellers who are charging above-market prices in exchange for easy financing terms.
Remember, as long as you have good credit, you can buy any home on the market within your price range using a conventional zero-down loan program. You don’t need to use any sneaky tricks or gimmicks.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com.
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