Investors often dream of no-money-down deals. Even in today’s market, such deals do exist and investors find them. But their risk tends to be higher than it used to be. When real estate appreciated by leaps and bounds, year after year, investors could enter into highly leveraged deals and still come out winners. The same deals in a stable or sluggish economy rarely work. Based on recent real estate activity, no-money-down deals usually are not worth the risk in the current market.
If you buy a property without sinking any money into the investment, you generally have no equity. In some markets, a building could lose value and you would find yourself owing more than the building is worth. At the least, you could not gain appreciation or equity. Whenever you have little to no equity in real estate, your risk is great. Unless you can afford to lose money, you probably should ignore the temptation of no-money-down deals.
When a seller offers a proposition that does not require a buyer to come up with cash, it’s usually because the seller needs the sale desperately. The offer of a no-money-down deal should put you on the red alert for danger. Sometimes offers are made due to divorce or other personal problems and can be good opportunities. More often, however, the chance to buy property without a down payment means that you are either paying too much for the property or buying something that other people are not interested in owning.
There is a difference between the seller offering you full financing and you arranging it yourself. You can buy property without using your cash when you pledge your money or equity in other assets as collateral for a loan. When sellers offer to provide you with financing themselves, be careful. The deals can be quite tempting, but they can be just as dangerous. Owner financing-or seller financing, whatever you want to call it-can become one of your worst nightmares.
Sellers who finance their own sales might slant the loan contracts heavily in their favor. You may not get the same protection that you would when you secure financing from a commercial lender. In some cases, you might make major improvements to a property, fall onto hard times, miss a few payments, and lose your investment to the person who sold you the building and financed the loan.
Another risk of owner financing is that most lenders do not allow an owner who owes money on a property to offer full seller financing. Older loans don’t always have acceleration clauses, but newer loans usually do. A loan that has an acceleration clause gives the lender the right to demand that the buyer pay off the loan in full if the seller transfers the property with an installment contract. In other words, the loan is not necessarily assumable, and if the lender doesn’t approve of an assumption when an acceleration clause exists, it can demand payment in full. If payment is not made, the lender has the right to foreclose on the property. If a seller owes a bank money on a building and arranges a private sale and financing with you while the building remains financed at the bank in the seller’s name, you could be in severe trouble. You might make all of your payments regularly to the seller and still lose the property because the seller might not pay the bank’s mortgage. In this case, the bank would have a right to foreclose on the property. The whole thing can get very nasty. Therefore, if you have any inclination to participate in seller financing, it is strongly suggested that you run every document past an excellent real estate attorney before signing anything.