One of our readers made an interesting comment recently when he said, “Sure you can do no money deals, but they are a lot riskier for newcomers.” I think that he hit on an excellent topic to expound upon, risk level with no money down deals.
At times, real estate investing gurus glamorously inflate the value and theory of “Nothing Down” deals without giving newbies a solid understanding when evaluating them. This leaves people mistakenly thinking that any “No Money Down” deal equals a good deal. WRONG!! Just because you can buy someone’s house for what’s owed and take over payments, get an owner to finance all of his equity over time, or get a loan to cover all your costs doesn’t automatically justify doing a deal.
Here’s a few questions to consider: What percentage of value would I be buying this property for? Is the property located in an acceptable area? What condition is the property in? Is the interest rate on the underlying mortgage or new owner financed mortgage adjustable? Is there a balloon? Am I just taking over someone else’s problem?
The risk level of any deal is going to be greatly influenced by two things:
- Buying Criteria
- Exit Strategy
Our Buying Criteria
For an all cash offer, which can be a “No Money Down” deal if you bring in a loan to pay for all costs associated with doing the deal, the property must be purchased below 70% of value. That is, ARV (after repaired value) minus repairs multiplied by 70%.
If we are able to structure some owner financing, buying subject to and/or getting an owner to finance his equity, we will go upwards to 80% of value depending on the condition of the house, the terms of the financing, and the amount of cash that will be sitting in the deal.
We have a sliding scale based on repairs a property needs and what we will offer. The more repairs needed, the less we are willing to offer regardless of how the deal is structured.
Your buying criteria may be very different from ours but make sure that you are not lured into a deal that doesn’t fit your model just because it’s “No Money Down.” Establishing your buying criteria is an important step for any investor so you don’t ever become emotionally involved with a property. Either it fits your buying criteria or it doesn’t!
“No Money Down” or not, if you only have one exit strategy to make a deal work, it’s risky. Flipping a property is the most expensive and risky selling strategy as a real estate investor, especially if that is your sole exit strategy. When you plan on flipping, I would suggest being very conservative with your ARV and over estimate the repairs needed. This way, you hedge against the risk involved with the deal.
3 Quick Tips to Safeguard Your Success with “No Money Down” Deals
- First and foremost, make sure you’re not just taking someone else’s problem off their hands. As soon as you buy it, now it’s your problem. And if you pay too much for it, you won’t have a profitable way out.
- Know your buying criteria! This will help you stay unemotional when evaluating a “Zero Down” deal.
- Plan multiple exit strategies. One way to do this is simply buying a property far below what it’s worth. Worst case scenario you could unload it to another investor and still make a good quick profit.