No Money Down Property Deals

publication date: Sep 23, 2008
author/source: Kate Faulkner

No Money Down Property Deals!

Well they sound pretty fab when someone is walking you through the numbers and to be fair if it's a property that is sellable within six weeks and the property price increases by 5% plus within the year, they can work.

However..........the truth is they are rarely 'no money' down in reality and are a big risk. If you are considering these deals, it is essential you assess the potential gain against the potential losses that can occur from:-

1.  Downturns withing the property market.
2.  Interest rates start to hike up soon after you've bought.
3.  Demand for tenants isn't there so you are left funding the mortgage yourself.
4.  The property is repossessed because rental income doesn't cover your costs.

To work out if they are right for you, firstly it's important to understand how they work, then to know what they 'don't' tell you and then how to evaluate what else you could get in return for investing your money elsewhere and finally, if it does go wrong, how much could you end up paying out?

Here's how they work
Basically property investment companies offer the following:-
Property's value (according to the investment company)               £150,000
Discount off the property's cost secured by the investment
company @ 15%                                                                      £  22,500
You buy the property at the difference:                                       £127,500

All seems pretty easy really. However, you will incur some, if not all of the following costs:-

Legal costs for buying: £  900
Mortgage Fees            £1,000
Survey/Snagging         £  400
Stamp Duty                £1,500 (temporarily 0% until 2009)

Total:                                £3,800

You are also likely to have to pay a 'finders fee' to the investment company which should be around 2% - so in this case a further £3,000. Total costs for you are therefore:-

Cost of the property:       £127,500
Costs to purchase:          £    6,800

Total Costs:                          £134,300

If you chose to keep hold of the property, the likely annual running costs (including an interest only mortgage at 5.5% on 85% of £150,000) would cost you around £10,500 per year (and this doesn't take into account the average rental void of three weeks).

You would need a minimum of around £900 to cover all your costs, before you'd even earn any money on the property. It is vital that you check the ikely rental income of the property, independently with local letting agents - and know how many other properties are likely to be coming on the market at the same time. If the rate settles at £800 due to competition and a lull in demand, then you will be losing money each month!

If you look to sell straight away - check how many others might be doing the same, as a group of houses/flats coming on the market at the same time is a sure fired way of driving the price down, unless the demand for your particular type of property is high.

Total Selling Costs:                          £3,243 (including estate agent's fees)
Costs incurred to completion date:     £ 2,000 (including estimated cost of mortgage for 3
                                                                  months, bills, some maintenance)
Final Costs Figure:                                    £139,543

Assume that you sell at the same price, in theory, you would make (gross) £10,457, off this you would need to take off the costs incurred and the tax that you would have to pay.

So, still probably looks like a good deal, but don't forget a fall in the price of the property by approx 3% would halve this profit, and if you didn't sell for a further 3 months, your profit would fall again.

As a result, never do a no money down deal unless you check the figures with an Independent Financial Advisor who is NOT associated with the investment/sourcing company offering you the deal.

Need help with a property problem? Have a question? Why not call Designs on Property on 07585 897128 or Contact Us via email.
Kate's Consumer Portal
FREE Buy to Let eBooks

Download a copy of our
Buy to Let Show eBooks
for FREEsimply click on
the image below

Buy to Let Show - download our Buy to Let eBook for FREE