More on the Fallacy of Down Payment.

I wrote this forum post some time ago. 

There were some questions so I am responding to them here.

The mess we are in is because of too many people got houses at high DTI when they bought the houses AND many people ended up having high DTI after they bought because they lost all or most of the income due to bad economy.

For example, if Big Three were hiring like crazy in Detroit, would people we walking away from their houses or would the be bidding the prices up?

No money down DOES NOT mean that anyone off the street just shows up and demands to get an ownership of a property.

Let's break it down.

A potential buyer wants to buy a $1,000,000 property.

He DOES have $200,000.

The property has 1.2 DSCR (Income 20% above mortgage payments)

The bank requires him to "donate" that $200,000 to the seller.

Bank finances $800,000 and may require that the buyer have 6 months of reserves, which is less than $40,000.

The bank could have required the seller to hold $200,000 second which is junior to banks $800,000 anyway. So what does the bank care if it has to foreclose on the property and the second lien position? It cares because of the "skin in the game" mentality.

Let's say, as soon as the closing happens, 30% of the tenants leave, furnace blows up, etc.

Unless the buyer is experienced enough to handle such things, he is going to be up the creek without a peddle. The six month reserve may turn out to be 2 months reserve.

If he can survive, then he is fine. Otherwise he will be foreclosed upon and the bank will destroy not only his credit and equity but also the valuation of the property.

Even if nothing major happens, the buyer will just be working with less than 20% of the total cash flow he collects.

If he wants to upgrade the building to increase rent, he has to produce that money from somewhere else.

Banks like to lend money to people who already have money stashed away even after walking the tight rope they want you to walk on.

The better solution is to avoid working with banks and work with private money. If you can find debt partner, you are doing great. You avoid all of those points and pre-payment penalties.

In the case of equity partners, you may have to share some of the profits with your partners, but you will have the peace of mind while you make money off of one projects and go to the next.

You may want to read my blog on the $6.6 trillion funding source.