One of the consistently trending online searches is how to get into real estate investing with no money and poor credit. A great number of sites and videos are dedicated to this topic. What they peddle most is an encouragement and “can-do attitude” that has little to do with reality. It makes me wonder if those so-called experts have even a slight understanding of how the real estate investing or lending industries work. So if you want to be told that having poor credit and no dime to your name makes you a great candidate for real estate investing, stop reading right now. Find an alternative source of information that would cuddle you into wasting your time and energy with false promises. My goal is different and this article is for those who both can handle the truth and are prepared to work on the long-term plan.
First, let me start by assuring you that you don’t need to have perfect credit and wazoo of money to become a successful real estate investor. Private lenders like us make a living by providing their borrowers with a source of financing that is dramatically different from the type of financing available from conventional lenders. For example, here at New Funding we do not verify income and are not credit score driven. We underwrite holistically looking at the pros and cons of working with each borrower and the pluses and minuses of each transaction. Simply put, the stronger you are as a borrower and the more profitable your flip is, the more likely are to be approved for financing.
“Bad Credit History” – What does it mean?
Credit history is one of the components that go into the evaluation of your strength as a borrower. If you are a stickler for timely payments, chances are you will continue to pay your obligations on time. Obviously, seeing the history of timely payments is an encouraging sign for any future creditor. But what to do with a borrower whose credit history is …e-e-h-h… bad?
First, let’s admit that “a bad credit history” is a loose term that is open to interpretation. Many conventional lenders won’t lend to real estate investors with credit scores below the 660, 680, and even 700 marks. For all practical purposes, those who don’t meet their minimum credit score requirements are effectively deemed to have a “bad” credit history.
Things are much different in the private lending industry. At New Funding Resources, our definition of bad credit history includes current lates on the primary residence mortgage payments, current lates on the investment property lates, recent repossessions, and or current and recent bankruptcies. It’s based purely on common sense: it’s not the right time to borrow more when you are already struggling with paying existing obligations.
Luckily, we have few applicants with credit histories quite that bad. The majority of not-so-stellar credit histories are results of occasional 30-day lates in the past, having too many credit lines open, or borrowing close to the limits. Such dings on the credit is an obstacle that a private lender can potentially help you overcome – especially if you have other strengths.
“No Money” Investing… and Why It’s Problematic for Borrowers and Lenders
Having a borrower invest some funds of her own is a strong preference and often an underwriting requirement for many hard money lenders. Why? Because it’s a sign of your financial savviness and discipline. In addition, your willingness to invest some of your funds in your rehab project indicates your faith and commitment to the transaction. Private lenders provide you with the majority of funds to buy and renovate a property but the borrower’s ability to put her own funds on the line helps them manage their risk.
Having money to invest helps overcome weaknesses such as subpar credit history. Alternatively, having no capital of your own can prevent you from becoming a real estate investor even if your credit score is sky-high. Combine having no money with a poor credit history and you are really in a tough spot. That is not to say that you cannot flip houses with poor credit and no money. You can but probaby not right now. What it means that you have some groundwork to do before you position yourself for success. Here are some actionable suggestions on how to do it.
Four options to prepare for house flipping with no money and bad credit
Don’t let anyone take advantage of you.
Many potential investors are so eager to get into house flipping, they are willing to follow anyone promising to lend them money. Often such promises hinge on collecting a hefty fee or attending an expensive seminar. Once paid, a guru will reveal a secret to flipping homes with no money and bad credit. Bring in the drums! Many such “secrets” are simply a list of private lenders who might consider working with aspiring investors. And since many seminars peddle the notion that because private lenders use properties as collateral (aka asset-based) they will lend money just to anyone. “Hey, if you don’t pay the loan back, a hard money lender would just take back your property,” their reasoning goes.
Truth to be told, no reputable hard money lender builds its business on “taking back properties.” Foreclosure is a costly and time-consuming process. Any lender’s preference is to avoid it. That is not to say that if you search far and wide, you would not be able to find a company or an individual that promises to lend you what you need. In my experience, these offers either come from inexperienced lenders, have nefarious reasons behind them, or would be withdrawn once a steep application fee is collected. You can read more about possible hard money scams in our blog.
Another expense that you should avoid is paying for real estate seminars. The so-called real estate gurus will charge you $1,000, $3,000, and often $10,000 for the information you can easily obtain for free. Use this money instead to pay off your debt and build some savings toward your next flip. This brings me to my next point…
Concentrate on paying your debts and fixing your credit.
Being a real estate investor is all about having access to financial leverage and minimizing your costs. This is exactly why flipping houses with bad credit is a challenge. As we’ve discussed above, creditors (including conventional and private lenders) prefer to work with borrowers who have a track record of paying their debts as agreed. In addition, the better your credit history the better the rate you can negotiate. Over the lifetime, it would save you a considerable amount of money in interest. So improving your credit history should be on the very top of your to-do list. One way to expedite the process is to hire a reputable credit repair firm. A number of our borrowers used a credit repair firm called Lexington Law and had a decent experience with them.
Get some experience and exposure.
While I advise against paying for any seminars, there are plenty of free events where you can learn the real estate investing ropes. They are typically sponsored by real estate agents, real estate attorneys, and lenders. A good free seminar focused on your local market might offer more valuable and actionable information than a generic (and overpriced) show put on by a real estate guru. Better yet, such free local events offer plenty of opportunities to meet other local investors and real estate experts. Not only you can learn from them but also build real estate partnerships down the road.
Much of your success as a real estate investor hinges on your ability to find homes to flip. To make a profit, you need to be able to negotiate a price that is well below its fair market value. What if you have an innate ability (or a special way) to find such homes? You can be a part of flipping houses with no money of your own required. How? By wholesaling the property to a qualified buyer.
A real estate wholesaler is a person (or a company) that finds a home and puts it under contract with a certain sales price. Before the closing date, a wholesaler assigns the contract to another buyer at a higher purchase price. The difference between the initial purchase price and the purchase price that the new buyer is willing to pay is a wholesaler’s profit. Wholesalers in the DMV area typically make between $3,000 to $20,000 per contract assignment. They do not contribute any of their own funds and their credit history is utterly irrelevant for the transaction.
Responsibly raise capital.
In addition to improving your credit and increasing your level of savings, you might want to start thinking about responsibly raising capital. The best way to do it is to approach your family, friends, and business associates. You don’t need to raise much – just enough to satisfy the borrower’s contribution requirements of a lender you work with. A great thing about working with a private lender is that your funds don’t need to be “seasoned.” “Seasoning” means that they need to be on your account for some minimum period of time. Typically, this period is ninety days or more. The reason behind it that conventional lenders want to make sure that the funds are actually yours and have not been transferred to your account from someone else at the last moment.
In contrast, if you are working with a private lender, you can raise or borrow funds from any source. You can tap a home equity line of credit on your primary residence, form informal partnerships with friends or simply borrow money from your grandma. As long as you don’t secure this debt against the property you are about to purchase, you can use any source of funds to make a required contribution. Flipping houses with no money is not impossible if you are willing to think creatively.
Exception: One sure way to flip houses with no money
Though flipping houses with bad credit and no money is typically a challenge, every rule has an exception. One sure way to avoid any contribution requirements is to already own a property. Let me give you an example. Occasionally, we receive phone calls from prospective borrowers who inherit a distressed property from an elderly relative. The home is in a good area but is hopelessly outdated. A newly minted heir knows that if renovated it would fetch substantially more than if sold as-is. However, he or she is lacking funds to pay for such renovation. Do they need to contribute their own funds to the transaction? Absolutely not! Chances are that the as-is value of the property and its ARV are substantially larger than the amount they are about to borrow. And that’s exactly what makes any lender feel warm and fuzzy.
Having no money and bad credit might be irrelevant if you are involved in a non-arm length transaction. A non-arm length transaction is a transaction between relatives, close friends, or business associates. In other words, you are getting a special deal. The only reason you are getting it is because of the special relationship that you had with the seller prior to the transaction.
Flipping homes with poor credit and no money is a challenge. Poor credit will make borrowing more expensive. The lack of funds will make you make you less efficient and more likely to default. Unless you have an incredible non-arm length investment opportunity on your hands, concentrate on laying a strong foundation for your future success. There is no need to jump head-on into the current you might not be able to navigate successfully.