The real estate guru, decked out in a white linen suit and perched on a stage at a swank Hawaiian resort, made it all sound so easy.
With crashing ocean waves and swaying palm trees as a backdrop, Dave Del Dotto, self-proclaimed "cash-flow expert/millionaire," preached to his audience about buying property with little or nothing down.
To his right sat eight of his disciples, from bricklayer to barrister, all of whom told of amassing great wealth after buying their master's $297-collection of inspirational tapes and books.
Del Dotto and his flock answered questions spoon-fed by Monte Hall, best known as host of the "Let's Make a Deal" game show popular in the 1960s and '70s. And the whole spectacle could be seen in millions of American homes--again and again--thanks to several 30-minute blocks of cable TV time Del Dotto purchased to pitch his copyrighted "cash flow system."
Del Dotto is one of the last of a vanishing breed: The ranks of the real estate preachers have thinned over the past few years as the double-digit inflation needed to make many of their deals work disappeared. A few of the lecturers have even gone bankrupt, victims of bad real estate deals or mismanagement.
But toned-down "creative financing"--or, as some experts prefer to call it, "alternative financing"--still plays a role in today's real estate market, and it's a particularly valuable tool for people trying to buy their first home.
"Alternative financing still has its place, but it has to be down to earth," says Marc Garrison, a real estate investor and author of "Financially Free."
"If you think you're going to buy a home with no money down, forget it. But if you think you must have a 20% down payment to buy a house, you're wrong there, too."
In fact, some financing techniques that were considered creative when they were first introduced several years ago are now commonplace. At the top of this list is the adjustable-rate mortgage, or ARM.
Adjustable-rate loans first appeared in the 1970s, when interest rates were so high that millions of buyers--particularly first-timers--couldn't qualify for a mortgage. The first ARMs started out with rates far below those charged on fixed-rate loans, thereby reopening the housing market to many buyers.
Today's ARMs still offer low introductory rates. But now they're attractive for a second reason: They're one of the few ways left that a buyer with less than 20% down can get financing from a bank, because lenders have tightened their credit requirements.
Qualifying Fairly Easy
Generally, buyers who can muster a 10% down payment have little trouble getting an adjustable-rate mortgage. Some lenders require as little as 5% down.
Since most ARMs start out with a below-market interest rate--currently about 8%--qualifying for the loan is fairly easy.
If a couple had a 10% down payment and wanted a $100,000 ARM with a starting rate of 8%, they'd have to earn about $36,814 annually and make monthly payments of $734 for principal and interest. If they insisted on a fixed-rate loan at the current 10.5% rate, they'd have to earn nearly $8,000 a year more and pay an extra $180 a month.
The catch, of course, is that ARM rates are periodically changed. Typically, the rate is adjusted monthly, quarterly or at six-month intervals.
Need Growing Incomes
A mere one-percentage point rise on a $100,000 mortgage that started at 8% would add about $70 to a borrower's monthly payment. Future increases would push payments even higher.
Gradual increases aren't a problem for buyers whose incomes are growing as they move up the career ladder. But they can present difficulties--or even trigger foreclosure--if the borrower's earnings don't keep up with the rising mortgage payments.
To protect against the perils of rising rates, experts say borrowers should select an ARM that has caps preventing its interest rate from rising more than two percentage points at any adjustment period and five or six points over the life of the loan.
"You could eventually find yourself in a real 'cash crunch' if those limits are any higher," says San Francisco financial planner John Cahill.
Although an ARM makes it easier for a buyer to obtain a loan, sometimes the amount the bank is willing to lend isn't enough to close the deal. When this happens, buyers often turn to the seller for help in financing their purchase.
Seller financing usually involves the use of a second mortgage, sometimes called a seller "take-back" or "carry-back." A seller who takes back a second mortgage essentially acts as a lender, financing part of the transaction.
One Westside couple, for example, recently purchased a $145,000 condominium with a $15,000 down payment. Since they could only qualify for a $110,000 loan from an institutional lender, the seller agreed to take back a $20,000 note for five years.