Exactly which doors do I knock?

Question

Hey gang,

It seems that I post most threads under this forum, simply because I know who follows it and who's going to respond ;) Thanks in advance.

So this question has two parts, or two angles.

The general picture is that I assume we are knocking on doors where the house is pending foreclosure? I think that's right, but I don't know if there are other types of properties (aside from the really distressed ones that might be worth inquiring about) where this strategy is used.

But, in researching this a bit, with the intention of wholesaling properties to build some cash, I find that there's a lot of debate over whether you can actually wholesale pre-foreclosures once the NOD has been issued, or the NOS. With respect to this, should I just call a title company and attorney for a little insight? Or does anyone have more particulars?

Secondly, if you do approach these people and happen to find a motivated seller, and wholesaling is a problem, is transactional funding necessary? Meaning I have to buy the property outright before assigning/selling it to an investor? Even if only for a few hours?

And lastly, as I've seen on several threads and been told in person, everyone says that more often than not these turn out to be short sales, so I'm wondering if that is one of the primary strategies when approaching these distressed sellers.

The other 'general' part of the question relates to mailing pre-foreclosure lists. I assume you are mailing the exact same people, while for people with little money door knocking may be more efficient, but, again, is the strategy short sales or sub 2s?

I hope that's clear enough to begin with. I'm motivated enough to do it, and think getting over the fear of doing it would be really worth while, I'm just not sure what strategy I should have going into these situations. As I've seen elsewhere, and some wholesale hater is likely to point out, I don't want to tie up the property the last month before foreclosure and give the seller no other options.

In any case, my study has still left these holes, so just looking for insight.

Thanks all,

JTM

Jeff Copeland · Answer

This is a multi-faceted question...

A seller can still sell his/her property during pre-foreclosure. They would just have to earn enough from the sale to pay off the mortgage, plus any accumulated late fees and interest. That's why it's so important for them to have equity - a seller can't sell her house for $100k if she owes $175k on it (unless she's willing to bring $75k of her own cash to the closing!).

So - an ideal scenario would be:

1. You find a distressed homeowner who is 6 months behind in his mortgage, and owes $100k in principal and another $10k in interest and late fees - so the payoff on the note is $110k. But the house is worth $155k as it sits, and $200k after rehab.*

2. You buy the house for $125k. The seller avoids foreclosure and walks away with his credit more or less intact, his mortgage paid off, and $15k in his pocket to start a new life.

3. You sell (or assign, or double close) the house for $135k and make a cool $10k on the deal.

(all of the above ignores closing and settlement costs for simplicity's sake)

*Needless to say, these scenarios are very few and far between, because this seller can usually just sell their house for what it's worth, or at a discount, as a FSBO or with a Realtor, and be even better off. On top of that, you aren't the only one looking for them. So there are 1) very few scenarios where a deal makes sense, and 2) hundreds of other investors scrambling for the same deal when it does exist.

With regards to short sales...

A short sale is a long and drawn out (and often frustrating) process, and is not for the faint of heart, or for wholesaling, in my experience.

First of all, in order for a seller to get the bank to consider a short sale, they have to submit a detailed short sale packet to the lender, which usually requires the assistance of a realtor.

Secondly, even if the bank will allow a short sale, they still want the highest sale price possible and thus will demand full exposure to the market, so it will normally get listed on the MLS with an agent.

So - let's say you find a short sale that's worth $175k as-is. The seller owes $200k on it and the bank agreed to let them list it as a short sale. It's listed for $160k. Here's what often plays out:

1) You make an offer on it. Let's say you offer $155k.

1. In a short sale situation, the seller will usually accept any reasonable offer (What do they care? They're never going to see any money from the sale anyway, right?) So you go under contract at $155k.

Don't pop the champagne yet - because the sale is still subject to bank approval, and...

2. The short sale addendum to the contract basically states the following:

• Your earnest money is due right away
• The bank has 90 days to review your offer (the timeline is negotiable, but in Florida the default contract option is 90 days)
• Your clock for inspections, financing, and appraisal contingencies doesn't start until you get notification of bank approval

3. So you make your earnest money deposit (tying up your cash), and then wait...and wait...and wait.

4. 82 days later the bank comes back and says "No, we will not take $155k. We have to get at least $178k for this property". (After all, it has been three months and the market is red hot and appreciating, and they are owed $200k and counting on the mortgage!).

5. You can't possibly make any money on it at $178k, so you cancel the contract and get your deposit back.

Finally, even if you did get bank approval on the sale at any price. You can't assign the contract and wholesale the property - the bank would never allow that.

The above has been my experience on several short sales in Florida, representing investor-buyers as an agent. This will obviously vary from market to market and laws and contract details will vary from state to state. I'd be interested to hear comments from other BP members about how this tends to play out in other markets.

Steve Vaughan · Answer

I don't door knock anymore or wholesale on purpose, but I do mail pre-foreclosures and vacant, high-grass houses.

To get a letter or postcard from me, the pre-foreclosure must have equity.  Here I compare the balance and arrears to the tax assessed value.  You may have a different benchmark there, but it is pretty easy to see if they owe way more than the home is worth.  Don't waste your time if the home is at or under water.

With vacants, I would have a flyer to give the neighbors as well.  Something like REWARD - $250 cash for information that leads me to purchase and fix up the house at ______________.  Gets the word out.

Others will have to chime in on transactional funding and such.  Usually if you find a deal, the money will come.  Good luck and stay motivated @Joshua Martin!

Johnny Kang · Answer

I would have to agree with @Adam Adams. A lot of people stay away from short sales for various reasons, one of them being because they "take too long." But it's not like you're working on 1 file 40 hours/wk for 10 months.

You send the initial short sale package to the bank, wait for response. Submit whatever documents they want updated, wait for response. Follow up with the bank to see if the investor on the loan has any update, negotiate back & forth on a price, giving every evidence you can find on why you're offering the amount you're offering, wait for response. Negotiate some more and get the deal done. And most of this "work" is being done by your agent anyway. Say you're working on 10 files. You can dedicate 1 day out of the week and still work those files, while continuing to look for properties with equity, analyzing multi's, wholesaling etc.

Ernest money is still between you and the seller, and unlike traditional equity sales where the seller would want to see decent earnest money, sellers of short sales don't really care what it is. So you put as little as possible. (I've put $100 before). Even if you put $500 and tie it up, think of it as cost of doing business.

Even if the bank wants it listed on MLS, you're the one in contract so if the realtor gets calls about the property, they just tell them it's in contract. No competition; End of story. The seller trusted you enough to handle the sale that would eventually have their house taken from them, so chances are they'll stick with you.

Everyone wants properties at a discount. Short sales are a great way to get properties at a discount so why not do them?

Adam Adams · Answer

@Johnny Kang

Thanks man! Thanks for the kind words.

I have found that doing exactly the opposite of what most people are doing can often be better than competing against the masses who utilize that one single strategy.

I don't doubt they are probably successful, I don't doubt that at all. But you can be just as successful in a niche.

Adam Adams · Answer

@Steve Vaughan, Thanks man!

Steve Vaughan · Answer

Go for it  oh great one with the same name twice. Whatever

Joshua Martin · Answer

@Jeff Copeland

Just wanted to say thanks for the very thorough response, and I think for the present I'll just continue mailing my leads and hold off on the short sale bit. Just trying to find a first deal in a 'traditional' cash transaction. Mailing probate, absentee, and owners with equity. Down the road I feel like I'll be able to handle this more advanced stuff.

But thanks again for all the input, I really appreciate it.

Best,

JTM

Steve Vaughan · Answer

@Joshua Martin- my market is pretty small, so I lookup the notices and compare to assessor's site manually.  I also quickly discard any house not located inside my very targeted area.

The tax assessed value should give you a reference point. Here 120% of that is close to FMV in general for a basic place.

I also quickly look in deed and sales history to the year/date of purchase. The purchase price is usually there. I am pretty safe ignoring anything bought from '06-'08. All those fools way overpaid.

I'm no expert on this.  I hardly look for places at all anymore.  No need for the skinny margin frustration of my market.  Your market is probably much different and much more diverse.

I spoke a little too quickly about places at water.  Shouldn't just ignore those.  They are great for sub2 if the arrears aren't too high.  No funding needed.  Cheers!

Joshua Martin · Answer

Thanks for the guidance @Steve Vaughan.

If I could just ask for one clarification: about checking the equity. I have heard others say they do this as well, but how exactly do you glean this information from the assessor's site alone? Is it an estimate based on date of conveyance and recording? Or are you buying an equity list and then scrubbing your pre-foreclosure list to determine who you're going to mail?

Thanks again.

JTM

Exactly which doors do I knock?

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