Good afternoon. I am fairly new to the BiggerPockets community and real estate as a whole; I attended Than Merrill's workshop and got the motivation to try out wholesaling with my significant other/partner. We started an LLC., got a business account and have been trying to get properties under contract but to no avail for a few months. Recently I was talking to a foreclosed homeowner's listing agent and was looking to try to wholesale it but didn't know how to go about it since it's an REO. There was an open house for the property and I was too reluctant to go because I didn't know if I could build rapport and secure the deal viaa double closing. The auction also starts by next weekend and I don't know how to effectively relay that to my cash buyer. I also have two hard money lenders, one is willing to do a 70% LTV loan with the property being $250k and the other is willing to loan for the earnest money deposit. Additionally, I have a lawyer willing to provide consultation services but I just want to make sure I can smoothly sail in this field. Am I overthinking this or are there things I should be cautious of? I appreciate any response.
Attorney · Chicagoland · Member since 2019 · 103 posts · 90 votes
6y
I don't think you can wholesale an REO. The bank has absolutely no motivation to sell you the property, because they're simply waiting for someone to buy them out of their investment. They use auctions, usually, and it seems like in your case that's what's happening too. I just don't know how you get a wholesale from a bank auction, considering any motivated investor could buy that property at the same auction you plan to buy it at, and these are all public proceedings.
In my state, if the bank has already taken the property, they sell you the property at the auction and then it's up to you to make that property saleable to the third party. Most jurisdictions won't allow bank-owned to resell without inspections in my area, and title gets very iffy about writing these because the encumbrances on the property are hard to discover (old HOA debts, old water bills, etc.). I had one of these last year where I brokered a bank-owned to an investor and we must have discovered $5500 in liens that the Bank didn't even know about. This turned a $120k auction into a $127k transaction (by the time we had stripped these liens). This made our basis too high to short-term flip this property, and we had to simply reno and sell.
I usually recommend that my investor clients buy pre-foreclosure or probated properties instead of bank-owned or sheriff sale properties. The pre-foreclosure properties require the current homeowner to sell it to you, which means you're directly rewarded by your business relationship and put into a position that lets you profit. Same with the recently inherited probate properties.
Which state are you in? Maybe if you supply some detail you could get the perspective of someone who buys these properties and can mentor you in acquisitions somewhat.
Attorney · Chicagoland · Member since 2019 · 103 posts · 90 votes
6y
I don't think you can wholesale an REO. The bank has absolutely no motivation to sell you the property, because they're simply waiting for someone to buy them out of their investment. They use auctions, usually, and it seems like in your case that's what's happening too. I just don't know how you get a wholesale from a bank auction, considering any motivated investor could buy that property at the same auction you plan to buy it at, and these are all public proceedings.
In my state, if the bank has already taken the property, they sell you the property at the auction and then it's up to you to make that property saleable to the third party. Most jurisdictions won't allow bank-owned to resell without inspections in my area, and title gets very iffy about writing these because the encumbrances on the property are hard to discover (old HOA debts, old water bills, etc.). I had one of these last year where I brokered a bank-owned to an investor and we must have discovered $5500 in liens that the Bank didn't even know about. This turned a $120k auction into a $127k transaction (by the time we had stripped these liens). This made our basis too high to short-term flip this property, and we had to simply reno and sell.
I usually recommend that my investor clients buy pre-foreclosure or probated properties instead of bank-owned or sheriff sale properties. The pre-foreclosure properties require the current homeowner to sell it to you, which means you're directly rewarded by your business relationship and put into a position that lets you profit. Same with the recently inherited probate properties.
Which state are you in? Maybe if you supply some detail you could get the perspective of someone who buys these properties and can mentor you in acquisitions somewhat.
Hey Justin. Thank you for the well-detailed and highly informative response. Regarding the bank auction, I found the REO as it was listed on the hudhomestore.com website as a pre-foreclosure in my state (I am in NY.) So pretty much the same thing applies here legally as it does in your state when it comes to foreclosures on bank-owned property. I was thinking that I could try to close a deal on the property myself and then I could close a deal with the cash buyer I had lined up since she is a flipper but the seller's listing agent seemed like they are just adamant on having buyers come view the place and then just proceed with the auction and cater to the highest bidder.
Speaking of encumbrances, how would I find out about non-paid arrears and things like that?
Additionally, where are some good places in person and online to find probated and pre-foreclosure properties? My partner was mentioning that we head over to the County Clerk office tomorrow to obtain a list of properties going into foreclosure and start from there but I just was unsure about how to go about it appropriately in regards to the assignment of contract and any other things I should consider, legal stuff in particular.
Speaking of mentors as well, could I see if the cash buyer/flipper I had ready to do the double closing with me serve as a mentor?
Sorry if my response seems all over the place but whenever I think I may close in on a deal, it seems like something else comes up but once again thank you for the crucial words of advice. I hope I can be successful in at least one deal by the end of this month.
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
@Justin Abdilla I don't believe your post is accurate. When the bank takes the property to foreclosure it goes to what's called a foreclosure auction at which point anyone can bid on the property and the bank can set a minimum strike price (typically however much they are owed). If no one meets the strike price with their bid the property is then officially foreclosed on and becomes whats called an REO. At this point the bank owns the property and can dispose of it however they see fit. Some go to third party auction sites like Auction.com and Hubzu, but most just list as you would any other property on the MLS. @P.R. Romain if you're dealing with a listing agent that's likely the situation you're in. Most bank contracts are prohibitive towards wholesaling as they don't allow an assignable contract and have time restrictions within which the property cannot be resold (e.g. property cannot be resold within 30 days of closing). If you don't mind holding onto it through that time then you may be able to do it, but it isn't likely you'll be able to double close same day.
@Odie Ayaga Since the auction does not start until the end of this week, would the property not be considered an REO until then?
Also how would I know the strike price and the bidding process? The listing agent seemed a little unwilling over the phone to provide much detail about the property and auction.
And should those restrictions you've mentioned be the case here, could I just turn the property into a rental or flip it to sell after that time restriction?
Lastly what would be the most plausible way to go about getting a (wholesale/double closing) deal done. Because since this past fall, we have passed up on wholesaling a multiunit in New York and a residential in Illinois as well as Georgia. I figured that I try to look into pre-foreclosures thinking that the seller would be as eager to close a deal as I am but that doesn't seem to be the case with this recent potential deal.
P.S. What would be a good source(s) to find MLS listings along with motivated and private sellers? Also what about the contract process as well should I be aware of?
Thank you for the advice and input so far @Odie Ayaga & @Justin Abdilla!
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
I'll address your post in two parts.
First, they don't typically tell you the strike price meaning you can "win" the auction on site, but still not win the property. If there's a listing agent it sounds like it's already been foreclosed on, is an REO, and is being offered via third party auction site. The process can vary widely depending on who the auctioneer is. It could be a live auction, it could be online, the only way to find out is by attending or getting more info on the auctioneer themselves (e.g. if it's auction.com finding out what you can about what the bidding process is for them). If there are time restrictions then yes you can rent and flip after they expire.
Second, I strongly advise people to start off in real estate wholesaling. I think it's sold as an easy and cheap way into real estate, but I think it's quite the opposite. The best wholesalers tend to be people who are flippers or buy and hold people, but wholesale properties that don't fit their portfolio. People who start out wholesaling tend to not be well versed in valuing properties, finding end buyers, estimating rehab costs, dealing with sellers and finding deals. Learning all of those factors out of the gate is a tough way to start and most don't make it. It involves finding off-market properties (so I wouldn't even consider MLS if you're looking to start out wholesaling), attending a lot of meetings and networking and getting a sharp sense of how to evaluate properties and their issues and ideally being able to close on a property whether you can find an end buyer or not. To me, flipping is a much better way to get started as you'll get a better idea of evaluating properties and rehab costs and you can use lenders to leverage.
@Odie Ayaga Thanks again for the reply. This is very explanatory pertaining to how I'll proceed in the near future with any upcoming deals. And that seems to be the case in regards to the property already being foreclosed and an REO but I am not sure why it was listed as a pre-foreclosure or maybe because it's because the auction did not start yet. This is all still new to me and a lot of knowledge to build on and apply to my RE acumen, which I am very grateful for. So pretty much, the only use for auctioned foreclosed properties from a wholesaling standpoint would be if I wanted to flip and/or hold then, especially with REO's?
And to add on in response to the latter part of your reply, I am in the process of networking with much more established investors but along with that, would it make more sense for a newbie like myself to just buy and hold properties (while renting out in the process) and just wholesale any off-market properties I come across just for the sake of my portfolio? Since you mentioned flipping then the properties I buy and hold could just be rehabbed in the meanwhile then right? This week I am looking to head to the County Clerk to get a list of the foreclosed properties and from there I can find my way towards landing my first deal. Once again thank you so much, this is good stuff.@George Skidis
@George Skidis I'm not sure if you read my post correctly but I indicated that I was attempting to wholesale one residential property in Illinois. I appreciate the input nonetheless.
Couple points. In order to bid on the hudhomestore.com site you need to be a registered agent. The "auction" closes every night and bids are checked and if you win it comes off the hudhomestore.com site. So you will need an agent to put a bid in for you (If they are selling through auction.com or something else it will not be on the hudhomestore.com site). Being a HUD it is not a REO, it is a HUD. HUD is very specific about who takes title. The person who takes title must be the same exact name as the one who the bid is for. If you use a middle initial on one but not the other they will reject it (so a different name is an automatic throwout). You also need to use their contract, they actually esign them out to the buyer themselves now. It is not assignable. Also HUD homes have different bidding periods so an investor can't bid for the first couple weeks, you have to be an owner occupant. If you have passed that point you can bid, it needs to be purchased in your name. After that you can sell it however you want.
Take this with a grain of salt, but I think you're trying to do wholeslaing the hardest way imaginable: via a bank REO. Banks are weird and have weird rules. They also have deep pockets and zero motivation to sell at a margin where you can turn a profit.
What you need is a seller who wants that house sold last month. They are sick and tired of owning it and want out, and therefore they are willing to cut you a sizeable discount to make their problem go away.
Where do you find those people? Advertizing online and the local tear sheet papers. Word of mouth. Knocking on doors. Letters mailed to owners. Not to be discouraging, but the wholesalers in my town who made a business out of it spend around $5,000 per monthon their ad budget. It's possible to do it for less, but deals will come a lot slower and you'll be doing a lot more individual hustle and grind.
Think about it: there just aren't that many people willing to give away tens of thousands of dollars. Your job as a wholesaler is to find those people.
Where do you find cash buyers? Advertising online and the local tear sheet papers. Word of mouth. Networking with investors at REI meetings. If the deals are truly good wholesale deals, you will have no shortage of buyers, trust me.
What is a good wholesale deal? Something you put under contract for no more than 70% of market value and sell to a Buyer for about 80% of market value or less. You get to keep the 10% spread. For the amount of time and effort wholesaling requires, I'd be aiming at properties with a current market value of $100,000 or more so that you can net at least $10,000 on the sale. Otherwise, it's just not worth it.
I did the hustle and grind for about 3 years before deciding wholesaling was a lot harder than the gurus make it sound. My deals typically netted me between $5,000 - $8,000, and that wasn't enough to keep me motivated.
The good thing about wholesaling is it requires almost no funding, training, licensing, or experience to get into. The bad thing about wholesaling is that is also true for all of your competitors, and due to courses just like the one you took there are thousands of new people getting into wholesaling each month. So, by definition, you have to out-hustle them: that's your only advantage unless you want to spend $5,000/month on ads.
Wholesaling, like many businesses, is part of the 80/15/5 world: 80% will try it, fail or achieve only modest success, and drop out after 1-2 years. That was me. 15% will persist and go on to make decent money and eventually transition into buy and hold or rehab and flip. 5% will become rich wholesaler rock stars in your community. Unfortunately, the rock stars are already out there, spending $5,000/month and they have a team following every lead and researching. You will have to out-hustle all the newbies as well as the rock stars. It's not easy, but it can be done. I know one person in my market who is a rock star, and 2 people in the 15%. It's a full time gig for them.
@Justin Abdilla I don't believe your post is accurate. When the bank takes the property to foreclosure it goes to what's called a foreclosure auction at which point anyone can bid on the property and the bank can set a minimum strike price (typically however much they are owed). If no one meets the strike price with their bid the property is then officially foreclosed on and becomes whats called an REO. At this point the bank owns the property and can dispose of it however they see fit. Some go to third party auction sites like Auction.com and Hubzu, but most just list as you would any other property on the MLS. @P.R. Romain if you're dealing with a listing agent that's likely the situation you're in. Most bank contracts are prohibitive towards wholesaling as they don't allow an assignable contract and have time restrictions within which the property cannot be resold (e.g. property cannot be resold within 30 days of closing). If you don't mind holding onto it through that time then you may be able to do it, but it isn't likely you'll be able to double close same day.
In Illinois, the REMIC and Freddie/Fannie properties are most frequently listed through the websites for auction. I read the original post to say that they were listed through the auction site, and so I assumed it was similar to how it typically works in my state. Banks in Illinois frequently do this because of title issues, because Illinois requires attorney-certified title, and the Banks like to have their counsel do the title.
I've not found success with wholesalers buying post-judgment foreclosure properties in my state because the auctions are public and the competition is so tough. I counseled OP about that difficulty because we usually see the Bank making an opening full-debt-bid on every single property that's up at these foreclosure auctions, just like you said. Illinois does not allow reserve bids on foreclosure auctions, they're pure auctions in my state, which is why I gave the answer I gave.
I think you're probably better qualified to comment on NY/NJ's situation than I am, because my expertise extends to judicial foreclosure states and not to non-judicial states. I appreciate the answer and I'll tag out to you on this question.
Attorney · Skokie, IL · Member since 2016 · 270 posts · 109 votes
6y
@P.R. Romain, welcome to the community! Short answer: no, you are not overthinking this - caution is a good instinct when it comes to complex real estate deals.
In my experience, wholesaling can be a great strategic approach for real estate investors with large portfolios. But it’s also a complex process that must be carried out very carefully. Consider an example from my home state of Illinois. Here (like most jurisdictions) if you enter into a purchase contract with a seller, you must enter into it with the intent to close on the property. In addition to establishing intent to purchase, real estate investors must also establish the ability to purchase the piece of property they put under contract. As a result, real estate investors wholesaling property need to be prepared to close on any property they put under contract, or else suffer potential legal consequences.
Be sure you are familiar with the wholesaling laws in your jurisdiction. Many state legislatures have taken an unfavorable stance against wholesaling in real-estate primarily due to the countless legal and regulatory violations that real estate investors have unknowingly – and sometimes knowingly – perpetrated when attempting to wholesale real estate. Legal pitfalls abound, so at the very least make sure you have a good local real estate lawyer who can guide you though the process.