Can You Buy With Zero Down?

Zero down homes are something of a mystery to most people, even most Real Estate Agents.  So you are probably asking, "Are they real?".

The answer is YES.  Homes can be bought with zero down several ways.  The easiest is a VA loan.  VA loans are available to just about anyone who ever served in the US military and was honorably discharged.  Here in California there is an obscure little program called Cal-Vet that can help too.

These days, less than 2.5% of Americans are serving in the US military.  So how does 97.5% of the country get a home with zero down?

There are a couple of ways, one is the Homepath program.  Zero down homes in the Homepath program are rare and will require some digging and patience on your part.

Another option is the way all property used to be sold, owner or seller financing.  The seller of the house gives you a loan to cover the down payment.  These are tougher to do and require some legwork by your Real Estate Agent and loan broker.

Now that home values are starting to creep back up, you have a chance to find a home where the owner might just have enough equity to "carry paper" and get you into that house with little or no money down.

If you aren't sure, always make the offer, the only think that can happen is they say "no", or they say "yes".

Interest Rates Fall A Bit But.....

This past week interest rates dropped a little bit. Also several banks have changed the rules on 10% down loans. So the big question I heard is "Do I buy now or wait?"

I have been saying for over two years "Buy Now". Why? In simple terms straight line 3% inflation tells us that homes are still slightly underpriced in many areas. Across the country with 20% down you can buy a home and rent it for more than the mortgage payment.

If you are thinking of selling and moving, now is a great time so you can lock in lower tax rates. If you wait for your house to sell for a higher price, You will be buying at a higher price and locking in higher taxes for as long as you live in your new house. Higher taxes are never good.

Looking at the buying situation you see a few things. One aspect is that most people can't save enough money to buy a home. Our National practice of "keeping up with the Joneses" has made it difficult to save. This is creating an opportunity for those you have the money and credit to grab some real estate bargains.

So how can I keep saying this for two years straight? Simply put the prices still haven't caught up and even though two years ago was a better time to buy, this is still a great time to buy real estate. Am I biased because I am a real estate agent? No, I am also buying myself. There are just too many deals for me to grab so I'm trying to help as many of my friends as I can.

Even if you can't afford to buy investment properties in Southern California, I have programs available to pick up turnkey investment properties with 20% down and positive cash flow at the close of escrow across the country. These properties have already been cleaned up, rented out and property management placed. We are trying to make it as easy as buying stock. Just like people want Coca-Cola they want a clean safe house to live in and as an investor you can provide that.

If you want to buy or sell in Southern California give me a call and I'll be glad to help or find someone in your area who can. If you want to invest and have positive cash flow today give me a call.

Scott Bourquin

BRE# 01911988

714-594-SELL (7355)

Is Now The Right Time To Buy Your First Home?

#BuyFirstHome

As a Realtor I will tell you that just about any time is the right time to buy your first home.  As an investor, I am happy to collect your rent.  What is most important though is how you buy it.  So is now the right time to buy your first home?

Before you tune out and say any time can't be the right time to buy a first home, let me give a little background.  In 2004 I genuinely believed the California Real Estate Market was about to burst.  I missed the call by two years because the big banks got together and figured out how to make it look like loaning people money that didn't have the income wasn't really that risky.

From 2004-2006 I would have told you that it is very hard to "buy right", and probably wouldn't have sold you anything.  I sold my personal home and my investment properties at a substantial profit.  The reality was none of my properties value went below what I originally paid for them, so I would have been petter off sticking to my original plan and holding the properties.

In that little nugget is the truth.  Buying right is everything.  So how do you know if you are buying right.  First of all, you need to be able to afford the payments.  Even if values drop and you can afford to stay, you will be alright.  The mortgage crisis was fueled by people who over bought, banks that extended loans to people who where already over extended, and then it was accelerated by people who just wanted out of their loans because they could.

If the government said "tough luck, if you can afford it, it is yours" the dip might not have been as bad.  At the same time though, they couldn't let people stay in their homes if they couldn't afford it.  A very small percentage who were able to renegotiate the loans to a much lower value or interest rate were the only real winners.  Everyone else got the shaft because the government wouldn't hold people accountable for buying homes they couldn't afford, nor did they really hold the banks accountable for the loans they should have never made.

So here you are today, pondering the question, "Is now the right time to buy your first home?"

And the answer of course is "Yes, if you buy right".  Buying right isn't just buying a house you can afford, it means buying in a place you want to live.  Buying right means buying in a place where you would be willing to spend the time and energy to make the house your home.

If you can get a deal, then you are even better off.  Normally I favor older homes that need work in good areas.  You might not want to do a lot of work though.  If this is the case, then negotiating with a builder can be tough.  Watch the options and compare prices from other contractors.  Don't let the builder overprice your new home with upgrades.

Don't just listen to me, here is a very nice chart from my friend Michael Wright at United American:

Rent vs. Own Comparison JOE RENTER       DON'T THROW YOUR HARD EARNED $$$ DOWN THE DRAIN Joe Renter vs. Joe OwnerCalculation Assumptions Monthly Rent $2500.00 Estimated Yearly Rent Increase - 3% Estimated Yearly Appreciation-3% Estimated Tax Bracket 20% Where would you want to be in 10 years?   Year Annual Rent Annual Payment Federal Tax Savings Estimated Value Loan Balance Estimated Equity 1 $30,000 $37,377 $6,166 $463,500 $433,033 $30,467 2 $30,900 $37,377 $6,079 $477,405 $424,573 $52,832 3 $31,827 $37,377 $5,989 $491,727 $415,789 $75,938 4 $32,782 $37,377 $5,895 $506,479 $406,670 $99,809 5 $33,765 $37,377 $5,797 $521,673 $397,203 $124,470 6 $34,778 $37,377 $5,696 $537,324 $387,375 $149,948 7 $35,822 $37,377 $5,591 $553,443 $377,172 $176,271 8 $36,896 $37,377 $5,482 $570,047 $366,580 $203,466 9 $38,003 $37,377 $5,369 $587,148 $355,584 $231,564 10 $39,143 $37,377 $5,252 $604,762 $344,168 $260,594 Total $343,916 $373,774 $57,315 $604,762 $344,168 $260,594 Loan Type FHA Reg Sales Price Term $450,000 30 Years Rate APR 3.750% 5.168% Dwn Pmt Closing Costs $15,750 $1,475

Is A 4% Home Loan A Good Deal?

It is amazing how many people think rates will keep dropping.  Personally, I think the printing press economics of the Obama administration are going to catch up with stagflation like we saw in the late 70's and early 80's.  I think that Obama is handing his replacement a bigger economic mess than Carter handed Reagan. 

So is 4% a good deal?  If you are in investor, the question is can you make money with it?  Or can you sit on the property until you can?  If you are a home buyer the real question is, can you afford the payment?  If you can answer yes, then 4% is a good deal.

As a Real Estate investor and agent, anything below 4% is a smoking deal when it comes to financing real estate.  Why?  Inflation has been historically calculated at 3% per year.  Since the loan is fixed at 4%, as the home increases in value, the money is essentially free after just a couple of years.  On a 4% loan, nearly half of the payment is going directly to the principle.  You don't get much of a tax deduction but you get a great savings account in your house.  It might even be tax free or tax deferred.

I bought my home at 4% and refinanced at 3.25% a year later.  I did it because if rates went up to just 4.5% I couldn't get the loan for my house.  Remember the late 70's and early 80's?  If you don't, loan rates jumped from 8% to 14% and peaked right at 18%. 

The trick to surviving in the real estate game is to leave some wiggle room.  When money was really easy to borrow from 2004 to 2006 home prices went up based on greed, not economics.  People bought what they couldn't afford on the assumption they could use their home like an ATM and just keep taking money out to keep up with the bills.  Bad plan.

Think of it this way.  If you have a home with a $1000 monthly payment, over $400 is being used to pay down the loan on a 4% loan.  If you had the same loan at 8%, you would have a $1480 monthly payment that still only paid $400 of your loan that first month.  When prices go up or interest goes up, rents usually follow.  If you get transferred in just two years, and rates climb to 6%, the chances are good you can rent the house out for a nice profit.

At 4%, a $200,000 home only needs to rent for $600 a month to cover your real expenses.  Remember, the other $400 is buying you a house.  Think of it as a forced savings account.  If you can afford it, historically it is much better than a savings account.  If you rent it for $1000 per month meaning you have zero cash flow, you are still growing your equity at $400 per month plus the increase in the home value.  That is free wealth.  After five or ten years if you can rent it for $1200, then they are buying you a home and you are getting $200 a month for letting them do it.

So is 4% a good deal?  That is all up to you and your goals.

Is Now The Right Time To Buy Your First House?

There is always a lot of controversy when the discussion of buy or rent starts.  So lets start with a little perspective.  Only half of all the homes in the US are occupied by their owners.  About 5% are vacation homes, so 45% of the homes are rented.  Who do you ask to get a straight answer?  The guy you are renting from?  Your friends that rent? The neighbors that own?  If you did a poll, it makes sense the renters and landlords would say rent.  

This is where I would say two things, 1. "Be careful who you listen to" and 2. "Follow the money".

The Investors Secret

Investors wouldn't rent the property to you if it didn't make them money.  When you follow the money, you realize that you need to be careful who you listen too.

So Rent or Buy?

The answer is a personal choice like no other, and I want to share something with you about how my decision made a difference in my life.  When I was a kid in the 1970's, I was amazed that my parents didn't buy more houses to rent out and make money.  14% increases in prices annually, and peak interest rates of 18%, it just made sense.  My parents told me I was young and that real estate was a bad investment.  I listened.

At 18 years old I was in the military, and rented a small apartment, and rented out a room so I could live in a slightly nicer place and drive a nicer car.  One of the guys I worked with was driving an old crappy VW beetle.  I was driving a new VW Rabbit Diesel with payments.  Another friend in college bought a two bedroom condo, rented out a room and drove a 70's Maverick.  

In 1989, the real estate itch was getting stronger, so I started taking real estate classes at Century 21.  I learned here that a lot of agents don't own a house.  I figured my parents must be right if agents don't even buy homes.  It seemed odd though, can you imagine a car salesman without a car?  A TV salesman without a TV?  A cell phone salesman without a cell phone? It was looking more and more that my parents might just be right, and that houses were different.

I kept renting until 1998, when I couldn't resist any more and jumped in head first.  Instead of starting with a condo like my friend or a small house, I bought the biggest house I could afford. Even then I was right at the limit to the penny for getting the loan.  When I bought that first home,  my buddy with the VW beetle had just "retired" and pulled up in his new Ferrari to congratulate me.  My buddy that bought the condo also retired.  We were only 28 years old, and I was late to the party.

Better Late Than Never

The guy in the VW, Bob, had a small business on the side painting houses.  He was always saying you have to own a business to succeed.  The painting business gave him connections to buy commercial buildings at good prices that needed work.  It wasn't a full time job and a painting business on the side that let him retire, it was the commercial real estate he bought at good prices.

The guy in the condo, Dan, kept buying units in the same complex.  In 1998 he owned 14, in 2004, he owned all 40 units in the complex and sold the entire place as a high end apartment building.  He flipped the money into a great home for himself and another dozen homes that he used for rentals and income.  

So why did Bob show up to congratulate me?  He wasn't there because I bought my first house, he was there because I bought it right, I bought it like an investor.  There are some things that investors and agents don't want you to know, and I because I knew Bob and Dan I used these "secrets" to get a great deal.  I bought the model home in a new high end tract for 30% less than anyone else in the neighborhood paid.  I had an instant 25% equity after paying all of the fees.   On paper, I had just made more money in one transaction than I had made in any one year.  

So, do I think you should buy your first house now?  Absolutely, and here is one thing that I wish I had known when I was 18.

When you rent, you are buying the landlord a house.  If the landlord had a 30 year loan, and every tenant moved out every two years, he only had to deal with 15 tenants and he owns a house.  Then when he rents it out and he has free money.  Warren Buffet calls this infinite returns.  Someone else bought the investor the house, and he keeps making money forever.   In fact it is better than free because you get business tax deductions if you are an "active investor"*.  Why wouldn't you do this?

If you buy a house, you might have a bigger payment for the first few years, until rents catch up, but here is the part I didn't get early enough.  If you rent a house for $2000 per month, that is $2000 you have to make after taxes.  If you buy a house at 3% interest and pay $2500 per month, $1250 is interest that is tax deductible.  That means half of your payment is reducing your tax bill in many cases.  At the end of the year, they might end up costing you the same amount.

A small part of your payment is for insurance, and the rest is principle.  Principle is like a savings account.  Even if your house doesn't go up in value, about $1000 per month is paying down the loan.  If you stay in your house just 24 months and you sell it for the same price as you paid, even after paying all the fees, you get a check.  

When was the last time your landlord gave you a bigger check than you gave him?  So lets take a simple example, a $200,000 house, that you buy for $200,000.  The 4% interest 30 year loan gives you a payment about $1000 per month including interest and insurance.  When you sell, there is $12,000 equity that you can get as a check.  How is that for a deposit refund?

What if it goes up just 5% per year?  After 12 months it is worth $210,000 and $220,500 after 24 months.  Many homes are available for 0% or 3% down, but lets say you put 10% down.  You put in $20,000 plus $24,000 in payments for a total of $44,000.  Selling the house, you would get back your original $20,000 plus the $20,500 it went up and the $12,000 in principle you put into the house.

Add that up and you are $52,500 on the good side.  Take out the 8% for real estate fees and escrow of $17,600 and you get $34,860.  So you put in $44,000, and you get back $34,860.  Living in a house for two years and it only cost you $9,140.  Or you could have paid $24,000 in rent.  So which one is the better deal?

What If The Price Of The House Drops?

Historically there have been several "flat" periods where house prices remained relatively level and a couple of short periods where home prices dropped.  The key is to do your homework, buy right and make sure you don't buy more than you can afford.  Even if you buy at the top of the market, as long as you can afford the payments, you will make it out the other side just fine.  If you look at the number of homes that sold at a loss during the most recent price drop, it is actually very small.  The media made it look a lot worse than it was.

Buying Smart

In 1998 I bought my first home.  Following the slow path to making money in real estate, I moved into a slightly smaller house 24 months later, buying a VA repo for zero down.  24 months later we did it again, and 24 months later we did it again.  In 2004 I lost a little faith and sold them all thinking the market had peaked.

After the crash in 2006, not one of the houses I used to own fell back to the price I sold them for in 2004.  While the 2006-2007 crash looked bad on paper, for investors who weren't over leveraged it was a windfall.  All of the people that were handing their homes back to the banks still needed a place to live, the rental market grew as the housing market crashed.

While I was out of the rental market for a short while, I was never out of the real estate game completely.  In 2004 I bought some great rural land with a small home that I fixed up and sold in 2006 for a nice profit.  I bought an estate foreclosure in 2006 when the market peaked, and sold it for a nice profit in 2010.  I had to stretch my 24 month plan just 24 more months to pocket a tidy profit.  The people who panicked sold everything, rented and lost big.

So are you ready to buy your first house?  I hope so, and I would like to help you, even if you aren't buying in Orange County Ca where my office is.  Let me know what you want to know.  I am putting together a book that will include the top ten things your real estate agent doesn't want you to know (or doesn't know) about buying your first home.

What else would you like to know to buy your first house?

* Check with your tax advisor about the tax benefits of buying a home, this article is not meant to provide tax advice.