Zero down loans are usually a fantasy, but there are exceptions. With commercial real estate and even single-family residential, there are strategies that work. Keep these strategies in your toolbox, in case a deal comes up you could use them with.
The Under-appraised-value Deal
This one may seem like the needle in the haystack, but it has worked before. Basically, if you can put a property under contract for a great price that turns out to be for 65% or less of its appraised value, a lender may be willing to finance the whole purchase for you at 65%, or higher, loan to value. This might sound like a dream, but it does happen. Seller’s get desperate due to personal reasons, families inherit commercial properties they don’t have a clue how to manage and need a quick sale. Sometimes a long-lasting relationship with a fellow real estate investor results in them offloading properties for less than market value. People’s personal circumstances change, and you never know when a deal like this will come up.
The key is knowing your market and what the property is really worth, so you can confidently get the property under contract and move forward with financing and an appraisal. You’ll also need a lender willing to lend on loan to value, rather than loan to cost.
This is for properties with multiple tenants: strip malls, office buildings, even industrial property. This is known as “Second Landlord” in places like China. You basically lease the entire property from the current owner for a long period of time (something like five years). You also retain an option to purchase the property at the end of the lease for $X. It’s YOUR option to purchase, and the price is set at the time the lease & option are signed. You inherit the tenants and responsibility for managing the property. Tenants pay you, and you pay the owner.
Make some improvements, increase revenue, decrease expenses, and increase the property value. After five years, that great price in the option you negotiated and the increased current value of the property should allow you to get bank financing at 65%, or higher, loan to value.
Most aspiring real estate investors hear about seller financing and then get frustrated when most owner’s aren’t willing to actually do owner financing. There are circumstances when it makes sense for an owner to finance some or all of a property, and it comes down to your ability to: 1) educate the owner of the benefits, and 2) negotiate.
Owner’s benefit from owner financing when they sell a property just as much as buyer’s. Capital gains on the owner-financed portion aren’t payable until the loan principal is paid back (disclosure: I’m not a CPA, and you should check with yours). An owner offloading multiple properties and retiring may be interested in spreading out capital gains tax over multiple years. Additionally, owners often get a higher sales price when they finance at least a portion of the sale.
Negotiating a 100% owner financed deal may not be feasible if there’s a broker involved, or if the owner needs to pay closing costs such as land transfer tax, depending on local laws. However, if a bank is willing to finance around 65%, and the owner will do the other 35%, you wouldn’t have a downpayment to worry about. You’ll need a good relationship with a lender to make this work or a really solid deal.
These are just a few ways to get to closing with the least cash possible. You’ll usually still have closing costs to pay, but hopefully, this helps. Happy to answer any questions if you get in touch.