Is ‘No Money Down’ still possible?

One of the most common questions I’m asked of late is ‘is it still possible to buy property with no money down?’

So I’d like to explain what No Money Down really is, how it came about and whether it’s still possible.

‘No Money Down’ was a concept coined by US property investor Robert Allen way back in the 90s. It was nothing new in the US but Robert was amongst a new breed of investors putting their thoughts in writing or onto tapes and selling the idea – sound familiar!

Robert’s strategies involved buying properties using a variety of methods to get your money back out of a property investment as soon as possible or not even putting money in in the first place. These strategies included many of the ones investors have seen and used for the past few years and others that are only now becoming more popular. These include investor partners, instant refinancing, bridging, using loans and credit cards, cash backs, vendor gifted deposits, sub sales, seller financing, options and lease options to name just a few.

It’s important at this point to note however that there are marked differences in property investment lending and legislation in the US and that many strategies are far more acceptable there than elsewhere.

However, suitably behind the US market the No Money Down concepts only really started to take off in the UK in the early 2000s as the buy to let market took off.

The catalyst for this was a combination of a worldwide property boom and mortgage backed securities leading to a massive influx of cash into the worldwide markets. Banks all over the world were falling over themselves to lend on property and new lenders sprouted up all over the place. Loan to values increased, rates dropped and investors piled into property. The result was lax lending and regulation however.

The typical No Money Down strategy used here in the UK was some form of instant refinancing and or vendor gifted deposit, as follows:-

Instant Refinancing

Property value £100,000

Agreed purchase price £75,000

Obtain a mortgage offer from a lender of 85% based upon the £100,000 valuation – the lender was informed this was a remortgage which technically it was so there was no harm in obtaining the valuation and offer based upon the true valuation of the property.

Bridging or cash was used to purchase the property at £75,000 and the lender would instantly release the £85,000 mortgage. The investor paid back the cash or bridging and pocketed £10,000 before costs.

As the boom heightened it was not uncommon for investors to simply draw down on the £85,000 without actually purchasing the property for £75,000 as it was all a same day transaction. Not strictly legitimate but lenders seemed content to turn a blind eye at the time.

The second method was with some form of vendor gift or cash back arrangement.

Using the same figures a purchase mortgage would be obtained based upon a theoretical purchase price of £100,000. The seller (vendor) would then provide a gifted deposit of £15,000 and cash back of £10,000 or a cash back of the full £25,000.

Again somewhat questionable practices but lenders seemed content to let it happen as did the other parties involved in the transaction.

Then along came the credit crunch.

As a result of this regulations tightened hugely from all quarters, legal, FSA, lenders criteria and terms and conditions. Added to which all the parties who were now losing money started to look for those who they could blame. 3 years after the credit crunch solicitors, valuers, mortgage brokers and investors are still being investigated, sued and even imprisoned as a result of transactions done back then.

The primary result of all of this was a clearer mandate from lenders that the actual purchase price must be declared and a failure to do so amounts to non-disclosure.

There are numerous No Money Down schemes in operation including but not limited to the following:-

• Vendor cash back
• Vendor gift
• Equity allowance
• Sub sale
• Option agreement used to create the equivalent of a sub sale without an actual completion
• Using a bridge for the deposit
• Build up of equity (rent credits, etc)

Not one of these strategies does not involve some form of non-disclosure of the actual purchase price. Let me make this quite clear non-disclosure is fraud. Or more accurately ‘obtaining a pecuniary advantage by deception’ in legal circles. In English this means that you deceptively applied for a mortgage to obtain a financial advantage.

The fraud is committed by the mortgage applicant. That’s you!

Beware of anyone who tells you that the scheme they use has been declared to the lender. This is a common phrase I hear which is often a misnomer.

Usually you have been informed by the scheme provider and/or their legal team that it’s been declared to the lender. What they actually mean is that their system is structured such that they believe that they do not need to declare certain points to the lender. The usual way of doing this is using several solicitors in the chain so that the one that the solicitor thinks is transacting the purchase is unaware of the NMD structure and can legitimately tell the lender there is no cash back/gift/sub sale.

However this is only half of the story.

The question I tell people to ask is this ‘if I call the lender myself and tell them how I am purchasing this property will they still agree to lend’.

I think you will find the answer most enlightening!

Do not be fooled into thinking that the other parties would not do such strategies if it was fraud. While a complicit valuer, broker or solicitor may well face prosecution be under no illusion that the fraud is committed by you the mortgage applicant.

Ignorance is not a legal defence either; you cannot claim that you did not know.

If you know that you are paying a net price of £75,000 for a property and that the broker/solicitor is informing the lender that you are paying £100,000 for it then you have committed a fraud.

You cannot claim that it was an electronic application and that you were unaware. Brokers should provide you with some form of summary of your mortgage whether that be a Key Facts Illustration, a letter or even a copy of the application form itself (these can be provided even on electronic application systems). So there is simply no excuse that you could not have known.

To my knowledge there is one private lender who is prepared to lend against value for buy to let purposes. I will not name them but suffice to say I have done a lot of research upon their offering and at best I think it is highly risky strategy that is extremely costly and will not suit 95% of investors and at worst it may well be some form of Ponzi scheme or scam.

Aside from this NONE of the buy to let lenders will allow a mortgage against the market value of the property. In all cases they will lend against the LOWER of purchase price or valuation.

Again if you do not declare your actual purchase price to the lender then it is non-disclosure and that is fraud.

So if you are using any of the following lenders to transact a No Money Down deal then I can assure you that you are committing fraud:-

• BM Solutions
• The Mortgage Works
• Northern Rock
• Aldermore
• Precise
• Godiva
• NatWest
• Post Office
• Woolwich
• Platform
• Paragon

This list is not exclusive; these are simply the most common buy to let lenders.

I have to say as a broker it is very tough when a client says ‘with you I have to put in 20k or I can go and use Joe Bloggs NMD scheme and get cash back?’

Err yep that’s right!

But ultimately that’s the client’s decision; I can only advise then of the dangers of doing so.

I now find it a great filter frankly as you shouldn’t get into property if you don’t have cash. And these people just don’t take the business and their future seriously – how can they when they’re willing to be part of a fraudulent application?

So what can you do?   Part 2 of the article will be published next month.  Subscribe now to receive notification www.justdoproperty.co.uk

Article Provided by Lisa Orme

Mortgage Broker and Property Investor

If you would like to ask Lisa a question email lisa.orme@justdoproperty.co.uk

The above is for information purposes only; rates can change and may not be applicable at the time of publication.

Please consult appropriate professionals and contact us for up to date quotations.

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Categories: Finance, Property, Property Mentors  |  Tags: Buy To Let, buying properties, commercial mortgages, credit crunch, eBook, Financial Services Authority, FSA, investment, investor, investors, Lease, Lease Options, lenders, NMD, No Money Down, Options, paragon, Property, property investment, property investor, Purchase, Rent  |  2 Comments »