Buying from Wholesaler or Making Cash Offer on MLS - Boston

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Buying from Wholesaler or Making Cash Offer on MLS - Boston

Maureen F.
Milton, MA · Member since 2016 · 88 posts · 27 votes

Hi, I'm trying to buy a three-family (or maybe a two-family) in the crazy-hot market of Dorchester or nearby, and need advice! How would I go about buying from a wholesaler? Do they only accept cash offers? How much time to close? Can my broker be involved? Alternatively I might make a cash offer for a property on MLS. If so, how much lower might a cash offer be than a financing-contingent offer, to be attractive to the seller? If the offer was accepted, could the conveyance actually be to my son if he could get financing in time?

Here's the situation. My son has been trying to buy in Boston or nearby (south of) for seven months. He has been beaten out on many properties by higher offers or cash buyers. (Thus far the offers he submitted had a financing contingency with 5% down.) He's had offers accepted on several properties, but they didn't go through due to issues such as discovering major structural issues during the inspection, seller being in bankruptcy, seller's spouse (in divorce process) refusing to sign P&S, etc. The market is such that it seems a cash offer is the way to go. My only reason to buy a house is to convey it to him. If I actually have to pay cash, I will take title, and then he would buy it from me with a mortgage, and preserve his eligibility for mortgages limited to first time homebuyers.

The other issue being if I actually have to pay cash, where to get it? We can probably come up with half from non-retirement accounts. The other half would either need to be from taking a loan on our home (which has no mortgage), however my husband is opposed to this idea because he's risk averse. Or, I could use funds from my IRA, but there would be a big tax hit unless I can replace the funds within 60 days. The third option would be a Hard Money Lender. The IRA idea would work as long as I could convey the house to my son within 60 days. If that timing didn't work out, then go to the HML? My son has been pre-qualified many times by his lender, and would be putting down 20% (with help from a gift from a family member) because his income went up and he's over the income limit for the ONE Mortgage, and doesn't want to pay PMI. I am fully confident of his ability to get financing, unless the lender has a problem with buying from a family member.

I would greatly appreciate your advice ... thoughts .... ideas ??

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Doreen Chaisson
Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
10y

You will pay not only taxes if you don't replace the funds within 60 days, you will also pay an early distribution penalty if you are under age 59 1/2. Additionally, keep in mind you can do only one rollover in any 12-month period per tax payer, regardless of how many IRAs you may have. Some people think they can "daisy chain" rollovers - take money from a second IRA to replace rollover money from the first IRA, then money from a third IRA to replace money from the second IRA, to continually extend the amount of time they have to actually replace the originally distributed funds. This is now illegal. With the additional complication of conveying a piece of property and relying on financing and closing dates and so forth to align, you'd have to time your distribution very carefully.

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  • Damian S.
    Real Estate Broker/Investor · Chicago, IL · Member since 2015 · 106 posts · 22 votes
    10y

    Please at least do not use funds directly in the IRA to purchase a property that is intended for a disqualified person. This situation would automatically result in a prohibited transaction.

    2Reply
  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thanks Damian, I think your concern is with buying a property using funds from a self-directed IRA as an investment in that IRA. I had thought about that option but as you mentioned, I don't think it would work in my situation. What I'm contemplating is to withdraw funds from my ordinary IRA; I won't have to pay taxes if I replace them within 60 days.

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
    10y

    You will pay not only taxes if you don't replace the funds within 60 days, you will also pay an early distribution penalty if you are under age 59 1/2. Additionally, keep in mind you can do only one rollover in any 12-month period per tax payer, regardless of how many IRAs you may have. Some people think they can "daisy chain" rollovers - take money from a second IRA to replace rollover money from the first IRA, then money from a third IRA to replace money from the second IRA, to continually extend the amount of time they have to actually replace the originally distributed funds. This is now illegal. With the additional complication of conveying a piece of property and relying on financing and closing dates and so forth to align, you'd have to time your distribution very carefully.

    3Reply
  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thank you Doreen. And yes, that's why I need a good Plan B, in case my son can't get a mortgage within the 60 days, so I can repay the IRA. I'm thinking Plan B would be to convince my husband to put a lien on our home and get a conventional loan, or go to a Private Money Lender. I'm not sure which would be more difficult.

    0Reply
  • Nuhan Demirkan
    Rental Property Investor · La Plata, MD · Member since 2011 · 216 posts · 117 votes
    10y

    Maureen, please put the brakes on. I would not recommend any of your suggestions/thoughts. First of all if the house had major structural issues you don't want it anyway. You are not looking for a distressed property for fix and flip you want a nice home for your son. A cash purchaser couldn't purchase bankruptcy and divorce houses either. Get your son pre-approved by a lender on his own, I'm assuming you are a licensed agent, you mentioned your broker, find a nice home he wants to live in and write the offer. Because you are not looking for an investment property, you can pay a little more than a cash purchaser if you have to. Look to buy from an equity seller not from a distressed seller. No hard money lenders, no IRA's, no cash purchase by you (you don't have all of it anyway). I think you are too emotionally caught up in this. Take a deep breath and do it right. No reason for risk.

    2Reply
  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thanks Nuhan.  I can't disagree with your assessment of my state of mind!  But still, I want to do it, definitely maybe.  My son has already been pre-qualified.  And I'm not an agent; he has been working with an agent for seven months and the agent has done a great job, shown him many properties, put in many offers.  So if I buy from a wholesaler who won't pay a commission to a buyers agent, I'm sure he will pay his agent something out of his own pocket.  Also he is more than willing to do work himself on a property so that it will end up the way he wants it (although with a full time job and not being a skilled tradesperson, he's limited in what he can do).  He does want it to be a nice home for himself at the end of the day.

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  • Sam Resnick
    Wholesaler · Boston, MA · Member since 2015 · 16 posts · 3 votes
    10y

    Hello Maureen, Yes indeed Greater Boston is a tough real estate market, I have to agree with Nuhan as its best to find an equity seller that a wholesale/foreclosure, many sellers love it when you tell them that you will be moving in the house and taking as loving care of it as they did instead of telling them they are going to tear it down and put up three condos! Great advice get with a bank or a mortgage broker that would be step #1 know what you can afford and become aware of the various kinds of mortgage programs out there

    Good luck!

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  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thanks Sam.  Step #1 is done, and the sellers that we've come across seem interested in getting the best deal from their perspective.  

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  • Andy Meckel
    Investor · Stratham, NH · Member since 2016 · 19 posts · 9 votes
    10y

    Often times people offer "cash offers" and are really just waiving the financing contingency and are still getting financed. the are just very sure the will be financed or will get out of the deal at inspection if feel they don't want it at that time.

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  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Exactly Andy, and that might be what we do -- buy something from the MLS with an all-cash offer and six weeks to close. Such an offer would be much more competitive than a financing contingency. We just need to be sure to have back-up plans in case the 1% chance of not getting the regular mortgage happens.

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  • Ray HurteauPro Member
    Developer · Boston, MA · Member since 2013 · 128 posts · 66 votes
    10y

    @Maureen F.- there is some great advice here about what to do and not to do - the IRA info was definitely great.

    Adding to the other comments, I would not recommend your son attempt anything other than painting if he has no experience with it.  

    What seems like a simple project can quickly get out of hand or you won't get the same polished look compared to someone who does this for a living.  Plus it will take forever if there's a laundry list.  

    I'm semi-skilled and having two jobs last year while trying to fix up my fiance's two family proved to be a major stress.  Yes, we saved thousands on contractors, but at what cost?  

    I only did things like drywall repair/replacement, door repair, new bathroom floors, toilets, bath fans, vanities, some basement work, sidewalk repair, etc.  It added up... paying a little extra for a turnkey property could be the way to go.

    The second bit of advice for sourcing leads would be to drive around the more desirable neighborhoods in Dorchester based on your opinion and target some homes, maybe 25-50.  

    Have him hand write letters explaining his situation about wanting to buy a home, live in it for a long time, keep the house's character but losing out to investors/developers right now.

    My friend did this when he was looking for a home and his response rate (after sending 2-3 letters per house) was over 50%. He was looking in one very specific part of Dorchester, and at the time nobody was in the market to sell, but that's your key to getting out of the MLS mess.

    Dealing with a wholesaler will likely mean quick turnaround, limited inspection (or no inspection), and "cash" offer - aka no financing contingency.  Too many risks.

    Also, call around various banks (the local ones) and see what programs they offer where you can avoid PMI. Someone I met recently said he found a lender who would do 5% down and no PMI and I know someone who got a 15% down loan with no PMI.

    Keep looking on the MLS, but have him try to source off-market leads with a personal, hand-written message. Best of luck in the hunt!

    2Reply
  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thanks Ray -- great stuff!  

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    10y

    @Maureen F., a few points:

    1.  It is entirely likely, in fact extremely likely, that you won't be able to close within 6 weeks.  New government regulations have stretched out a typical residential financed closing to about 60 days.  (do some searches on TRID if you are curious)

    2.  I think you need to slow it way down.  The last time people were this anxious to buy was just before the bubble broke.  

    3.  I love @Ray Hurteau's ideas.  It's certainly worth a shot. 

    4.  As for buying from a wholesaler, you'd have to ask the particular wholesaler for the particulars of the deal.  Brokers are never involved, you need to deal directly with the wholesaler and your real estate attorney.  If you go that route, as an end consumer, I would suggest you have your son execute instead of you, so you don't need two closings.  Some wholesalers won't sell to an end consumer because of the long time line with closings.  But if you find one, there is no reason to insert two closings.  Make sure you give all funds to an attorney to hold in escrow.  

    1Reply
  • Maureen F.
    OP
    Milton, MA · Member since 2016 · 88 posts · 27 votes
    10y

    Thanks Ann, I'm so glad you took the time to address these issues.  

    Re point #2, I agree that the Boston market is approaching the top of a bubble.  The question is not IF it will burst, but when and how much.  But let's say an owner-occupant buys a triple today for $600K for a long-term hold, let's call it five years.  Each month he's out-of-pocket $1K (due to living in one of the units).  He gets favorable financing for first time home buyer (3.5%, 30 years, and just to make it simple let's say it's 100% financing).   And let's say the alternative to buying is renting for $2K/month.  So he's ahead by 1K/month.  At the end of five years the loan balance is $537K, and he's saved 60K versus renting, so he's in for $477K,  20% less than he paid.  So if the market is down 20% he's at breakeven.  What is the likelihood of that being the case, who knows?  If he simply rented, we can be sure that he'll be out of pocket $120K after five years with nothing to show for it.  

    Re point #4, the idea is to try to mitigate risk by buying at a price below the regular MLS market (although it has other risks).

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