Sweat Equity
In an economy like today, a good sized down payment is necessary to get into home ownership, but coming up with an adequate down payment may present a challenge.
But there is another option you can look for to help spread out your down payment over time. It's called "sweat equity".
Sweat equity is basically is trading work for equity, meaning you will do the work needed on the house in exchange for a dollar amount that goes towards the purchase of the house.
And if done correctly, banks will honor sweat equity as a legitimate down payment.
So how would this play out? Let's say that you find a house that you want to lease/option and the house needs some work. Maybe it needs new paint and carpet inside. You could offer to take the house "as-is" and do the work over time in exchange for a certain dollar amount to be taken as your down payment.
If the house requires $4,000 in work (verified through professional estimates), rather than letting the owner of the property fix it before letting you move in, you could offer to take the house "as-is" in exchange for $6,000 off the price of the house and $4,000 of that counting as your down payment.
There are 2 questions that many ask at this point:
1. Why would anyone give me $6,000 off the house when it only needs $4,000 in work?
2. Why can't I have the entire $6,000 count towards my down payment?
To answer the first question, a seller would definitely give you an extra 50% in credit off the price of the house because they don't have to spend $4,000 fixing it up themselves. That alone is reason enough for them to give you extra incentive to take the house "as-is." All you have to do is ask.
As to the question of the down payment... remember, banks always want to see that you put down a legitimate down payment. They will not except credits of any kind to be used as a down payment like rental credits.
In order to get the bank to give you $4,000 as a down payment, you will have to show them the repair estimates from a legitimate company.
Now slowly over time you could pay for someone else to do all the work for you, and if you do, make sure you keep all the invoices that were paid to show the total amount you spent.
Or, if you decide to do the work yourself (most of the cost in repairs is labor) and make it a family project to paint your house, all you need to do is keep the invoices showing the purchase of the supplies and then let them know that you did the work yourself.
Either way, the bank will give you a full $4,000 to be counted toward your down payment as long as you have the following:
- Repair estimates from a reputable company showing $4,000
- Receipts and invoices for all the supplies purchased and/or labor hired to do the work
- A document signed at your lease/option signing showing that the seller was giving you $4,000 as sweat equity in exchange for doing the work yourself.
So let's look at what could potentially happen for you.
You are looking at a house worth $175,000 that needs $5,000 in work (mostly paint and carpet). You have $2,500 to put down and are willing to trade sweat for equity. You offer to take the house "as-is" in exchange for $7,500 off the price of the house.
If the seller agrees, as long as you get a document showing that you are getting $5,000 in sweat equity, when it comes time for the bank to give you a loan, you can show the bank that you have $7,500 as a down payment, as well as getting an additional $2,500 off the price of the house.
In this scenario, you could get into a house with $2,500 down but actually show a $7,500 down payment to the bank. And don't forget about the extra $2,500 credit. So for $2,500, you are getting $10,000 off the price of the house!
And if you get on a down payment assistance program, you can add to your down payment each month and really start to grow your down payment to a size that will make you very attractive to the banks. And all with only $2,500 to start (in this example).
That's called leveraging your money!
I know that was a lot of information. Let us know if you have any questions.
And if you haven't personally spoken to us yet to let us know your specific needs and goals as it relates to your home ownership needs, please do so.
You can either email us or call our office at 678-797-1787. We'd be more than glad to consult with you and answer any questions that you may have.
But there is another option you can look for to help spread out your down payment over time. It's called "sweat equity".
Sweat equity is basically is trading work for equity, meaning you will do the work needed on the house in exchange for a dollar amount that goes towards the purchase of the house.
And if done correctly, banks will honor sweat equity as a legitimate down payment.
So how would this play out? Let's say that you find a house that you want to lease/option and the house needs some work. Maybe it needs new paint and carpet inside. You could offer to take the house "as-is" and do the work over time in exchange for a certain dollar amount to be taken as your down payment.
If the house requires $4,000 in work (verified through professional estimates), rather than letting the owner of the property fix it before letting you move in, you could offer to take the house "as-is" in exchange for $6,000 off the price of the house and $4,000 of that counting as your down payment.
There are 2 questions that many ask at this point:
1. Why would anyone give me $6,000 off the house when it only needs $4,000 in work?
2. Why can't I have the entire $6,000 count towards my down payment?
To answer the first question, a seller would definitely give you an extra 50% in credit off the price of the house because they don't have to spend $4,000 fixing it up themselves. That alone is reason enough for them to give you extra incentive to take the house "as-is." All you have to do is ask.
As to the question of the down payment... remember, banks always want to see that you put down a legitimate down payment. They will not except credits of any kind to be used as a down payment like rental credits.
In order to get the bank to give you $4,000 as a down payment, you will have to show them the repair estimates from a legitimate company.
Now slowly over time you could pay for someone else to do all the work for you, and if you do, make sure you keep all the invoices that were paid to show the total amount you spent.
Or, if you decide to do the work yourself (most of the cost in repairs is labor) and make it a family project to paint your house, all you need to do is keep the invoices showing the purchase of the supplies and then let them know that you did the work yourself.
Either way, the bank will give you a full $4,000 to be counted toward your down payment as long as you have the following:
- Repair estimates from a reputable company showing $4,000
- Receipts and invoices for all the supplies purchased and/or labor hired to do the work
- A document signed at your lease/option signing showing that the seller was giving you $4,000 as sweat equity in exchange for doing the work yourself.
So let's look at what could potentially happen for you.
You are looking at a house worth $175,000 that needs $5,000 in work (mostly paint and carpet). You have $2,500 to put down and are willing to trade sweat for equity. You offer to take the house "as-is" in exchange for $7,500 off the price of the house.
If the seller agrees, as long as you get a document showing that you are getting $5,000 in sweat equity, when it comes time for the bank to give you a loan, you can show the bank that you have $7,500 as a down payment, as well as getting an additional $2,500 off the price of the house.
In this scenario, you could get into a house with $2,500 down but actually show a $7,500 down payment to the bank. And don't forget about the extra $2,500 credit. So for $2,500, you are getting $10,000 off the price of the house!
And if you get on a down payment assistance program, you can add to your down payment each month and really start to grow your down payment to a size that will make you very attractive to the banks. And all with only $2,500 to start (in this example).
That's called leveraging your money!
I know that was a lot of information. Let us know if you have any questions.
And if you haven't personally spoken to us yet to let us know your specific needs and goals as it relates to your home ownership needs, please do so.
You can either email us or call our office at 678-797-1787. We'd be more than glad to consult with you and answer any questions that you may have.
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