Beware of Real Estate Deals with Nothing Down
Posted: Tuesday, August 19, 2008
by David Cowley
dfc investment team
Buying real estate with nothing down sounds like a great deal and an amazing arrangement. After all, many people stay out of the real estate market and shun it as an investment option simply because they don't have the large down payments needed for investment properties or private ownership. But as the recent housing crunch and mortgage crisis have both shown, it pays to be careful and cautious when it comes to real estate deals and how they work.
There are two basic types of zero down deals still available in the real estate market today. The first is being offered by home owners or real estate investors that do not have a mortgage on the property and they own the home outright. This type of a deal is commonly referred to as owner financing. The finance interest rate is usually much higher than is available with a conventional mortgage. This can be as much at three times higher than normal.
You spend several thousands of dollars fixing up the home and several more thousands of dollars in mortgage payments trying to sell the home only to find that it does not sell within a reasonable length of time. Now you are out of money and the original owner reposes the home. This is good for him because he had a good return on his investment for a short period of time and had some free work done on his home. Bad for you because you have lost thousands of dollars and your credit rating is now bad.
The second type of zero down payment deals for real estate investment is where the owner of the home does have a mortgage. Many of the Real Estate Gurus suggest that this is the ideal type of investment opportunity. You find a home owner that is in financial distress and make a deal to take over the mortgage payments without notifying the mortgage company. While it is not illegal to assume the mortgage payments without notifying the underlying mortgage holder it is a morally questionable practice.
Almost all mortgage companies have a clause written in the contract that if the home owner sells or in any way transfers title of the home to someone else, the under lying mortgage becomes payable upon demand. While the mortgage company may look the other way as long as the payments are kept up to date, they are under no obligation to do so.
As for investors, it's so easy to get caught up in the hype and frenzy of real estate ownership. The population was growing at such an incredible pace and more and more people were buying homes that it seemed that you could do no wrong with a real estate investment of any type. But unfortunately those who entered into the real estate market because it was so easy to invest in real estate with nothing down have found that the bubble has now burst. Homes are getting sold and languish on the market for months and even years, with many even withdrawing their homes from real estate listings. So while purchasing real estate with nothing down seemed like a good investment at the time, many are learning that the down payment was just one small part of the decision process in buying or investing in real estate. Buying real estate with nothing down is of course no guarantee that it will appreciate in value or that one would even be able to sell it if the equity did grow.
And there's another reason to exercise caution when it comes to real estate with nothing down deals. You may want to ask yourself just why the person is selling the property at such a low price or without such requirements in the first place. If the property is no longer desirable to them, is there a reason for that? How is the economy in the surrounding area? What are real estate prices and values doing, increasing or decreasing? Sometimes just the fact that someone is offering real estate with nothing down is a warning sign in of itself.
Of course this doesn't mean that all real estate with nothing down deals are scams or should be avoided, it simply means that an investor or buyer should exercise caution, do some homework, and make this decision carefully.
David Cowley has created numerous articles on real estate investing. He has also created a Web Site dedicated to real estate investing. Visit http://www.rgvre-team.com
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Top-level comments on this article: (2 total)hi david,this was a well written an interesting article that i think everyone should read before they invest in a home. i might even talk to the neighbors, and see if they know a reason the owners are selling. thanks for sharing,best regards,sue thom
I know that depending on your credit worthyness and debt to income ratio you cannot buy a home without anything down. Those who HAVE can do anything and in that I agree. The same ones who created this mess are out there lurking to make more.
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