Late night TV gurus sell you on the fabulous lifestyle that can be yours if you invest in real estate. They tell you that you can do it with no cash and no credit. The typical formula is to buy subject to the existing mortgage and/or to borrow money from the seller.
So can you really buy with no money down?
Yes, actually. One way is with a USDA loan, if your property is in an eligible area and you meet the criteria. http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do If you are not eligible for a USDA loan, you might be eligible for a low 3.5% down FHA loan. Of course, you will need credit for these types of loans but FHA requires a lower credit score than other programs. Your best bet is to talk to a mortgage broker and ask what programs are available to you.
You may also need to live in a unit to be eligible for this type of loan, but this is not a bad way to get started. Buy a fourplex and live in one of the units and rent out the others. You could even get a roomate for your unit to increase your cash flow. Four units is the maximum size for conventional loans (conventional loans that have good terms such as low 30 year fixed rates).
So what about the guru strategies? Do they work? They can but put yourself in the position of the seller. Would you be willing to sell your place to someone without receiving any cash? Would you lend your money to someone with no credit?
To accomplish this kind of zero down purchase, you have to find a motivated seller. If the seller is upside down on their loan (owes more then their property is worth) and insolvent, they may be willing to let you buy their place subject to their existing loan with no money down. There is not much risk to them if they are about to lose it anyway in foreclosure. Of course, since they are upside down, this means that you are overpaying for the property. You are assuming the debt which is higher than the value of the property. That is the kind of thing that makes for a “motivated seller.” Most sellers can easily figure out what their place is worth, using Zillow or other automated tools, or by just asking a real estate agent. So they can sell easily if they price correctly. They are motivated when they are not able to sell, which usually means that their price is too high. It can also mean that their property is condemned or has other extreme problems.
Also keep in mind that they are violating the “due on sale” clause if you leave the existing mortgage in place. While rates are stable, banks may not care. To reduce the risk of the bank becoming alerted to the problem, you can leave the seller’s name as the “named insured” in your insurance policy and add yourself or your company as an “additional insured.” If the seller ever decides to buy again, he or she may want to remove this property from their credit report. Having a property on your credit report makes it harder to qualify for a new loan. The banks look at your debt to income ratio and it is worse when there is a property on the credit report. If the seller informs the bank of the sale, the bank will probably call the loan due and you will have a limited time to sell or refinance.
If a property cash flows at this higher than market value price, and you have no credit or poor credit, and are willing to risk having the loan called due, this kind of high risk strategy may be a reasonable option for you as long as you are willing to hold for long enough for the value to rise above what you paid. You will spend a lot of time trying to find a seller willing to go along with this kind of scheme. If you are looking to make a quick buck, overpaying is not a good strategy.
With apartment complexes, which have a smaller pool of potential buyers, it is easier to find sellers willing to take back a second or willing to provide seller financing.