By knowing how to make money on deals which have no equity, you’ll be able to do deals most other investors can’t. This eliminates most of your competition.
There are a lot of sellers out there who want to sell their home, but they don’t have enough equity to cover a real estate agent’s commission. Some may barely have enough equity to even cover their closing costs. Most of these sellers are just waiting for someone to come along and provide them with a solution, and that is where you can fit in.
You may be asking… “If the property doesn’t have any equity, how am I supposed to make any money?” Well, there are several ways in which you can make money on a property even if you are paying full market value. They are… buying “Subject To”, doing an Agreement For Deed or Lease Option, and doing a short sale.
Don’t Give The Seller Any Money
One thing to understand upfront about making money on properties which have no equity… The first way you begin to make money, is by not giving the seller any. If the seller owes what their property is worth, there is no reason why the seller should make money on the deal. Therefore, the only thing you’re going to give them is a solution to their problem.
One way to make money on a property which is 100% financed, is to take over the property “subject to” the existing loan. Then, you can Lease Option the property to a tenant/buyer. You could not only make money by getting an upfront deposit, but you can also make money every month by charging a higher monthly payment. You can even tie the sales price to a future appraisal. This way, you are building up equity in the property until your tenant/buyer exercises their option to buy. That equity would be your third payday down the road.
You could take over the property “subject to” and then assign the deal to a buyer who wants to live in the property. There are a lot of homebuyers out there who would be willing to pay five or even ten thousand dollars above market value to own a home, if they didn’t have to qualify for the loan.
Agreement For Deeds & Lease Options
If the seller is unwilling to deed you their property and walk away, you can offer to do an Agreement For Deed or a Lease Option. The important thing here is that the monthly payment you will make, will be the same as the payment on the seller’s underlying loan. In addition, the purchase price will be the amount owed on that loan. It is just as if you took over the loan, but the title just gets transferred to you later.
In this situation, you can make money the same way you would if you had taken over the property “Subject To”.
If the seller is behind on their payments, it could be a great opportunity to get the lender to do a short sale. This would create equity in the property by the lender taking less than what is owed on the loan. If the property is financed at upwards of 100% of its value, the lender already knows they are going to take a loss. It’s just a matter of how much of a loss they are going to take, and how much time and money it will cost them in the meantime. If you can get the lender to give a hefty discount, you could come in with private money and close on the deal. You could then do any repairs needed on the property and retail it.
If you’re unable to get a large enough discount to use hard money, you would then have to flip the deal directly to a pre-qualified home buyer. The key here is to get the property sold to a home buyer quickly before you have to close on the short sale because you don’t want to even try to come up with funds anywhere near full price. To do this, you must have a buyers list built up ahead of time and know how to get the buyers qualified quickly for financing.
This technique is usually difficult for a beginning investor, but some experienced investors can do this like a piece of cake.