By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
March 2000
In the early 80’s, the lending climate was so bad and lending rates were so high that the real estate industry turned to “creative financing” in order to close deals. In those days we worked with wrap arounds, seller carrybacks, second and third trust deeds, subject to loans and various methods of “getting the job done”.
Though creative financings got a bad name because of some shenanigans, those methods helped thousands of Californians sell or buy real estate. During that time there was a craze of BUYING PROPERTY WITH NO MONEY DOWN. Perhaps you will remember all of the Saturday television commercials and full-page newspaper ads offering (for a fee) to teach you the road to riches.
There is no mystique to buying property with “no money down”. No money down transactions has always been available to the knowledgeable real estate investor or buyer. No money down transactions are, frankly, successful as long as EVERYBODY knows what’s really happening, i.e. full disclosure. If the seller is involved with part or all of the financing, they must understand the consequences of a buyer default. On the other hand, the buyer in a no money down situation must understand the consequences of a downturn in the real estate market. On this note, I remember a broker (20 years ago) showing me a formula for riches, including projections of real estate appreciation increases of 3%, 5% and 10% per year. I’ll never forget his quote – “If property values only increase 2% per year….”. R.T. and I are still friends today and, of course, I still rub it in that his projections didn’t account for ANY down side.
Let’s start the easy way. If your credit is excellent and you wish to buy a single family residence with no money down, there are more than a few foolish lenders who will make a 100% or more LTV (loan to value) loan. That is the easy part. Let’s assume you have bad credit AND no money down. There are still many avenues available including, but not limited to, the following examples.
One way: ask the seller of a “free and clear” property to carry a first trust deed with zero down. In that example there would be a first trust deed for most of the sale price and a second trust deed to cover the broker’s commissions. In that event, the broker would carry their commission in the second trust deed via assignment from the seller at close of escrow. Another method for a persuasive buyer would be to obtain a new first trust deed for 50%-70% of the purchase price (equity type lender), and ask the seller to carry a second for the balance of the purchase price. The sellers could either assign a portion of their trust deed to the brokers for commission or structure the transaction in a second and a third. The simplest way to accomplish no money down is to lease the property with an “Option to Buy”. Though this doesn’t provide the tax benefits of an actual purchase, it certainly provides the buyer with an increase in property value (if they exercise the option) and a year or two to come up with a down payment and/or clean up their credit.
Another common approach to no money down situations in the 80’s was EQUITY SHARING. A friend or investor would lend the down payment. You would move into the property, fix it up and either sell it or refinance it in the future. In the event of a sale, the investor would be paid back with a pre-arranged percentage of the profits. The equity-sharing contract would also cover a refinance if the homeowner stayed in the property after the contract term.
This article presumes a buyer with no money down and no other property. If the buyer has other property with significant equity the no money down scenario is a cinch. A trust deed on the already owned property could be given to the seller of the new property as a down payment with the seller carrying a normal first trust deed. If the seller refused to “carry paper”, the down payment trust deed could easily be sold in escrow. That way the seller would be “cashed out” and the buyer would still purchase the new property with NO MONEY DOWN.
In the event that you are a truly motivated buyer with “no money down”, look around for an experienced broker knowledgeable in “other forms of financing”. Many brokers won’t waste their time with a no money down buyer UNLESS they are really sincere.
I hope this article has given you “food for thought” in the event that the escalating price of real estate has left you priced out of the market.
Peter Rosenthal
VIP Trust Deed Company