The Truth About No Money No Credit Real Estate Investing

No Money No Credit: Building a Nest Egg for the Future

When you think about it, the true definition of ‘real estate investing’ is investing your own capital into a real estate project and growing that money through cash flow and appreciation. Fix and flips, rehabs, buy and holds, apartments, storage units, and purchasing real estate notes are true ways of real estate investing.

The problem is that many new real estate investors don’t have the capital to begin a real estate investing business, so instead of focusing on true investing, they focus on transactional real estate. Transactional real estate is when you only make money by making transactions instead of making money of the cash flow of your property.
What if you’re just starting out and don’t have enough money to purchase notes or properties? Then transactional real estate strategies that don’t require using your own credit or your own money may be your best bet.

No Money No Credit | Wholesaling?

The most basic form of no money no credit transactional real estate is wholesaling. Simply put, wholesaling a property is a strategy where you get a discounted property (unsellable in current condition and requires repair) under contract, find an end buyer (usually a fix and flipper), and assign the contract to the flipper for an assignment fee. Your assignment fee can range from $500 to $20,000! For this strategy, you don’t use any of you own money or credit, assume minimal risk, and can be close quickly. The hardest part about a wholesale transaction is finding the buyer. You will generally have to find a property at a discount of less than 60% market value in order to find an end buyer. How many people are looking to sell their properties at such a deep discount? Those motivated, distressed sellers are out there, but it takes a great deal of time and effort to find.

No Money No Credit |Subject-To / Owner Financing

A popular no money no credit strategy in real estate markets that haven’t experienced a significant drop in prices is subject-to financing with owner financing (also known as a wrap). Subject-to means purchasing a property ‘subject-to the existing financing’ … To understand the concept of the subject-to transaction, it is important to understand that the deed, or title of the property and the mortgage, or note of the property are two different documents, and as such, can each be transacted separated. Therefore, the deed or title can be sold to the investor while the mortgage or note stays with the seller. As you can tell, the investor does not use any of his or her own credit for this type of transaction.

This subject-to strategy allows the investor to acquire the deed or title of the house while leaving the mortgage in the sellers name. The investor, now responsible for paying the mortgage on behalf of the seller, looks to find a buyer who can’t qualify for traditional financing, and create a wrap. A wrap is a new mortgage that is created on a property that “wraps around” an existing mortgage. Since none of the investor’s credit is being used, they can perform as many transactions as possible.
There are disadvantages to this strategy because the investor is relying on the end buyer to make the payments each month. If the end buyer defaults, then the investor is responsible for the payments. If the investor is cash poor or has multiple properties default at once, then the investor would have a developing situation, and would need to find a way to keep the notes performing. A smart investor plans for this occurrence by keeping 4 months reserves in an account for each property for such a rainy day. The other disadvantage, or concern, is the ever present 2 ton boulder hanging over investors’ head known as the ‘due on sale’ clause. The due on sale clause states that the lender may call the note due if a sale or transaction occurs. Technically, any subject-to financing with owner financing could evoke the due on sales clause. But the truth is this very seldom if ever happens. As long as a note is performing, the bank has little inclination to create a non-performing note; especially in this tough economy. But the fact is that threat is still out there and the investor should prepare for such an occurrence by creating equity when purchasing.

No Money No Credit | Contract Assignments?

Consider the following equation for Contract Assignments: Subject-to financing strategy + Owner financing wrap + wholesale strategy – subject-to financing. With a contract assignment, the investor is gets a property under contract with owner financing in place, like he or she would with a subject-to financing strategy and the wholesaling strategy.

But here’s the difference. Rather than keeping ownership of the title or deed, the investor will find a motivated end buyer who doesn’t qualify for traditional bank financing and assign the contract to the individual for a fee. Unlike the subject-to financing with the owner financing wrap strategy, the investor doesn’t make monthly cash flow or have equity when the end buyer refinances. Those monies go to the original seller. However, the benefit to the investor is that he or she is no longer liable in case the end buyer defaults. So the investor is trading cash flow and equity for peace of mind.

When getting the property under contract, it is IMPERATIVE that the investor explain the risks of the due on sales clause and every other risk to both parties. Work with your attorney to disclose all risks associated with this wholesale transaction.

No Money No Credit Summary

In summary, finding wholesale products is risky and subject-to financing with owner finance wraps have costly long-term potential threats that can put an investor on the wrong end of a lawsuit (or possibly even land him or her in jail). Given the risks and difficulties of each strategy, the contract assignment option combines the best of both strategies while giving up the liabilities of the other strategies. Unlike wholesaling, there are millions of distressed seller and millions of motivated buyers who can’t get financing. Putting these folks together for a fee will be the most profitable No Money No Credit strategy in this tough economy. However, seek legal counsel before engaging in any no money no credit real estate strategies.

If you enjoyed 'No Money No Credit Real Estate Investing', then you may also enjoy other articles by Tom Bukacek at www.REMillionaireBlueprint.com