How to do ‘no money down’ property deals

I am often asked how to do or how to find ‘no money down’ property deals. The following is generally my response. Q. Have you been to a property seminar recently? The answer is usually YES. More often than not if you go to a property seminar you will hear there are many ways to do no money down property deals particularly on the glossy, get rich quick seminar brochures, apparently it’s easy! I disagree.

For the majority of home owners or investors the days of 100% borrowings to purchase property are over. In fact they were never really there in the first place for investors just a select few home buyers with really strong incomes who worked in professions that the banks regarded as unemployment proof. I think we all now know that is not the case.

Drawing on equity, be it an existing property or having someone put up their place as security and be a guarantor, is the only real “no money down” way. If you’re using a Self Managed Super Fund (SMSF) to buy property, you have to have a cash deposit in the SMSF, so it involves money down. With ‘options’ you don’t own the property, you just have the option to buy, so they don’t count. If you have an equity partner it means they put the money down and if you get a small piece of the action that’s great, but in reality this just doesn’t end up happening because if they are putting the money down the property will go in their name.

The only other path is vendor financing. Here, the vendor leaves 20% or more in the property for say 5 years and you pay interest to them for it. The bank lends you the 80%, the balance, and you pay interest to the bank for that portion. It’s a great strategy in theory, it sells expensive seminar tickets but I don’t know one person who has ever actually pulled off such a deal.

Drawing on equity from another property is a sensible strategy provided overall you haven’t got more than 80% Loan to Value Ratio (LVR) across both properties at any time. My personal view is unless you have saved a deposit, 20% or more for an investor and ideally the same for a home buyer (but in certain circumstances you can get away with a bit less) you shouldn’t be investing or buying a property as you haven’t earned the right.

100% no money down loans are very risky as the banks have discovered and they have pulled back from allowing it to happen for good reason. Why do you think lenders mortgage insurance is required for lending beyond an 80% LVR? Because it’s very risky to borrow beyond that level, so the bank makes you “the borrower” pay around a 3% fee to an insurer for a policy to cover them “the bank” for the difference between the 80% and 100% you have borrowed. If you default at some stage in the future or go into negative equity and stop paying your mortgage they will help you (willing or otherwise) to sell up to recover the money they loaned you.

I’ve always advocated that borrowers should have some skin in the deal – by that I believe that a 20% deposit is very important as it gives you a buffer if times suddenly become tough. Borrowing 100% or near enough is not a smart way to go as should the market take the slightest downturn, you’re in negative equity and you have no fallback position apart from selling. Unfortunately since the GFC, a lot of people who purchased off the plan property with deposit bonds or 5% deposits find themselves in this situation.

The Brisbane property market following the floods is another example. Many properties in the affected areas have been devalued by between 10 and 30%. For owners with little to no deposit that means they now owe the bank around 30% more than their property is worth. It is possible for the bank to ask you to pay them that difference to return the lending to the agreed ratios particularly for commercial holdings. Talk about pressure when you don’t need it!

At the end of the day even if you manage to do a no money down property deal it’s going to be high risk and will remain so till you have a decent amount of equity. I recommend you let the “lotto mentality” go and create a savings plan. Put in the hard yards and save your 20% or greater deposit and appreciate the satisfaction and peace of mind you will feel knowing that when you purchase you will also have a buffer if you need it.