Best No Money Down Ways to Buy Real Estate

If you've been reading articles or books on Creative Real Estate Investing, you've doubtless heard many, many different ways to buy houses, condos, townhouse and any other real estate you can think of. These include:

Lease/Options (more correctly Sandwich Lease / Options)
Master Lease / Option for multi-unit properties
Contract for Deed (A.K.A. All Inclusive Trust Deed, or Installment Land Contract)
Subject – To
Owner Carry
Wraparound Mortgage
Traditional Purchase

Confused yet? I know that the first time I heard many of these terms I certainly was. So let's break these down briefly, and I'll explain what I like and don't like about them.

Sandwich Lease / Option

This is where you (rather your company) signs a lease with an option to purchase a property. The agreement gives you the right to sublease to another. You're the middleman leasing for a low monthly cost with a low purchase price and a long term from the homeowner, then you lease it back out for just above market rent and a future appreciated price to a potential buyer. You make monthly cash flow, and when (IF) they buy you get the difference in price. You also get a decent upfront option payment that you get to keep if your tenant / buyer moves out.

Easy, huh? Well, yes and no. This is probably the easiest way of presenting a creative purchase to the homeowner, and the easiest to explain. However, sometimes the legal aspects of a lease / option are shaky, and if you have a homeowner that won't work with you, you could be in for issues. The key here is you have to protect yourself with the right agreements and escrow documents.

The other side is you have to know your landlord / tenant laws and make sure you follow them and that your contracts follow them. You could be in trouble if you don't.

Given the warnings above, I'd recommend this method over anything else to someone just getting started. While there is a bit of paperwork to use to protect yourself, it's the easiest to manage. And there can be great profits in lease / options.

Master Lease / Option

Same as the Lease / Option but with a master lease agreement that lets you rent out individual units in a multi-unit apartment building.

Contract for Deed

This is known by different names in different states. Here in Colorado, it's an Installment Land Contract. Other places it's an All-Inclusive Trust Deed, or a Contract for Deed. All the same, just different names.

A Contract for Deed is just what the name says. It's a contract for the deed to a property. The contract usually involves making payments to the owner and after a period of time you guarantee to purchase the property. Whereas a lease / option gives you the right, but not the obligation to purchase, a Contract for Deed obligates you to buy.

This one's a bit more complicated, but essentially the same as the Lease / Option. You buy it on the contract, then rent it out to a Tenant / Buyer. They usually won't buy so you get their monthly rent, and keep the option deposit if they don't buy.

This is my second choice for people just beginning. It's easy to explain to the homeowner, it makes them feel like they still have some control, and they like the sound of it. Also, most title companies understand the Contract for Deed, and will do the closing for you.

Subject To

This is a much more difficult deal to get. This is the one deal where the homeowner will tell you how to buy instead of the other way around. I never have signed up a Subject-To by suggesting it. The homeowner has ALWAYS told me "just take the house – I'll sign it over to you".

It's honestly sad to see people so desperate, but the sense of relief you see in their eyes when you say "okay" is phenomenal. Some people think that real estate investors are sharks, but I've never hugged a shark after they've had their way with me. I have, however, received a hug or a hearty handshake almost every time I've taken a house over subject-to. People are in such a bind that having someone help them out really does wonders for them.

A subject-to is pretty basic on the surface. A homeowner in financial trouble signs a deed to his or her house over to you. The loan stays in their name, and you make the payments. Under the hood, though, there are a number of things you need to do to make sure you're protected. Putting the property in a land trust, signing the deed to the land trust, then naming your company as the beneficiary is just one of the things you need to do to protect yourself. Before you do this type of deal, make sure you have the right education and paperwork.

This is by far my favorite way to sign up houses. But it's not for beginners. I recommend this after you've been investing for a year or two. Not because of the legal issues with this, but because I truly believe that you're very obligated to follow through on this deal. If it goes sour, you're stuck. Maybe not legally, but morally and ethically. You have to make the payments no matter what.

Owner Carry

Yet another great way to buy. However there's one drawback – the owner almost always wants a down payment. If you've been investing for awhile and have the money that's great, but if you're just starting out and you don't it's probably not for you.

This one is pretty self-explanatory. You buy the house and the owner carries a mortgage. Generally this is a property that has no existing mortgage, so the owner is allowed to write you a mortgage without worrying about the due on sale clause.

Again, this is a great way to buy a property as the mortgage doesn't show up on your credit. But you need to have the cash for the down payment.

Wraparound Mortgage

This is basically an Owner-Carry, but there is an existing mortgage on the property. The owner "wraps" a new mortgage around that and sells the house to you with the new mortgage. The only drawback of this is you have to make sure to write your paperwork so that the due on sale clause isn't triggered. You can do this similar to the Subject-to, by putting it into a Land Trust.

Traditional Purchase

Please, Please, PLEASE don't buy houses retail unless it's a really great, smokin' hot deal! Please?

Here's how I like to buy traditionally. Buy a wreck of a house from a bank, from HUD, or from a wholesaler. Make sure that the price of the house, plus all the costs fixing it up don't go over 80% of the fixed up value of the house.

Buy the house, fix it up, then refinance it, pull all the money out that you put in buying it and fixing it, then rent it out or do a rent-to-own. When you've refinance and pulled your money out, do it again. A good investor can do four or more houses a year this way. The only fly in the ointment here is that eventually the mortgage companies will cut you off and you won't be able to buy any more. Then you'll have to resort to the above methods. But by then you should have enough cash flow that you can pretty much sit on your butt all day if you'd like.

So to sum up:

As you're just getting started, concentrate on Lease / Options first. Once you've gotten your feet wet and understand what a good deal vs. a bad deal is, move on to Contract for Deed, then finally to Subject-To. Throw in some Owner Carry and Traditional purchases and in ten years you can retire and NEVER have to worry about money again.