How to Buy a House with Little Money in 2020 (with Minimal Risk)

Face it, the vast majority of us don't have enough money for the deposit and closing fees in a property transaction. Yes, even those earning high incomes.

Is it possible to buy a house with little money?

But money or no money, you want a house. It’s the Malaysian dream.

That's why new projects are so attractive. Many of them appear to be “no money down” homes for sale.

Developers often offer discounts that offset the 10% deposit you're required to pay. In fact, there was a time when cash-back rebates from some developers were not uncommon. You could buy a house from such developers and get back as much as 20% of its value in cash.

For example, if the house is sold to you at RM1,000,000 (after a 10% discount), that's RM200,000 in cash-back to you. You just have to buy 5 such houses and you're an instant cash millionaire. Hundreds of people have done this using a method called "loan-compression." Amazing right?

There's just one catch; you’re the one financing this surplus cash. It comes from the loan you take at inflated purchase prices. Prices that do not reflect real market values. Therefore, appreciation in the short and medium-term is usually minimal to zero.

If you're buying-to-let, such properties also have poor rental returns which makes it risky for buyers with poor cash flow.

Sub-sale properties (properties sold in the secondary market) on the other hand usually have prices that are more reflective of real market values. They're easier to evaluate because of the available history in terms of appreciation rate, rental rates, occupancy, demand, maintenance and quality.

What you see is what you get with sub-sale properties.

That brings us to the first big insight if you're buying a house:

You want to get a house that does not come with cash-back rebates, huge discounts and that is ideally in the sub-sale market, where you can make a fairly thorough assessment with real data (not projections).

But private owners are not going to give you cash back rebates and no-money down deals in general.

If you have little capital, buying a house that gives you the best investment return may therefore seem like a pipe dream. Something you would love to do but simply can’t afford to.

What then do you do? How to buy a house with no money down in Malaysia?

What Happens If I Don’t Have a Down Payment for a House? (Answer: Hold On Until You Read This)

Legit ways to buy a house with little-to-no money out of pocket do exist. We’ll discuss some of these ways in a short while. But first, you need to be aware that the down payment is only a portion of the total money you have to raise to buy a house.

Every house purchase comes with closing costs and renovation costs. 

The closing costs include lawyer fees, valuer fees, and government duties amounting to about 5% of the purchase price.

Renovation costs can start from 5% of the purchase price and go all the way up to 100% of the purchase price if you want to splurge on a lavish makeover.

You will therefore have to raise at least 10% of the purchase price for closing and renovation costs. Throw in the deposit into this and your real capital outlay to buy a property is 20% of the purchase price.

If you’re buying a house for RM800,000, you’ll need RM160,000.

You therefore have to be aware of this fact: most people think that buying a house with a 100% mortgage is a “no-money down deal” but it isn’t. You still have to raise money for the closing costs and renovations (or furnishing). Even incentives like the Home Ownership Campaign 2020, doesn’t eliminate all the closing costs.

True no-money down deals are rare.

Therefore, if you find a deal where you don’t have to fork out the down payment, you must still ensure that you have enough money for closing costs and renovationst.

Clear? Let’s move on.

How Can I Get a House with No Money? The 4 Strategies...

As mentioned above, true “no-money-down” deals are rare. But possible.

The strategies below will significantly reduce the money you need to fork out and in extreme cases, you may be able to cover all the closing and renovation costs. Bear in mind that your cost increases with every effort you make to reduce your capital outlay.

#1 Mark-Up Sale

"Highly motivated" owners who’re selling their houses at below-market-value (BMV) may be agreeable to do something called a "mark-up" in the Sales & Purchase Agreement (SPA).

Let me illustrate.

John is selling his house for RM800,000. However, the house has a market value of RM900,000. You agree to buy his house on condition that the price in the SPA is RM889,000. This means, on record you're buying the house for RM889,000 but the real amount you're paying to John is RM800,000.

The bank, thinking that you're buying the house for RM889,000, gives you a 90% mortgage amounting to RM800,000. You therefore don't have to come up with the 10% deposit.

The mark-up sale is quite common. Sometimes, you'll also be able to mark-up high enough to get cash-back that then covers your closing fees (legal fees, stamp duties, and other fees). On the outset, this may seem attractive because you're buying with no money down. However, the legality is suspect and you lose the BMV advantage.

The vendor may also ask you to pay the RPGT on the difference between the SPA price and the actual purchase price.

#2 Lease Option or Rent-to-Own

You can also go for a lease-option which means you get a lease on the house with the option to buy the property in the future.

A variation of this is the rent-to-own scheme where you rent the property first with a portion of the rent going towards a deposit. After the deposit is fully paid, you have the option to buy the house.

#3 Financing From the Seller

You can also negotiate for the seller to finance the deposit. That is, you pay the owner the deposit in installments over a period of time.

This method is risky because many banks would ask the owner to declare that the difference between the loan amount and the purchase price is fully settled before disbursing the loan. Owners will likely not give a false declaration and rightly so. I learned this the hard way in a deal that went completely sideways.

You also increase your repayment amount significantly because of the additional installments on the deposit.

#4 Refinancing Your Current Property

If you already own a property, you could refinance your current property for the deposit and closing fees on the new house. This is probably the safest method relative to the others above. With one catch. Mortgage repayments on your current property will increase and you will also have a new mortgage to pay. Not so good for your cash-flow.

Since we’re talking about no-money down deals, let’s get more audacious…

How to Buy a House with No Money Down AND Bad Credit

If you’re willing to increase your risk exposure this is possible. You’ll have to buy the house under the name of someone else, who is eligible for financing.

This “someone else” could be a spouse, sibling, parent, friend, or a business partner. You’ll need to have a solid agreement in place giving you full control over the house, usually by way of a Power of Attorney (PA).

A PA will give you some legal rights over the property. For example, you can sell the property without requiring a signature from the legal owner.

Convincing someone to put their name on the house will not be easy. They will have little legal rights to the property but bear full liability on the mortgage. In most cases, you’ll have to offer compensation like a share of the rental income or sale profit.

This method is highly risky because you’re not the legal owner and without an air-tight contract protecting your interests, you’re just a glorified tenant in the property.

The Downside to These No-Money Down Strategies

The hard reality, my friend, is this: if you don't have enough money to buy a house, you should not be buying a house.

You’ll not be able to maximise your ROI, you may have to take higher risks, and some options that you've read above may not be legal. These are things you don't want to get entangled in if you have little money. You can't afford it.

Remember this too; the additional 10% or 20% that you finance via the bank is not free money. You’re charged interest on this. If you use the mark-up example above, you’ll be paying nearly RM60,000 in additional interest over 30-years for a 100% loan.

Let me rephrase that. Instead of paying RM80,000 for the down payment, you’ll be paying RM140,000 over 30 years.

So how to buy a house with no money down in Malaysia? My answer may surprise you.

The Best (and Safest) Way to Buy a House If You Have Little Money

Home ownership is a big commitment. Especially if you’re financing it with a mortgage. If you lack financial discipline, mortgages are like credit cards. You could find yourself in hot soup.

More often than not, people who don’t have the money for a deposit, need to build their financial muscle. With enough discipline, most people can learn to save and become financially prudent. These are key skills you must acquire before you think about investing and taking out mortgages.

It will put you on a stable foundation, allowing you to build a solid portfolio over time with minimal risk to yourself. Therefore...

Leverage the 8th Wonder of the World to Buy Your House