Buying a home is a huge, sometimes terrifying investment that so many will make. But what if it didn’t have to be so expensive? Below are 2 cheap ways to buy a house without credit.
Networking + Flipping
This method is the more difficult option of the two, because you have to find a willing investor who trusts you, and you also have to sell the house at the end. But, this method also has the greatest return of (your very small) investment.
Step 1- Network.
Spend time with people who have a higher net worth than you do, and make friends with them. When I say “make friends” I mean you really need to put in an effort to curate a genuine friendship- don’t be a mooch!
Step 2- Find the Perfect House.
My definition of ‘perfect’ and your definition of ‘perfect’ are probably miles apart! Take the following scenario into consideration.
You’re driving through town, up and down the side streets, just looking at the neighborhoods. The current neighborhood is nice, middle class, clean and neat yards, and the houses are lightly decorated to match the season. But then, right in the middle of it all, sits an ugly, abandoned house. The grass is grown up, a window or two is broken, and the porch is looking more like a ramp than anything else. The shutters are looking a bit green, and the house could certainly use some paint. Bingo. Write down the house’s location, and start your research.
Step 3- Do the Research.
- Figure up about what the surrounding homes’ net worth are. In this scenario, we’ll say each surrounding home appraises for roughly $150,000.
- Contact the owner, and see if he or she is willing to sell the home, and ask what the selling price range is. Let’s assume the price is $80,000.
- Locate an up and coming, but also trustworthy contractor. Ask him for an estimate to repair the home. Make sure the estimate includes his labor, as well as the cost of materials. To increase your profit margin, you can take on some of the smaller, more tedious tasks yourself, such as washing the shutters or repainting the house. We’ll say he quoted $20,000 for the repair.
- Now add up the cost of the home to purchase it, the repair costs, plus an additional 10% as a safety net.
Step 4- Pitch your Offer to a High Net Worth Friend.
Tell your friend about the home, and offer her a deal. Say you’ll borrow $110,000. In 2 years, you’ll owe her $110,000 back, plus an additional 15%- for a grand total of $126,500. Make sure you have a contract wrote up, signed by you both, and then officially notarized.
Step 5- Purchase, and Begin Work on the Home.
As soon as you purchase the house for $80,000 (you did try to negotiate, but the owner wasn’t having any of that), you and your contractor friend need to hit the ground running. This is why you hired an ‘up and coming’ contractor, rather than an established one. You need a person who is willing to commit to the project. You’ve given him half of his pay up front, and he’ll receive the other half once the home is complete. Of course, this is in writing in an agreement, and also officially notarized. As you dig into the home, the inevitable pops up, and you have unexpected repairs. One of the floors needs replaced, but luckily for you, you tacked an additional 10% to your borrowing sum. You cover the $5,000 floor repairs.
Step 6- Finish, and Resell.
After 8 months, the home is complete, and you begin searching for potential buyers. You use Craigslist, Trulia, Realtor, Zillow, and Facebook, to advertise very cheaply. At 16 months, you find the perfect buyer, and the home sells for $145,000. You already had $5000 left over from the original loan, so you now have $150,000. Your contractor has already been paid in full. Now it’s time to pay your investor friend. She you pay her the agreed $126,000. Your investor friend is thrilled to be paid back early and in full, your contractor is very thankful for the steady work you provided him, and you now have $24,000 left over- which is your profit for organizing this deal.
Step 7- Repeat.
Should you ever want to repeat this deal, you can do so, but now with a smaller loan, and perhaps a better interest rate, which means a greater profit margin for you.
(Almost) Foreclosed Homes
This option doesn’t require so much networking, and it lets you keep the home. However, your ability to make a profit significantly drops, and you need a little bit of money saved up. Here is how you do it:
Step 1- Research.
Check your county clerk’s office for homes that are about to be foreclosed. Make a list of the addresses, the owners, owner contact info, and then if you can, drive past the home to see if it’s something you’re interested in.
Step 2- Cold Call.
With that list of distressed owners and their contact information, start cold calling. Be polite, and humble. Ask the homeowners if they would be willing to sell the home to you as an ‘assumption’, meaning that you’ll take ownership of the home, and take the risk of foreclosure off the table. If the home forecloses on them, that will severely hurt their credit, and oftentimes, that information can be published publicly, which could be embarrassing for them. If they are willing to let you take the house (which oftentimes, they’re thrilled to), you need to now contact their lender.
Step 3- Lender Contact.
Call the lender, and ask to do a loan assumption without qualification. This means that the lender will not check your credit score, but will instead require that you have (usually) 3-5 payments worth of money in your bank account.
Step 4- Write an Agreement.
Create an agreement to purchase the almost foreclosed house with an addendum for a loan assumption. The distressed owners will need to sign this, and you’ll need to take it to the bank where the home was being foreclosed, and have it approved by the lender. Once approved, submit the contract to a title insurance company. Typically, that takes 7-14 days to process. Once approved, you may pay a small (or no) fee to receive the home’s title insurance and closing costs. The company should then assist you in setting up a closing appointment.
Step 5- Close on the House.
You may now close on the house in front of a notary. The sellers will sign the home over to you, and the bank transfers the home’s deed into your name. You’ll receive your new title and keys here. You now own the home and can begin living in it, or you can bring in tenants so that they pay the mortgage for you. The previous owners are now off the hook for foreclosure, and have a clean credit history so that they may rent or purchase with less issue.
- So what are your thoughts on these two cheap ways to buy a house without credit?
- What advice would you have for people who want to begin real estate investing, who don’t have credit or savings built up yet?
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