An investor in contract to buy ten steeply discounted homes in a bulk sale recently reached out to us looking for 100% financing – with no down payment.
He wanted us to finance 100% of the purchase price of the properties because he insisted he was getting them for 50% of the actual market value – making our loan-to-value ratio effectively 50%.
We said “no can do” – even if an appraiser was willing to appraise the properties for twice the amount of the purchase price.
This is a reminder that lenders must always use the lesser of the appraised value or the purchase price on the contract for financing and loan-to-value purposes.
So, even if we have a rock solid $500,000 appraisal, if the purchase price on the contract is $250,000 – $250,000 will be the value from the lender’s perspective – no matter what.
Here are a few reasons why:
1. Why Would A Seller Leave Money On The Table?
In a free, open, and liquid market, there is usually no reason for sellers to leave money on the table – unless they’re under extreme duress and need a very fast close. But, if duress and the need for speed were the case, why would a seller wait for the buyer to obtain financing?
So, lenders are very skeptical when they hear that buyers are getting “50% off.” More often than not, “great deals” are much closer approximations to market value than buyers realize.
And – if anyone thinks lenders are too skeptical, wait until they talk to an appraiser. Some appraisers will go to the end of the earth to ensure that their appraisals come in at contract price, as they have been around the block many times and are well aware of how quickly market conditions can change. In a volatile market, 90-day-old comparable sales can be meaningless.
2. Buyers Need Skin In The Game.
Buyers, and especially investors, need skin in the game, e.g. healthy down payments, to ensure loans perform. Lenders discover this every time prices correct, as buyers walk away from loans in droves as soon as their equity diminishes. This was the major cause of the foreclosure crisis in 2008, as I have mentioned many times; it was not increasing payments like the media would have us believe.
The all-time riskiest loan in history is 0% down investor financing – no matter how strong the borrower is otherwise. Such buyers have very little incentive not to walk away from properties when equity dries up. Every lender that was dumb enough to offer 0% down investor financing prior to 2008 (and there were many) saw almost every one of those loans go south as soon as the market corrected.
Gift of Equity Exception
There is one way to effectively get 100% financing without any money out of pocket – and that is with a “Gift of Equity.”
If grandma wants to sell her $500,000 home to her grandson for only $400,000, she can “gift” $100,000 of equity (20% of the purchase price) to her grandson.
Her grandson can then get a loan for $400,000 and not bring in any money at all for a down payment.
