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From: dave@cylixd.UUCP (Dave Kirby)
Newsgroups: net.invest,net.consumers
Subject: "No Money Down" (Other People's Money) Scam
Message-ID: <587@cylixd.UUCP>
Date: Tue, 17-Dec-85 11:42:06 EST
Article-I.D.: cylixd.587
Posted: Tue Dec 17 11:42:06 1985
Date-Received: Sat, 21-Dec-85 06:39:44 EST
Reply-To: dave@cylixd.UUCP (Dave Kirby)
Organization: RCA Cylix Communications , Memphis, TN
Lines: 88
Xref: watmath net.invest:956 net.consumers:3626


> I have a question concerning the various television and newspaper 
>ads ( i.e. "Special Report" at midnight on Ch 7 Albuquerque would be
>a good example ) about investment methods that manipulate mortgages and
>other real-estate vehicles by buying with "other people's money".  
>...
>I and probably many other would like to see this "nothing down" craze laid
>to rest one way or the other. If I am allowed to use it, fine, but otherwise
>I want to know how much of a scam it really is.


In the original posting Mr. Fine asked some questions regarding the
legality of such shenanigans; I cannot comment on those questions. But
I can comment on how advisable it is to enter into one of these schemes.
The Wall Street Journal a few months back had an expose' on such scams.
I will summarise their findings here.

The whole pitch of "Make Money Without Money," "Create Wealth in 6 Easy
Steps," "Buy Real Estate at Below Market with NO MONEY DOWN!" and the
like, sounds irresistible to most people. And it used to work sometimes
in the 70's, when hyperinflation in the real estate market was rampant.
But now the rise in real estate prices has slowed significantly, and
there just aren't the desperate sellers there used to be. These schemes
are by no means a sure thing, and never were.

Not only are they not a sure thing, they are also downright dangerous.
First, you spend megabucks on seminars and tapes and books. Then, if you
have the daring to actually go out and try it, you might luck into a
property you can buy this way. But slowing inflation and poor market
conditions can trap you into a negative cash flow very easily. As one
disgruntled would-be investor said, "The hard part has not been buying
houses for no money down. The toughest thing is keeping them after you
buy." One economist observes, "A few years ago you could count on
inflation to bail you out of your mistakes. But there isn't any margin
for error any more."

Even though such deals are called "No Money Down," this name is very
misleading, because even if you can swing such a deal, the closing costs
frequently eat you alive. Also, finding a buyer desperate enough to
give up all his equity is much more difficult than the seminarists let 
on. If he is that desperate, there is probably something terribly wrong
with the property.

In a typical No-Money-Down deal, the buyer must obtain a 75% mortgage,
then convince the seller to finance the remainder and accept a note
in lieu of a down payment. This is not always so easy to do. First, it
is difficult to find a bank to lend you the money unless you are 
already rich, especially if they know you are financing the down
payment.

But there are other deals and schemes, too, that can get around some of
these difficulties. Typical of these is the "Documented Paper 
Acquisition." Here's how it works. It's simple. You negotiate an option
to purchase an $80,000 mortgage by offering the cash-hungry seller
$48,000. In a separate transaction, you then purchase a $100,000
property free and clear by offering its owner $20,000 cash and the
$80,000 mortgage. Of course, the closing on both the purchase of the
mortgage and the purchase of the house must occur simultaneously - you
also have to arrange that.  Now, using the property as collateral, you
then obtain an $80,000 loan (and we all know how quick and simple that
can be at a bank). Finally, you pay the seller of the mortgage 
$48,000, and pay the seller of the property $20,000. You end up with a 
property and $12,000. Now isn't that easy?

Most real-estate brokers dread the thought of these seminars coming
to town. "We get a flurry of these no-money-down offers every time
one of those guys comes through town. We don't even bother with them.
It's a waste of our time and theirs," is a typical response. Most
realtors have their standard form that says "initial deposit" on one
line and "down payment" on another. If you can't fill in those lines
with something reasonable, they don't want anything to do with you.

In Houston a while back, hundreds of desperate homeowners were swindled
out of their money by some folks who took these seminars. Seems they
bought the house and mortgage from them, and rented the house back to
the sellers. But they refused to make the mortgage payments, so the
lender foreclosed and the seminar people absconded with the rent. One
such crook who got his start in a No-Money-Down scam said he couldn't
find a way to make it work for him legally, so he settled on an illegal
way.

If you want to learn more easy, simple steps like the "discounted
paper acquisition" method above, go ahead and plunk down your money
for one of these seminars. But count me out, please. I feel I will 
stand a better chance at Harrah's in Las Vegas.

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Dave Kirby    ( ...!ihnp4!akgub!cylixd!dave)