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What You Should Know About Buying Property With No Money Down

You may have heard of offers that claim to let you purchase real estate without having to make a down payment. While there are a lot of offers out there that are little more than outright scams and therefore should be avoided, there are also a few that actually make good on this claim. Some of the more realistic no money down real estate deals that you can expect to run into in the current real estate market are described below.

 

In the first scenario, the buyer gets a new first mortgage for the bulk of the of the total purchase price. The rest of the amount will then be financed by the seller. This solution is more feasible if the seller has enough equity in the property, and is willing to hold a second mortgage.

 

To make this arrangement work, you should talk to your lender beforehand and find out the availability of financing options that allow a seller second. You will want to go with a lender that is experienced in investment property loans.

 

Another way to avail of no money down real estate is by using one of the low or no down payment programs available. While many of these are available only to owner occupants, there are a few that are available for real estate investors. Again, talking to the right lender is a crucial step in this procedure.

 

When going for this option, you may want to consider taking on a second mortgage at the rate of 5-10%. This is not an unreasonable amount in itself, and it may actually help you sell your property off much quicker.

 

Recently, one of the more common ways of securing no money down real estate to come up is by purchasing wholesale properties with cash with the goal of fixing it up. Once all the repair work is done, the buyer then secures a new mortgage in order to pay off the cash loan. Since this legally qualifies as a refinance, the buyer can take cash loan out of the property. While the buyer will have to pay a certain amount of money to close on the hard cash loan, he or she will get all of it back upon refinancing, so the result is that no money was actually spent. This then results in something better than a no down payment real estate deal, which is a "cash back at closing" arrangement.

 

Keep in mind that the definition of down payment is the money that is used to initially "pay down" the total purchase amount. This sum does not include money for various other expenses such as closing costs, points, interest, and insurance. Buying wholesale properties with the goal of fixing them up and then refinancing them to pull cash out should result in the buyer being able to pay off all expenses and realize a respectable profit besides.

 

While true no down payment real estate deals are in the vast minority nowadays, the inevitable rise of interest rates in the future will probably result in a lot more opportunities for creative financing and no down payment deals in the future.

Mortgage Refinance

A mortgage refinance refers to the replacing of an existing debt with another debt obligation that has different terms. Just like anything else in the real estate industry, there are many advantages and disadvantages to a mortgage refinance, some of which are outlined below.

 

Advantages to mortgage refinancing

A mortgage refinance may be applied for in order to reduce interest costs for the property owner, to extend the period in which the mortgage should be paid, to channel funds into the repayment of other debts, to reduce a property owner’s payment obligations by taking on a longer-term loan, for the reduction or alteration of risk by refinancing a fixed-rate loan, or to raise funds for investment purposes.

 

In all of the above examples, refinancing can therefore change the monthly payments that are due on a loan either by changing the interest rate of the loan, or by changing the terms of the loan with regard to maturity. Some lending conditions may even give the property owner an option to reduce the overall cost of borrowing. In most cases, mortgage refinance is used in order to improve the cash flow of the property owner by making his or her monthly bills or payments lower.

 

One other function of refinancing is to reduce the risk inherent in an existing loan. Interest rates on adjustable-rate loans and mortgages tend to change based on the movements of various factors used in their calculation. With a mortgage refinance, an adjustable-rate mortgage can be converted into a fixed-rate mortgage, with the risk of interest rates increasing reduced considerably. This will ensure that the interest rate remains constant for the duration of the term. The downside to this is that lenders who grant fixed rate loans tend to charge much higher rates for these services.

 

In terms of personal finances, a mortgage refinance can also be used in order to help pay off a high-interest obligation such as credit card debt, by exchanging it for a lower-interest obligation such as a fixed-rate home mortgage. This allows a lender to reduce his or her costs by more closely mirroring the borrowing cost with the general good credit and security of collateral that is available from the borrower. In addition, there may be certain tax advantages that borrowers can benefit from with mortgage refinance, particularly if there is no Alternative Minimum Tax paid.

 

In the No-Closing Cost type of mortgage refinance, borrowers typically pay upfront fees in order to avail of the new mortgage loan. In situations wherein the current market rate is lower than the existing rate by 1.5% or more, it would be a good idea to apply for mortgage refinance since there is very little cost involved.

 

In the Cash-Out form of mortgage refinance, the borrower can lower his or her monthly payment or have a shorter mortgage period. This type of refinancing is often used for home improvement purposes, or credit card or other debt consolidation. In addition, if the borrower qualifies with his or her current home equity, the loan can even be refinanced at a larger than the current mortgage, and the borrower gets to keep the difference.

Mortgage Loans

Mortgage loans are types of loan secured by real property with the use of a mortgage. In common usage, the term mortgage itself is often used in reference to mortgage loans.

 

Mortgage loans typically involve the home buyer or builder obtaining financing for purchase purposes or to secure the property against a financial institution, such as a bank or other lending institution. Some considerations when applying for mortgage loans are the size of the loan, the maturity period, the interest rate, and the method by which the loan will be paid off.

 

There are actually several different types of mortgage loans, although they do have several factors in common that may vary slightly depending on local regulations and legal requirements. Some of these factors and what they entail are outlined below.

 

Interest. The interest can either be fixed for the duration of the loan or it can be variable, in which case it will change at certain pre-determined periods. In some instances, the interest the interest rate can also, be higher or lower.

Term. Mortgage loans typically have a maximum term, after which it is expected that amortizing loan will be repaid in full. Some mortgage loans on the other hand may have no amortization, or they will require full repayment of any remaining balance at a certain date. In some instances mortgage loans may even have negative amortization.

Payment amount and frequency. This term refers to the amount that is paid per period and the frequency of these payments. In some instances, the payment amount per period may change, or the borrower has the option to pay more or less.

Prepayment. Certain types of mortgage loans may impose limitations or restrictions on the prepayment of a portion of the loan or the entire loan, or they may require payment of a penalty.

 

Mortgage loans can generally be classified into two types: fixed rate mortgages or FRM and adjustable rate mortgages or ARM. ARMs are also commonly known as floating rate or variable rate mortgages. In many countries around the world, the most commonly used mortgages are floating rate mortgages. In the

United States

on the other hand, fixed rate mortgages are more common. Some lending institutions also grant combinations of fixed and floating rate mortgages, wherein the loan will have a fixed rate for a certain period, and then vary after that period has lapsed.

 

In fixed rate mortgages, the interest rates and the periodic payments remains fixed for the entire duration of the loan. The term usually lasts up to 30 years with 15 years also being quite common. In some cases, the lender may offer a longer term depending on certain circumstances. With fixed rate mortgages, the payments for the principal and the interest typically remain the same over the duration of the loan, although there are ancillary costs–typically property taxes and insurance–that do change.

 

Most lenders in the real estate markets rely on credit reports and credit scores in order to determine a borrower’s eligibility for a loan. Borrowers with a higher score are more likely to avail of a mortgage loan, and they are also usually given lower interest rates.

Make Money Off Real Estate Now

Many people looked into real estate as a way to make money now. There is a good reason for doing so, as just like any thing else for sale, real estate changes hands every single day. The primary reason that drives many people to explore real estate as a way to make money now is the realization that even a small portion of a real estate deal can mean a significant sum of money.

 

You may be surprised to know that it is really quite simple to obtain a real estate license, and get started with a career in real estate. Of course, what this also means is that there is intense competition among agents in the field, and you really do have to put in some long hours at work in order to become successful. It would not be unheard for a successful real estate agent to be on call almost constantly–including weekends and evenings–with their cell phones always at their side.

 

There is also a need for real estate agents to constantly update their skills and knowledge by way of classes and they also need to follow oftentimes rigid guidelines implemented by government agencies.

 

One of the terms that you will come across in the field of real estate is the “flipper”. These are basically people that purchase real estate with the goal of selling it off quickly in order to make a profit. Flippers typically buy properties at much lower rates than the current market rate. In most cases, they act as both the principal and the middleman of the deal by buying properties at a low price and then reselling it at a higher rate.

 

There are a few key differences between a flipper and a real estate agent. Unlike a real estate agent, a flipper only has to spend a few hours negotiating every deal. A flipper also typically makes a much higher profit than a real estate agent, since there is an increase chance to run into bargains that can result in a huge return.

 

Flippers do not generally need a license in order to practice, and they are not subject to government rules and regulations. In addition, flippers have the benefit of low overhead costs, flexible working hours, and the freedom from having to make a favorable impression on clients constantly in order to be taken seriously.

 

Three are actually different kinds of flippers based on experience level. These are: scouts, dealers, and retailers.

 

The Scout basically functions as a gatherer of information. His or her primary role is to find potential real estate deals and pass on this information to other investors for a fee. This is how most people get started in the real estate business, since it does not involve any cash or previous experience.

 

Like the scout, the dealer also finds real estate deals for other investors. The difference is that he or she finds piece of property that is going for a low rate, and signs a purchase agreement with the owner. The dealer then either closes on the property and sells it, or sells the contract to another party. In this situation, the dealer holds the property with a purchase contract instead of merely providing information.

 

The Retailer for his or her part buys a property from a dealer with the goal of fixing it up and selling it for full-retail price.

The Current Kansas City Real Estate Scene

The real estate climate in

Kansas City

has been quite favorable lately; so much so, that you would do well to explore your options for investments in the city. Over the past several months, real estate investors from all over the country have been buying up properties in Kansas, particularly in the Blue Springs, Overland Park, Lenexa, Olathe and Leawood districts.

 

One of the most attractive things about purchasing real estate in Kansas is that it is entirely possible to purchase a piece of property, hire the services of a property manager and after all that still realize a positive cash flow, all for as little as 10%-25% down payment.

 

If you already familiar with the real estate markets in places like

California

,

Washington

,

Florida

,

Maryland

or

New York

, you will probably be pleasantly surprised by what awaits in

Kansas   City

. The city is an interesting mix of a relatively stable and educated work force that enjoys an income that is higher than the national, and property prices that hover around the national median. This results in a situation wherein there is quite a lot of disposable income going around.

 

In terms of real estate appreciation, while there is no way to guarantee what the levels of property appreciation will be in the future, the fact that properties in the Greater Kansas City area have consistently appreciated at a rate of approximately 5.0% per year is a good indicator of the current healthy state of the real estate market in the city. In some years this rate may be as high as 10% and in others as low as 2%, but things are generally bright as far as the appreciation of real estate properties are concerned. In addition, the real estate market in the city has traditionally remained fairly steady, experiencing very little of the drastic swings that many of the coastal states’ real estate markets experience. What all of this simply boils down to is that

Kansas   City

is a very attractive place to invest at least some of your real estate portfolio in.

 

Another issue that may be of interest to those who are looking to invest in real estate property in Kansas City is the recent passing of a bill in The House that can have some potentially beneficial effects for investors and first time homebuyers in the area. This bill is of particular interest to people who have purchased or will purchase a home between April 9, 2008 and July 1, 2009, and have an income of less than $75,000 as an individual or less than $150,000 as a couple. People who meet these requirements will be eligible for a $7,500 tax credit.

 

Of course buyers who avail of this offer will be expected to pay back that amount over the next 15 years, but the advantage is that it will be free of interest. You can actually realize pretty hefty discounts from this offer and even be saving hundreds and even a few thousand dollars in interest during those 15 years.

How to Benefit From Foreclosure Lists

While foreclosed properties are obviously bad news for the people who are threatened with losing their properties, they are on the other hand a definite boon to real estate investors. The question that this brings up however is how exactly does one benefit from foreclosed properties?

 

Before we go into that, let us take a look at what foreclosure really is. Foreclosure is a situation that results from a property owner being unable to make their mortgage payments. When a homeowner is no longer able to make payments towards the mortgage on his or her property, the original lender will have to find a way to collect on the remaining debt, and foreclosure is often the only recourse. This gives the lender the legal right to sell the home to another buyer in order to make back the amount that is owed on the property.

 

While most foreclosed properties are sold through a public auction, a few of them are sold privately by banks. A certain number of these properties are also sold by the owners themselves during the pre-foreclosure stage in order to avoid being subjected to a full foreclosure and subsequent public sale. Foreclosures then give homebuyers and real estate investors a chance to buy properties at greatly reduced prices.

 

The process of buying foreclosed properties begins by searching the many listings of foreclosed homes in your area. The lists that you will typically come across are usually pretty detailed, and they will provide thorough information about each property such as the type of foreclosure it is going through, details on the property, and the person to contact for more information.

 

Many web sites that offer listings of foreclosed properties will also provide information about the different kinds of foreclosures procedures and the steps that you will need to take in order to purchase them. In some cases, information on local foreclosure laws and procedures for different states will also be provided. Some web sites will even help you get in touch with local real estate agents who can help you with the purchase procedures, as well as teach you everything you need to know about attending real estate auctions, contacting owners of pre-foreclosed properties, and buying property directly from banks.

 

You may also want to look into properties that are still in the pre-foreclosure stage. These properties are owned by people who are currently in default on their mortgage payments. While these properties are not foreclosed as of the moment, the continued non-payment of the mortgage debt within a specified amount of time will make foreclosure inevitable. Given this situation, many homeowners will take steps to sell off their home during this stage as a way to avoid a large foreclosure debt, and to at least receive a certain amount of money in return for their home.

 

Keep in mind that a pre-foreclosure home is not yet in the full foreclosure stage, so the owner may not respond to your inquiries right away. It is important therefore to communicate your interest in the property effectively without being too pushy, so they will keep you in mind and take your offer seriously.

Real Estate Investment In Detroit

While the media has traditionally painted a less than favorable picture of

Detroit

real estate, the fact is that there remain some very positive signs for the future of the industry, particularly for buyers and investors. If you do your own research, you will find that there are many opportunities for investment that have yet to be discovered underneath the city’s reputation. In fact, many real estate speculators have already begun to benefit from the

Detroit

real estate market’s low prices, with other buyers sitting on the fence waiting for the market to reach even lower prices.

 

Now admittedly,

Detroit

’s real estate market is plagued with serious problems that should not be overlooked by real estate investors, such as foreclosures, a lackluster local economy, high unemployment rates and crime. In spite of all this, the city has retained more than 99% of its population. This in itself is an indicator that there may be hope for the city yet.

 

The good news for buyers and investors is that there are many low-priced opportunities for investors who wish to purchase property in the city, with the prospect for profits a very real possibility. Many in the real estate industry believe that the widespread buyer confidence is an indicator that the future in the area–at least in terms of real estate–appears to be bright.

 

In fact, buyer activity in the city has increased significantly in the past few years, and many analysts expect that this trend may even spread to the surrounding areas. In the first four months of 2008 alone, sales of residential properties in the city went up by as much as 48% from 2007, according to sales statistics of residential properties published by the Michigan Association of Realtors. The average price of these properties went down 56% to just a little over $20,000, with many of the sales being homes in neighborhoods with low employment rates. This was according to a report published by the Wall Street Journal in May of 2008.

A lot of the real estate purchasing activity in

Detroit

has admittedly been based on speculation, as real estate investors buy up entire street blocks of low priced properties in the hopes of the market experiencing an upswing. Nevertheless, even first-time buyers– who have traditionally held off on buying property until the market begins to look more favorable–are beginning to sit up and take notice.

 

It is important for real estate investors to realize that the potential for increased buyer is considerable. While it would be a good idea to keep a close watch on the market and wait for prices to hit bottom, waiting for the perfect time for the market to improve may result in a missed opportunity. One real estate analyst has even gone so far as to say that this is the ideal time to buy, with the market being so close to hitting bottom. Investors who wait for the bottom to hit before acting may realize that prices will rise up quickly.

The Lowdown on Creative Real Estate Investment

The term creative real estate investment is used to refer to non-traditional methods of buying and selling properties. In most cases, someone who is looking to buy property will first secure financing from a bank or other lending institution and pay for the full amount of the property with a combination of the borrowed funds and his or her own funds as down payment.

 

Creative real estate investment came about simply because most people are typically unable to pay off their purchases in full. They then have to make arrangements to finance this purchase. Most people are only able to afford a modest down payment and are then obliged to pay off the remainder of the purchase through a mortgage. Of course the larger the down payment that you are able to make to begin with, the smaller the total interest payments will be over the duration of the mortgage.

 

Below are some of the terms associated with creative real estate investment and their meanings.

 

Bird-Dogging

This refers to the process of getting paid a certain amount of money as a referral fee for finding good real estate deals for investors. This is a common way by which many people begin their creative real estate investment careers, since it does not involve a lot of money. These agents typically get paid upon the closing of the deal.

 

Seller finance or "subject to"

There are basically two types of seller financing currently practiced. In the first scenario, the seller acts as a bank and lends part of his or her expected equity to the buyer instead of receiving it at the closing of the sale. These types of loans could be an interest only or amortized loan and could have a fixed rate interest payment or a variable rate. The terms and conditions of these contracts tend to vary depending on the agreement between the buyer and the seller.

 

In the second scenario, the seller allows the buyer to assume an existing loan. This can be done either by allowing the buyer to assume the loan, which requires the pre-approval of the buyer's credit, or by a process called "subject to" wherein the buyer purchases the property in accordance with any existing financing plan. This can be a financially risky option for the buyer, since many loans have restrictions that legally give the lender the right to collect on the loan in the event of the transfer of ownership of the property.

 

Options

Options refer to the right of a buyer to purchase property at a certain price during a specific amount of time. The owner of a property may sell an option to a buyer on or before a specific date at a predetermined price. In this situation, the buyer is acting on the assumption that the property’s value will go up by this date or is already sufficiently low as to make the purchase viable. Keep in mind that option premiums are usually non-refundable, and represent an equitable interest in the purchased property.

The Cleveland Real Estate Market

An interesting situation is brewing in the

Cleveland

real estate market wherein the large number of properties up for foreclosure has caused home prices in general to sink to lower levels. This early in 2008, a number of banks and lending institutions have already begun to unload properties at incredibly low prices. In fact, the current median home sale prices in the city has fallen to 75 percent. In comparison, the median prices in the first six months of 2007 ranged from around $62,000 to $15,500.

 

Some of the areas in real estate Cleveland that have seen steep declines in the prices of homes are Maple Heights, Garfield Heights, Euclid, Bedford Heights, Warrensville Heights, East Cleveland, Cleveland Heights and South Euclid. These communities have been experiencing unprecedented foreclosure rates in recent years.

Around forty percent of the single-family residential properties sold in

Cleveland

in 2008 were bought for less than $10,000. In addition, only 27 percent of these types of homes sold for more than $50,000, with more than 60 percent of those located on the

West Side

.

 

Most of the people looking to buy and sell properties in

Cleveland

nowadays are speculators and companies from out-of-town that are aiming to make quick profits on the city’s plentiful supply of homes in need of repair or more extensive rehabilitation. Two of these companies are Stonecrest Investments operating out of

San Jose

,

California

, and Blue Spruce Entities operating out of

Rapid   City

,

South Dakota

. These two companies in particular have been some of the most prominent buyers and sellers of real estate property in

Cleveland

in the past year. Stonecrest actually bought 62 single-family properties in 2008 at the average price of just a little more than $1,500.

 

Blue Spruce Entities for its part began purchasing homes in

Cleveland

and

East Cleveland

beginning in early 2007. The company has since sold 35 single-family residential properties for an average price of a little less than $1,200. Many of Blue Spruce's acquisitions have been sold to TSE Properties LLC operating out of

California

.

 

If you were to look at the real estate figures, the numbers by themselves would make it seem as of the housing market in

Cleveland

is on the brink of collapse as prices fall way below the past levels. There are many in the industry who feel however that things are not as bad as the numbers would indicate. Certain research and county property records show for example that most of the sales of property activity in the city are of homes that are due for foreclosure. Property owners who have equity in their homes on the other hand are mostly waiting for the housing market to experience an upturn.

 

In fact a few lending institutions have begun to develop programs that will allow borrowers to combine the purchase price and repair costs of their homes into a single loan. These programs are a boon to first-time property buyers and people who are willing to put in the work to repair their homes.

Cash Flow Properties At A Glance

Generally speaking, there are two ways by which you can get positive cash flow from the ownership of a rental property. One situation is when the capitalization rate of your property is higher than the annual loan constant with the loan-to-value ratio or LTV calculated at 70 to 80%. The other way is when the LTV is at an unusually low figure, such as 60% or lower.

 

To determine whether or not you can realize positive cash flow from your property, you should multiply your loan-to-value ratio by your annual constant and if the result is lower than your cap rate, you have a positive cash flow property on your hands. The capitalization or cap rate on the other hand, is the annual net operating income of a rental property divided by its value. A piece of property valued at $1,000,000 for example, with a net operating income of $60,000 per year has a cap rate of 6% ($60,000 ÷ $1,000,000).

 

In order to determine the net operating income of cash flow properties, you should deduct the operating expenses–although not the mortgage payments–from the gross income. In this case, the cap rate is defined as the cash-on-cash return that you will get as a result of having no mortgage on the property.

 

The annual loan constant is also an important consideration with regard to cash flow properties. This figure is derived by dividing the sum total of the annual mortgage payments–including both the principal and interest–by the mortgage balance. In a 30-year fixed rate mortgage arrangement for example, the annual loan constant would be a little higher than the mortgage interest rate at the beginning of the mortgage period, typically at 7.25% is 8.14%.

 

Keep in mind that the shorter the remaining term of your mortgage, the higher the constant will be. When faced with an adjustable-rate mortgage, you should figure out the worst possible lifetime cap payments simply because there is no way of knowing whether or not the rates will increase after closing.

 

For purposes of determining cash flow properties, you should also consider all of the time and effort that you have put into the said property. Most–if not all–small investors typically undertake all of the management, repair, and improvement work necessary for the property. While you do indeed save some money in this manner, you cannot really consider this as positive cash flow, since you would have gotten paid for doing the same thing for other people. You could have also used the time that it took to do that work by earning extra money at your job or business.

 

By the same token, if you had invested your money into stocks, bonds, or commodities, you would not have had to put in the time to manage, repair, or rehabilitate those properties. The bottom line is that considering the money that you save by doing all the work on the property yourself as investment returns from the property is somewhat erroneous thinking.