How to buy/own REOs with little no no money down

Question

I searched for posts related to this in this forum. I figured ask a slightly different question, maybe get a different answer, so here goes...

I get listings for lots of REOs. Some look decent numbers wise. My point being I wouldn't mind owning more than I can afford downpayment wise that is.

Typically, unless the selling bank specifies cash only, I'd have to get a mortgage, put 20-25% down for the privilege of owning the house as an investor.

Knowing the banks want to get rid of their REOs, how can I can buy more with less?

Transactional funding seems interesting though it strikes me this used when you want to buy/sell. I want to buy-hold.

What's your experience and how to approach this?

Thanks~

Jon Holdman · Answer

Hard money then refi MIGHT work. Its expensive, and you need a good enough deal to fit under the HML guidelines and under the refi guidelines. You'll still need to qualify for the refi, which means good credit, good income (without the income from the rental) and house that will appraise for you to refi under 70-75% of the new value. You'll have to wait a minimum of six months, unless you find some local lender who's more flexible. Some HMLs now require you have some of your own cash in the deal, too.

Shannon Feol · Answer

I don't know about other parts of the country, but here in Memphis, the "hard money - Refi" model is dead. Lenders will tell you that they can do a 75% loan with 6 month seasoning, etc, etc, but try and find someone that is actually CLOSING these loans. No worries though, there are all types of creative financing options. If you have a self directed IRA you can invest with it or if you have a friend or relative with one they may be willing to create a mortgage for you. Even if you paid them 7% interest that will be alot better than the 2% they are making in their 401K or better than the money they are losing in it recently. We have built a program here in Memphis that combines investing with cash or a self-directed retirement account AND a non-qualifying loan and structures it so that you aggressively pay down the principal over 5 years so that you can own your rental properties in the clear in ONE SIXTH of the time of a 30 year mortgage and pay tens of thousands less interest. Plus purchasing with funds from different sources gives you the option to buy MORE homes and pay them off in LESS time. Try and find someone who knows a lot about creative financing. I agree, owner financing is good, too, and you'll be surprised how many sellers are open to the idea. You'll see there are lots of options.

Jon Holdman · Answer

IMHO, paying all cash from a SDIRA doesn't work very well. If you have enough cash in your IRA, you can get better returns making hard money loans. Rental real estate makes sense when its leveraged. Yes, its possible to get a non-recourse loan inside an IRA. But that then subjects the IRA to UBIT (unrelated business income tax) on the rental income. Wholesaling or fix and flipping using IRA funds are also going to be subject to UBIT since those are active businesses rather than passive investments. I do tend to agree with you, Shannon, that the HML/refi approach is shaky at best. I did finish one of these deals just in November, so its not impossible. But personally, I'm not going to try it again right now. Hence my capitalized "MIGHT". I think its a tough environment if you want to buy REOs and don't have a ton of cash. Finding properties you can buy with owner financing may well be a better way to go.

Steve Sparks · Answer

There is no "secret" formula to get this done. If you want to buy your buy and hold inventory from the REO supply you are going to have to have the cash or borrow it..maybe seek private funds. Sounds like looking for properties that you can take subject to or owner financed may be the best option for you. Transactional funding will not help you.

Curt Davis · Answer

Mark, I have deals for you to buy in Memphis. You can get your hard money and I can sell you the homes if you have the process in place. I would love to know what bank your using since the appraisers are at random selection.

Mark D. · Answer

I would have to disagree with Shannon that the "Hard money-Refi" model is dead in Memphis. In fact this is the only way that we are getting deals done right now. We are using private money to acquire Reo then rehab, rent and refi rate/term to pay back private investor. The key is for borrower to have 700+ fico, full doc, low dti, ltv under 75 etc. However, make sure you are paying way under retail as the new appraisal guidelines could easily kill you loan depending on market conditions. Also, no investors will back loans for borrowers with more than 4 investment properties on credit. Taylor, I would search for private money from friends/family first. Build confidence with a couple deals and you will be surprised how many others will want to get involved in your deals.

Taylor C · Answer

Hi Ted, Yes, I agree. Working on a buyers list :)

Ted Akers · Answer

Hello Taylor, Transactional Funding can help with those buy-flip scenarios. Rather than pass if you see good REO deals flip some to build cash reserves for more down payments on the buy-hold deals.

Taylor C · Answer

Jon and Shannon-Yes, refi in the short term seems like a long shot. Hindsight is 20/20 on a couple of deals we did where we thought we could refi. The thing about REOs is that MLS and help from a few real estate agents makes it easier to find deals. But there's only so much room for so many 20%-25% downpayment deals before the money dries up :) ...ah subject to. David-there's money for dp, but at 20-25% a pop, we'll be limited to how fast we can grow the portfolio. Which sounds like finding sellers to do owner financing and doing some quick turn (i.e. non buy-hold) is one way to go, which will ensure there's cash to weather vacancy increases and unforseen expenses.

Taylor C · Answer

Hi Steve, Yes, I'm hearing short term I'll have to have the cash. Maybe down the road private funds, or equity sharing. Thanks also for the subject to and owner financing, which will be great as soon as we build up and reach out to sellers.