Cross Collateralization – A Zero Down Financing Method

When negotiating a real estate purchase, the most important attribute is determining how much equity the seller has in the property. Equity is the amount the seller owns free and clear above any outstanding loans on the property. It’s the amount the seller walks away from the closing table with.


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Besides money, the other important element in every real estate deal is time. How long it will take the seller to collect the money. The seller wants his money immediately but as an investor, you want control of the property for zero down.

Here are the four typical scenarios you’ll find in most real estate deals:

1. When the seller has a pristine property, they are able to demand full market value and full payment at closing. These are retail deals and never work for savvy investors. You’ll never get into these properties for zero down.

2. The seller isn’t receiving full value offers because there is a problem with the property that most retail buyers don’t want to deal with. These sellers are willing to forgo a small portion of their equity in exchange for full payment at closing. Investors can’t make a zero down deal here either.

3. That same problem with the property makes some sellers willing to ask for full value but take payments over time in the form or seller financing to attract retail buyers. Here you are close to an investment grade property depending if the seller will 100% finance the deal. Usually they want some money at closing and the property is priced at full value. Not the best deal for investors.

4. The deal investors want is a deep discount and not having to put cash on the closing table. This is a property that isn’t bringing in any retail offers. It needs to be rehabbed or has a serious problem needing to be repaired. This is the investment opportunity you are looking for. You want to get in for zero down with 100% seller financing.

Getting In at Zero Down

Part of your offer is cross-collateralizing the property instead of offering a down payment. The biggest issue with zero down financing of a problem property is a fear that the monthly payments will not be made. Cross-collateralization is how you work around the seller’s fear.

You put up a small portion of equity in another property that you own. Let’s say you have an agreed to a sales price of $90,000 to be 100% seller financed. Instead of a down payment, you offer an additional $10,000 of security with the equity you have in another property. If you default on the seller financing, the seller receives $100,000 instead of $90,000.

In this type of arrangement, it’s important to include a clause in the contract revoking the cross-collateralization once the property appreciates in value above the above the cross-collateralized amount. You’ll find sellers willing to 100% finance your deals when you offer them 110% security in the deal.


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