The Mortgage Guru

Q: We have seen commercials from people like Carleton Sheets promoting their “No Money Down” real estate courses on radio and TV and others promoting “flipping” properties for profit. It all sounds too good to be true. Does that stuff really work? Can I really buy a house with zero down payment? Can you make money with these plans?

A: I get this question a lot. It’s human nature to try to get something for nothing, and the lure of buying real estate for “no money down” has a strong appeal. The “Get Rich Quick” real estate gurus have been selling this same pitch many, many years. They first gained popularity in the late 1970’s and early 1980’s. Many of them dropped out of sight during the roaring stock market boom of the 1990’s, but after so many people lost money in the 2000 to 2003 bear market, real estate is once again a very popular investment. And with home prices skyrocketing in many areas over the past couple of years, real estate seems like a “can’t miss” investment.

Can you really buy a house for no money down? Sure! There are lots of loan programs available these days for any home buyer with good credit and sufficient income to cover the mortgage payments. There’s no “secret formula” involved. The only catch is that you have to pay a slightly higher interest rate for a zero-down loan than you would if you made a down payment of at least 5 percent of the purchase price.

But these are not the kinds of deals that the “no money down” real estate hucksters are promoting. As I said above, to qualify for a zero down mortgage you must have documentable income and a good to excellent credit rating. The get-rich-quick guys like to target people with little income and poor credit by promising an easy way to make money. Their course is based on buying using seller financing. Here are a couple of examples:

1) Buy a “free-and-clear” home with the seller carrying a contract for the entire purchase price. In other words, if you paid $200,000 for the house, you would make payments to the seller on a $200,000 private note.

2) Assume the mortgage on the house with the seller carrying a private second mortgage for the equity. For example, if you were purchasing a $200,000 house with an existing $150,000 mortgage, you would assume the underlying mortgage and the seller would carry a $50,000 note for the remaining equity. You would then make two loan payments each month: one to the mortgage holder and one to the seller on the private note. In many cases, the first mortgage is not assumable so the purchase is made “subject to” the existing mortgage. That means the buyer makes the payments on the underlying mortgage but they do not formally assume liability for the loan. This puts the seller in a very risky position, but it’s a great deal for the buyer.

There are many other more complicated schemes for buying homes with no down payment, but as you can see from the examples cited above, you have to find a very “motivated” seller to accept such an offer. That’s what separates the real world from the hype promoted by the hucksters on late-night TV. Sure, even the wildest “no money down” offers are occasionally accepted — and every week someone wins millions of dollars in a state lottery — but the odds are definitely against you. And it today’s overheated housing market where home sellers routinely receive multiple offers from qualified home buyers of more than the asking price, finding a “motivated” seller is virtually impossible.

That brings us to the house “flippers.” These are the guys who teach you how to make money by buying a house today and quickly re-selling it (“flipping” it) for a quick profit in a matter of months or even a few weeks. These are the real estate equivalent of the stock market “day traders” who made quick money buying and selling stocks during the Dot Com boom of the 1990’s. Can you really make money flipping houses? Yes. In fact, I have done it myself in the past. But it is very risky. I’m a professional real estate investor and I know how to realistically analyze the upside and downside potential of any deal. Most people don’t have the knowledge and experience to do that. They get caught up in the excitement of “everybody’s getting rich” and think that ANY house they buy today will automatically be worth more money a few months from now. That’s not necessarily the case. Like a game of musical chairs, at some point in time the house flipping game always comes to an end. The unlucky “investors” who are caught holding properties at that time are then stuck without other speculators to whom to sell their houses and they invariably end of taking a loss. Timing is critical. It is possible to make money flipping houses, but I think the strategy is far too risky for all but the most experienced real estate investors.