REO/Foreclosure

[Tejuan Nickelson]

I want to put a offer on a home I've found. Should I tell the listing agent I'm an investor? And how do I get a proof of funds letter. I don't have that type of cash on hand yet

[Anita Fofie]

I would agree that you should avoid REOs as a beginner UNLESS you have:

1) an EXIT strategy. Do you want to wholesale this? Fix and flip it? Buy and hold? If you don't have the cash yourself to close and hold then you need to have a cash buyer to wholesale it to, but even then you'd need at least the closing costs because you can't assign these contracts. 

2) Proof of funds. Technically, you should really have the funds to be able to provide the bank the POF letter. HOWEVER, if you have an exit strategy to wholesale it, then there are hard money lenders who will provide you a POF for a nominal fee and you aren't obligated to actually take out a loan with them. A simple google search will point you towards these companies. You can also use a copy of a bank statement of someone you knows you and trusts you who has sufficient funds in their account (with their permission of course), this is called a verification of deposit and in most cases will suffice in place of a proof of funds letter. Just clarify that this person is your money partner if they question it.

3) Earnest money. You can make your offer and get a "dummy" proof of funds letter to accompany it. But once your offer gets accepted you have to back it up with cold hard earnest money. For entities like Fannie Mae and Freddie Mac if you are submitting a cash offer you'll need to pony up 10% of your purchase price within 48 hours of submitting your accepted offer. If you are using hard money or private money sometimes they will waive the 10% rule but you'll still have to put down at the very least $500-1000 or more depending on the price of the property. If you're slick and have a cash buyer in place to wholesale to, you may be able to have your cash buyer put up the earnest money for you. Again, you've got to be very very slick or have a deep cash buyer's list to accomplish this. 

4) Transactional funding. If you have no cash whatsoever realize that with REOs whether you're holding or reselling you will have to close. And you need money to do that. Even if it's just to buy the property close the A to B transaction and walk across the to hall to resell the property and close the B to C transaction. Hard money lenders will do this all day long but you will have to factor the cost of borrowing that money even for just 1 hour into your calculations. There are HMLs that will do 3 day transactional loans for 1%. If you intend to hold it for much longer than that, the money gets really expensive. Hence why having an exit strategy is the first and most important thing to consider before you start. 

Hope that helps. There are barriers to entry into the REO market but if you can jump through the hoops it can be a great niche. It's how I'm starting out.