Wholesale is one of the most popular approaches to investing in real estate. It attracts both beginning and experienced investors.
With the market in its current condition, more and more investors are finding that they are faced with hordes of motivated sellers. Unfortunately, all of these potential prospects tend to share one thing in common. They have no heritage! This small dilemma is causing many investors to direct their efforts towards foreclosures owed by banks.
The biggest single advantage associated with REO is the fact that equity can be created instantly either by finding a special deal or by shrewd negotiation. No one tells the bank they owe too much on a property and they can’t lower the price a bit. In theory… any house could sell for as little as a dollar.
In fact, there is only one downside to REO property wholesale. Not assignability. When an investor obtains a property from a bank under contract, it always comes with multi-page exhibits that make the deal non-assignable.
Many of the new wholesalers will view this hurdle as the end of the line when it comes to investing in bank-owned homes, not knowing that there are four ways to maneuver around this bump in the road.
Method #1: Add to contract and then exit the claim
Most banks have no problem adding an additional part to a contract, they just don’t want the ORIGINAL parts removed at any time. So Ivan Investor can get an REO property under contract for $50,000. Ivan calls Louie Landlord, and after going over a few details, they agree on a price of $60,000 between them.
Ivan calls the bank and requests that an addendum be drawn up adding Louie to the contract and title. The Bank agrees and everyone shows up on closing day.
Louie brings TWO certified checks. One for $50,000 for the purchase of the property and another for $10,000 in the name of Iván. All parties then show up for closing and both Ivan and Louie own the home. Louie hands Ivan the check for $10,000 and Ivan signs a quitclaim deed taking away title to that property. Pretty simple, right?
Pros: The advantage of this method is that there is only one set of closing costs. It’s a fairly simple and straightforward method that works for most offers. It works around the 90 day deed restriction that comes with many Fannie/Freddie properties.
Cons: These are the negatives that come with this method. This does NOT work for HUD properties because HUD does not allow any changes to the parts that are in the original offer and the final buyer generally cannot get a mortgage because a mortgage company will not let you have title if they are lending someone else money against home.
Method #2: Simultaneous Double Closure
The simultaneous double close (also known as a simultaneous close or “dry” close) is actually two transactions. An investor is buying from the bank and then instantly reselling it to a third party in a separate transaction. It follows a typical deal flow from A to B to C.
The “twist” that comes with this method is that the wholesale investor never actually puts any money on the line. Funds from the final buyer are used to finance BOTH transactions. This is possible because, as long as both closings occur on the same day, it does not matter which closes first for title company accounting purposes. The second transaction (B-to-C) could take place at 9 am with all the paperwork for that transaction taken care of at that time, while the first transaction (A-to-B) doesn’t close until 2 pm
What really matters is that the deeds are RECORDED in the correct order when filed with the county. It is important at this time to have the A-to-B deed filed first and the B-to-C deed next on file.
Pros: This works well for those who are cash-strapped as long as they have a good title company that will continue to do these types of transactions. It still works even with end-buyers who get conventional financing if the end-buyer gets their financing through the right lender.
Disadvantages: This method is NOT an option if the end-buyer obtains FHA financing. This method also doesn’t work for Fannie/Freddie foreclosures in most cases because these super banks place a deed restriction that prevents you from reselling the property to ANYONE for a full 90 days.
Also, with all double closing deals, there are two sets of transfer taxes, filing fees, and other closing costs that reduce your profits. You can of course include that in the deal by lowering the price of your offer to avoid this little hassle.
The biggest hurdle to closing these transactions is the fact that fewer and fewer title companies are comfortable with the simultaneous “dry” closing in which the wholesale investor contributes no cash to the deal. In fact, they often refuse to close these deals!
Method #3: True Double Closure
The true double closing (also known as a “wet” closing) is the same as the simultaneous closing in which the investor buys the foreclosed property and instantly resells it to the ultimate buyer for a profit. However, the wholesale investor is actually putting up his own cash to finance his part of the deal.
This small difference makes title companies happy, but it doesn’t work so well for beginning investors who don’t have oodles of cash to make deals work.
Then came Flash Financing. There are “transactional financing” lenders that will lend you all the money you need to do these same-day double-closing deals…for one price. Most will never run a credit check or request an appraisal on the property.
The pros and cons of this method are pretty much the same as simultaneous closing, except that on the plus side, more title companies are willing to do business with you if you go this route, and on the downside, you have costs. additions to the form. of Flash Funding fees that consume your earnings.
Method #4 – Selling the LLC
The latter method has been popularized by Steve Cook, who says he stole it from commercial real estate investors who have been using it for years to avoid paying transfer taxes.
The idea is for an investor to submit an offer on behalf of an LLC. If the investor was placing an offer at 1221 Sycamore, he can submit it with “Sycamore Group LLC”. Once the bank accepts the offer, the investor quickly submits their LLC start-up paperwork to the state making sure it matches the real estate contract correctly.
From there, the investor finds their ultimate buyer and they agree that on the day of closing, the ultimate buyer will purchase the entire LLC from the original investor for the amount of the wholesale fee. From there, as the new owner of the LLC, the ultimate buyer is empowered to close on the original transaction and purchase the property.
Pros: The advantage of this method is that it overcomes the additional costs in the form of transfer taxes and/or flash financing fees that come with the two double closing methods, and for those who are concerned about protecting their privacy, their name will never goes in the deal
Cons: The main hurdle for this one is that the final buyer has to pay cash. Banks do not make traditional mortgage loans (either owner-occupiers or investors) in the name of companies. You have to buy it in your personal name to get a mortgage. Other concerns are that if you do this often enough, you may attract the attention of state regulators who are confused as to why you start and sell 5-10 LLCs each month.
Armed with these four solutions, investors across the country can successfully wholesale REO foreclosures. None of these methods require the wholesaler to put their own cash on the line, other than the initial security deposit, and neither require a credit check. One of these methods will work for almost any situation you find yourself in when trading bank-owned homes.