Buy house with down payment, no loan, sell instantly

Question

I just read Rich Dad Poor Dad, and I have no idea about mortgages, loans or real estate. The author of the book describes a scenario in which a property is found for a cheap price (auction in this case), then acquired via a down payment and instantly sold to someone else at a higher price (or a little bit later).

In this exchange there is no bank or loan involved. (At least not a loan from a bank in the sense that you get a loan personally)

So how does that work in practice? I cannot imagine that if someone just makes a down payment, that the original owner just instantly gives you the ownership of the house. And if not, how can you sell it?

Answer 1

Wholesaling is basically the act of standing in at an auction and "buying" a home on behalf of a yet-to-be-determined buyer. You put a down payment on the purchase, and then, you go out, find that actual buyer, and basically get them to close the sale - but at a higher price than you bid for it, so you can pocket the difference as profit.

It works because auctions generally only require a down payment as of the actual auction, with a closing at some future date where the property and the balance of the sale price actually change hands.

If it's not clear from reading this, let me emphasize: there is an incredible amount of risk involved in wholesaling real estate:

• If you mis-judge the property value, you may have a hard time finding a buyer that you can actually profit from
• If the property has issues you didn't understand, you may find that it's essentially un-sellable
• If you do correctly judge the value and condition of the home, and you do actually find a buyer, any issues the buyer has (they can't get financing, their spouse runs off with all their cash, their dog ate their homework) become your issues, because it's your name on the sale.

Wholesaling requires an approach based on understanding your market and your housing inventory. If there are a lot of investors in your market who are well connected, there will be a lot of competition and you may struggle. If you're in a market without a lot of investment, you may find properties selling at auction significantly under their value, but generally a market with no investors means the market has no buyers either, so even if you get a home cheaply, there may simply be no one interested in buying it, at any price.

At the end of the day, when you attempt to wholesale a house, you're putting your name on the risk of the deal falling through and being responsible for whatever you bid. On the surface, it may seem like an easy way to profit from real estate without having to come up with the entire amount required to fund an actual purchase, but in reality, you are actually putting yourself on the hook for the entire amount even if a successful deal doesn't actually require you to fund the full price personally. If you go into an auction with $10k in your pocket, but you bid $100k on a house, you need to be ready to be responsible for $100k, even if you only plan on putting your $10k down. In fact, in most settings, you will need to prove that you can fulfill the obligation for the entire $100k amount, even if only $10k of your cash actually changes hands.

Ultimately: wholesaling doesn't significantly change the risks or final outcomes involved in real estate investments, it just gives you a different way to manage the cash flow before and during a deal. Rather than coming up with money before a deal, funding the deal, then selling it and recouping that money, you just go find your buyer before you close, so the money can change hands directly between the seller and the actual buyer. Authors that pitch it as an entry-level way to invest, or an "easy" way to invest, or a good way to start investing, are probably more interested in selling books than in actually making you successful.

Answer 2

As mentioned in the comments, the book "Rich Dad Poor Dad" by Robert Kiyosaki is not undisputed among experts. Its advise should be taken with a grain of salt.

When you want to participate in a real estate auction, you usually have to deliver some proof that you actually have the liquid capital required to pay for the object. Either because you have it in cash, in liquid capital assets (like tradeable stocks or bonds) or because a bank already made you an offer for a high enough loan. This is to avoid the situation that the auction is won by someone who thinks they won't have any problems to get that money quickly, but it turns out they can't. Which is a very awkward situation for everyone involved.

Also, buying real estate in an auction is often a gamble, even if you have the capital you need.

When it is a foreclosure, then you can often not even look inside before the auction. There is a good chance that the property has problems you aren't aware of, which means it isn't actually worth as much as you think it could be. And then there is the problem that depending on jurisdiction, you might not enjoy the same legal protections as you do in a regular real estate purchase. There might be disclosure obligations or seller liabilities which do not apply in auctions. Check your local laws about pitfalls which apply to real estate auctions.

I would only recommend it when you either have insider knowledge about the state of the object or have so much money laying around that it's a gamble you can afford to lose.

Answer 3

This answer is here more to support what others have already said, so I will skip the part where I answer the question and go right to the part they don't tell you about.

Buying a house at auction is a lot harder to pull off than you might think. This is a business for a lot of people, especially since reality TV has convinced people it's just so easy and makes a ton of money. If you think the professional flippers will just let you have a house, you are almost positively wrong. If they do, it's because THEY are passing on it. That is usually a huge red flag.

Yes, I have been to several property auctions. To bid, as others have said, you need to furnish proof you can pay the required fees, usually a cashier's check for $10k will do it. Do you have that kind of liquid capital? If not, back out now. If so, do you have the full liquid requirements to complete the job if you buy a property that needs anything at all, at a glance or speculative? If so, you may be able to pull it off. If not, you will lose on this deal. Do not seek a hard lender if you have never done this. Not only will they smell you coming, but you will almost positively struggle to make the obscene payments on loans of this sort. They are usually short term, fairly high interest loans because they are assuming all the risk with collateral of a trashed property.

But this is not to say it's impossible. If you have a reasonable nest egg and want to get into the business, and you are ok with the concept of a learning curve, you can pick up properties at auction and flip or sell as is within the closing window. You just have to be prepared to take on the work yourself if the plan doesn't go as expected.

See the properties, know the laws, and be ready for a ton of paperwork and waiting. If you happen to buy a property in a historic neighborhood or one with a HOA you may be subject to following their guidelines for fixing or improving the property, even if you're only making the curb appeal rise for a faster sell. If you need permits at all, you will be waiting quite a while. If you are waiting on permits while a hard money lender laughs at your mistake, you will be paying interest every single day the red tape holds you back.

Now, suppose you actually have the money (all of it, not just the 10k) and you just have an interest in this kind of business, or flipping houses. If you are financing the project and you won't go bankrupt if it takes a year to get it all fixed up and sold, then you can probably give it a shot and see what you learn the first couple times out in the field. Expect to take a loss until you really know what to expect. How much demo costs, blueprinting, DIY pitfalls and savings, indicators of major expenses like foundation or serious structural flaws, etc, and then the rise and fall of comps, and regional demand for properties of this kind, location, rentability if you can't sell... it all comes into play and becomes a lot easier to manage the more properties you have to deal with.

Don't assume shows like property wars show you all you need to know. Apart from it being reality TV, they tend to focus on people with at least some experience and capital and don't tend to showcase the person who got a house, tried what you're mentioning or even flipping, and ended up paying a second mortgage on a nice condo for a couple million roaches. They also report profits in the 60 - 300k range! Again, experts. You certainly can make profits like that if you know what you're doing and all things fall into place. But more realistically the first time deal will probably get you only a few thousand over purchase which will be subject to different taxation than most are familiar with. You might make the equivalent of minimum wage for what seemed like a pretty easy prospect.

So, to round it back to Kiyosaki, his advise has been regarded by many as sound and worth stacking your chips against. Then again, by some he is just blowing steam. If you look into his history, he has a rich load of experience in life, but not necessarily as a real estate mogul. So who knows for sure where his wealth of experience in real estate came from, especially such that he would be a sound choice for authoring some 40+ books on the subject. In case you aren't reading the tone, I am basically mocking him. He is a salesman. He saw opportunity, probably researched as much as needed, and then dedicated his life selling an idea instead of proving the idea works. Not quite a pyramid scheme, but as far as I am concerned, the information you are buying from his books or seminars are about as valuable as anything Ponzi came up with.

As I mentioned in the comment, you don't get rich by answering the ad. You get rich by placing the ad.

And to support that notion, would you arm the world with the recipe to take your business down? Or would you sell them just enough to get them thinking without actually telling them where your cash flow comes from? In Kiyosaki's case (not just the ones filed against him) he chose to sell people on a concept that could work in theory, and may even work very well if you start the game with a huge personal worth, well diversified, and in no way threatened by your ventures in real estate. In other words, unless you're already rich, I wouldn't go into this war without a staggering wealth of knowledge, a huge pile of cash I will never really need, and the patience to endure it until it becomes what you want it to be.

Disclaimer - My family has plenty of property. Acquired at opportunity in an era where the game wasn't so well known. They serve as rentals because that is as guaranteed as property gets without crossing the daring risk line. We still go to public auctions but even in the past 12 years or so we are just flat out muscled by the people who do this for a living. We never could get the flip concept down because the math never added up for us. We don't have contractor connections for building. Yeah, maintaining, but there's so much more to know. I'm not saying I'm an expert in real estate, or in selling self help books. But I am saying my family has done a bit of this and landed where we are because the risks are high enough to prevent us from being willing to use our properties as collateral. This has already gone into the TLDR zone so I'll shut up now.

If it sounds too good to be true...

Answer 4

The way this works, i.e. cash financing where no mortgage is involved in the beginning, is that you provide so called private money or hard money. This can essentially consist of your own money, someone else's money; such as friends, family or an investor who lends to you for high interests, usually for a short period of time.

Another way of financing, which is not possible in the case of an auction however, is seller financing where the seller gives you ownership over his property and instead you pay the owner monthly over a fixed duration of time instead of a bank. Seller financing may involve a down payment, it may not. The seller might even lend you the money for the down payment and you take care of the bank financing, perhaps resulting in a scenario where you can buy the house where you would otherwise not afford the down payment and the owner may get a better price instead.

What you're describing here however is wholesaling. A wholesaler may or may not own the property. How this works is that the wholesaler attends the auction, wins the auction, puts down a down payment of perhaps 5-10%, and has then acquired the rights to decide what happens to the property, although he doesn't "own" it yet. A wholesaler may also buy the property using a more traditional way, i.e. straight from the MLS or straight from the seller. That usually involves cash but not necessarily.

This means the wholesaler can win an auction for a property for perhaps $100k, put a down payment which can be his own money or borrowed money, and then the wholesaler can find another buyer who's willing to pay a higher price for the property. The wholesaler and the new buyer decide on a new price, for let's say 110k. The wholesaler then transfers his rights as the auction winner to the new buyer. The wholesaler pockets the difference (don't forget that the 10k profit will be taxed and the transfer may be considered being a separate sale, meaning there are stamp fees associated etc).

If the auction winner doesn't find a buyer during the auction process then the auction winner needs to be able to complete the purchase and sell it after the process is done. Also if the new buyer backs out then you may still be responsible for completing the auction.

This is effectively how it works, but notice that wholesaling is not a protected industry. You should really know what you're doing if you're going to get into it and you will have to make sure that if you're going to attempt to do this that you may have to end up buying the property for a 100% of the auction price if you don't find a new buyer in the process.

I recommend the Bigger Pockets community for topics such as this. It consists of seasoned investors, realtors, and other people interested in all aspects of real estate investing. that includes traditional buy and hold scenarios, flipping, wholesaling, etc. Their forum is free and their free podcast is very good. I'm not associated with them whatsoever just to establish that.

Answer 5

Usually, in any kind of somewhat civilized place, there is no such thing as "instantly", and there are no (legally binding) equity sales without cadastral register and the like. So that simply won't work (unless you are outright criminally fraudulent and sell something that you factually don't own).

Nevertheless, I got my first apartment almost exactly that way, with a little twist, 25 years ago.

At that time, you would go to the district court, show them some cash which should be approximately 10% of what you might reasonably want to bid later, and then you'd go bidding. This no longer works nowadays, you must instead do a cable transfer 4 weeks earlier (and you can only use it for a single auction, not as a "in general" deposit, and getting your money transferred back takes 2 weeks, too), or bring a certified FSCB check no older than 3 days, or a confirmed unlimited bail on your bank account with sufficient money on it (ridiculous, isn't it?).

After the hammer dropped, you leave the cash as a security deposit, and you owe the rest of the money to the court, which you can pay immediately, or at 4% interest rate can delay payment for up to 8 weeks. After said 8 weeks, there's another day at court (don't know the English word, German word is Verteilungstermin) at which it is finally decided who gets what. Usually, just the one person having done the highest bid gets the whole estate that was auctioned, and the first in line of creditors takes all the money, and the rest leaves with a frown because there is no money left after that. But your mileage may vary there.

What happens if you don't pay? Well, court seizes everything you own, and if they aren't happy with what they got, they re-auction the property...

On that second court day, 8 weeks later, you are technically the owner, but you still need to get your name written in the cadastral register in order to be the actual owner who can sell the property. Which, because it is very complicated task for a governmental official, takes around 2-4 weeks, too. Without your name in the register, you need not even ask a notary for an appointment, and sales without notary are null and void.

So, all in all, you need to bridge a gap of roughly 12 weeks for "instant resale". That doesn't work!

However, there is (or used to be, not sure if that's still the case) a shortcut out. This is how I got my apartment back then. There was a guy who tried to pull off the exact thing that you describe, although not to get rich quick but simply because he was kinda stupid. That's what I figure, at least -- I wouldn't know for sure.

Either way, being the only other interested bidder, he bid considerably higher than me, I couldn't be bothered to spend more than I wanted to, so let him have it. Then two days later, it turned out he couldn't pay because he wouldn't get that much of a loan (or at least that's what he told me, might have been a lie, also don't ask me where he got my name from, court must have told him).
So, since I also wanted that apartment, he would generously sell it to me -- for a little more, just to cover court fees and tax, and well, you know.

The first thing was calling the court whether this was legitimate at all since it smelled a lot like fraud, but to my surprise, they said that it was certainly possible for me to step in, if every party, most importantly the main creditor, was happy with the agreement. The creditor was happy, of course, since getting money from me right away was easier than reaching into a naked man's pocket, and that guy was happy, too. Only I wasn't, yet.

My position was that I actually didn't want the apartment that much, but generous as I was I would take it for 10% less than the bid, other guy could pay the difference as a practical learning experience, which he already had anyway by providing the security deposit. So, good news: He wasn't going to lose anything, only he wouldn't get back anything either. Of course, alternatively, he could try and find another more desperate buyer while time is running out on him.
Much to my surprise, he actually agreed to that, so I ended up getting the apartment I had wanted cheaper than before.