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Wholesaling is one of the most popular approaches to real estate investing. It appeals to both beginning and seasoned investors.
With the market in its current condition more and more investors find that they are coming across hordes of motivated sellers. However, this windfall of prospects all seem to have one trait in common. They don't have any equity! This little dilemma is causing many investors to turn their efforts toward bank-owed foreclosures.
The single biggest advantage associated with REOs is the fact that equity can be created instantly either by finding a hot deal or through shrewd negotiation. There's nobody telling the bank that they owe too much on a property and can't lower the price a bit. In theory...any house could be sold for as little as a dollar.
In fact, there is only one downside to wholesaling REO properties. Non-assignability. When an investor gets a bank owned property under contract it always comes with multi-page addendums that make the deal non-assignable.
Many investors stop right there and turn away to other paths such as short sale negotiation or subject-to investing not knowing that there are in fact four different methods to workaround this roadblock.
Method #1 - Add to Contract, Then Quit Claim
Most banks do not have an issue with adding an additional party to a contract, they just do not want the ORIGINAL parties removed from it at any time. So Ivan Investor can get an REO property under contract for $50,000. Ivan calls Louie Landlord and after talking about the deal Louie agrees to pay a total of $60,000 for the property.
Ivan calls the bank up and requests that an addendum be drawn up that adds 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 one for $10,000 made out to Ivan. Everyone closes on the property at which time both Ivan and Louie are the owners of the home. Louie hands Ivan the $10,000 check and Ivan signs a quit claim deed removing him from title on that property. Pretty simple, right?
Pros: The advantage to this method is that there is only one set of closing costs. It's a rather simple and straight-forward method that works for most deals. It works around the 90-day deed restriction that comes packaged with many Fannie/Freddie properties.
Cons: Here are the negatives that come with this method. This does NOT work for HUD properties because HUD does not allow any changes to the parties that are on the original offer and the end buyer usually cannot be getting a mortgage because a mortgage company won't allow you to be on title if they are lending someone else money against the home.
Method #2 - Simultaneous Double-Close
The simultaneous double-close (also known as a simul close or a "dry" close) is actually two transactions. An investor is buying from the bank and then instantly reselling to a third party in a separate transaction. It follows a typical A-to-B-to-C deal flow.
The "twist" that comes with this method is that the wholesale investor never actually brings any money into play. The end-buyer's funds are used to fund BOTH transactions. This is possible because, as long as both closings take place on the same day, it doesn't matter which one closes first for the title company's accounting purposes. The second transaction (B-to-C) could take place a 9am with all the paperwork for that transaction taken care of at that time while the first transaction (A-to-B) doesn't close until 2pm.
What really matters is that the deeds are RECORDED in the proper order when filed with the county. It's important at that time to have the A-to-B deed filed first with the B-to-C deed following on record.
Pros: This works well for those who have zero cash as long as they have a good title company that will still do these types of transactions. It still works even with end buyers that are getting conventional financing if the end buyer is getting their financing through the right lender.
Cons: This method does NOT work if the end buyer is getting FHA financing. This method also does NOT work for Fannie/Freddie foreclosures in most cases because these super-banks put a deed restriction in place that prevents you from reselling the property to ANYONE for a full 90 days.
Also, with all double-close deals there are two sets of transfer taxes, recording fees, and other closing costs that cut into your profit. Of course you can just build that into the deal by lowering your offer price in order to circumvent this small annoyance.
The biggest roadblock to getting these transactions closed is the fact that fewer and fewer title companies are comfortable with the "dry" simultaneous close where the wholesale investor brings in no cash to the deal. In fact, they are often refusing to close these deals at all!
Method #3 - True Double Close
The true double close (also known as a "wet" close) is the same as the simultaneous close in that the investor is buying the foreclosure property and instantly reselling it to the end buyer for a profit. However, the wholesale investor is actually bringing in his own cash to fund his end of the deal.
This little difference makes the title companies happy but it doesn't work so well for beginning investors that don't have piles of cash sitting around to make the deals work.
Then came Flash Funding. There are "transactional funding" lenders will lend you all the money you need to do these same-day double-close deals...for a price. Most will never run a credit check or request an appraisal on the property.
The pros and cons to this method are pretty much the same as the simul close, except that on the good side more title companies are willing to do business with you if you go this route and on the bad side you have additional costs in the form of Flash Funding fees chewing away at your profits.
Method #4 - Sell The LLC
This last method has been popularized by Steve Cook who's said that he swiped it from commercial real estate investors who have been using it for years to avoid paying transfer taxes.
The idea is that an investor would submit an offer in the name of an LLC. If he was writing an offer on 123 Main Street, he might put the offer in with the buyer as "Main Street Holdings LLC". If the offer is accepted, the investor immediately faxes in his LLC articles of organization and creates the company to match the Buyer on the purchase agreement.
From there the investor finds his end buyer and they agree that on closing day the end 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 end buyer is empowered to close on the original transaction and purchase the property.
Pros: The upside to this method is that you workaround the extra costs in the form of transfer taxes and/or Flash Funding fees that come with the two Double-Close methods, and for those who are concerned about guarding their privacy, your name never goes on the deal.
Cons: The major obstacle to this one is that the end buyer has to pretty much be paying cash. Banks do not loan traditional mortgages (either to owner occupants or investors) in company names. You have to buy it in your own 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.
These four major methods are pretty much all an investor needs to know in order to start wholesaling bank owned REO foreclosures. None of these methods require the wholesaler to bring his or her own cash into play other than the initial earnest money deposit and none require a credit check. One of them will work for pretty much any situation, whether the end buyer is paying cash or getting financing enabling you to earn large checks on a consistent basis by wholesaling REO foreclosure properties.
