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No Money Down Properties – Creative Financing You Never Thought About
To start off, let’s first emphasize that many established , savvy, experienced and successful property investors and home owners use many forms of creative finance for their dealings. It is something that is kept in the funding arsenal of many investors.
However, so many deals have fallen through that you must get yourself more educated if this is indeed an avenue of funding that you are considering. Seminar gurus who are advocating creative financing are overselling it’s advantages and downplaying the potential pitfalls. I’m not a seminar guru and do not expect you to listen to me. But before moving forward with these “No Money Down” creative financing schemes whether it is for Singapore, Iskandar or overseas properties much further away, you should think over your tolerance to risks. And always keep everything legally compliant. Some methods may or may not work here or in other countries and vice- versa.
Disclaimer: You are responsible for your own actions
Creative financing options
1) Lender. Under Singapore regulations today, the most you can obtain from a lender is 80% loan to value. However, if you are a private banking customer with a bank, go talk to your relationship manager. They might just be able to structure something that will allow you to put down as little money as possible for your property while being 100% compliant. Be prepared to make concessions like topping up your investment account with them.
2) Employer. Check with your human resource on any property financing benefits. You might be surprised to find that your employer have benefits that grant loans to employees to buy properties. It will serve you well to start sugar-coating your HR manager.
3) Loans against assets. You might have assets in your possession that can be used to raise money without even knowing it. Assets that you might be able to get a loan against include antiques, jewelry, art, insurance, stocks, vacation home, or that coin collection passed down by your great grandfather. You can also consider taking an equity loan out of your current property.
4) Downgrade. Consider downsizing from your current property to a smaller one. This will release your equity locked up in your home. For example, you can sell your property at $1m and use the proceeds to buy a $600k property to replace it. Then use the remaining $400k for the down payment of your second property while getting 80% loan to value for it.
5) Wraparound mortgages. This basically occurs when the seller has an existing mortgage way below current mortgage rates. The seller continues to service the existing mortgage while the buyer pays the seller the difference in interest charges. The buyer takes control over the property while the seller gets to make a monthly profit. Opportunistic buyers consider these methods when they are only able to obtain a loan that is lower than what the seller already has. Thus, gaining a higher LTV. High risks involved.
6) Credit cards. If you have to consider using credit cards and drawing down your cash advances to buy properties, you should consider whether you are making a logical decision. Nevertheless, using credit is something that is possible. Just remember credit cards serve short term needs and you will be using them for a long term commitment. An expensive decision.
7) Personal loans. Lenders do not like it when you have to get funding just to make your down payment. But you can bet that the seller does not mind as long as he gets his money. You are taking a big risk and exercising extremely high leverage. Make sure that you do your calculations and recalculate before making this move.
8) Contract for deed. A contract for deed allows you to pay the seller of a property in installments. Unlike a common mortgage, the seller will retain ownership of the property until the conditions of this contract is fulfilled. You will of course pay interest. The seller must be a real twit or your godfather to not charge an interest. When you breach the contract, the seller can repossess the property.
9) Renovations and remodeling. You might just be able to buy a property with 100% LTV if you are able to increase the value of the property through renovations and remodeling. Let’s say you want to buy a $800k property. You can contribute money for renovations and remodeling to bring the value up to $1m. You will then be able to loan 80% at the purchase price of $800k. You must really trust the seller to go ahead with this.
10) Partners. Pull in partners who has cash to invest. The magic of property investments is that when you have a great deal on hand, investors will magically appear with an offer to partner. Note: Do not leave your success to divine intervention.
11) Barter trade. As ridiculous as it sounds, you might just be able to barter trade. Maybe you own the exclusive rights to a product or have an antique car that the seller likes. Maybe you have a distribution channel into a country that the seller has been looking for the last year. Just ask if this is possible. You will never know until you ask.
12) Deferred commissions. No prizes for guessing whether your property agent will be happy with deferred commissions. It does not hurt to put this idea on the table though. Some agents might be fine with such arrangements. They will defer their taxes with these deferred payments and get to earn an interest on it as well.
13) Lease-option. This is a common property play whereby buyers take up the property on a lease with an option to purchase it at a specified price within a stipulated period stated in the contract. He can then live in the property or rent it out to tenants. You wouldn’t have to make a down payment but you will have to pay the security deposit and rental like a common tenant.
Creative financing are high risk activities. If you are a a first or second property buyer, you are probably out of your depth to even consider them. The risks multiply ten-fold if the property you are buying is overseas in a place that you are not remotely familiar with. I suggest to stay away from them unless you control a property empire with huge negotiation leverage.