Real Estate Investor · Atlanta, GA · Member since 2011 · 83 posts · 15 votes
I've gotten to a position in my business where I would like to expand into different niches. For the experienced investors, which would you prefer and why would you choose one over the other if not both.
Agreed with Anson. REOs are much quicker and simpler, and you don't have to deal with tenants (usually) at the sale. Short sales have the advantage of less competition (in my experience), but a more difficult and tedious process.
Short Sales can bring great bargains and great frustration. I prefer REOs but I will not always pass up a good deal on a short sale, in fact I just closed a short sale purchase last Friday.
I have done many REOs but only one short sale. We had to negotiate with 2 banks and then the original owners had no where to go so we took pity and let them stay an extra 3 weeks. Not looking for any more short sales but if one falls in my lap...i would do it again if the deal had lots of $$ to compensate for the expected hassles and time expenditure.
Thanks everyone for your replies and comments. Another question I have is about the process. I hear you have to put down $1,000 EMD or even up to as much as $1,500, is this true? Also I've heard that the bank makes you hold on to the property for a certain period before it can be sold, i.e 30 to 120 days, is this true as well? Thanks again for your input, it is greatly appreciated.
Tim, are you referring to purchasing it as a LLC and then selling the LLC to an end buyer? If so can you briefly walk me through how that transaction would work, or anyone that has done this before. Thanks everyone for all of your help.
90 days is the timeframe that the FHA stipulates if you are selling to a buyer getting a FHA loan. But holding an REO for 90 days is not that hard as it usually takes me 4-5 weeks for rehab, time to sell it and then 4-5 weeks for the buyer to close. If you do sell it in under 90 days to a FHA buyer the only real issue is that they will most likely be forced into obtaining 2 appraisals. It's just more hassle and potential for your property to not appraise at what is needed.
In terms of finding things on the MLS, REOs are better, no contest. I have found that most short sales aren't good deals, adn there is little wiggle room on the price due to the underlying mortgages. The only advantage seems to be that some of them are in decent condition (at least cosmetically) compared to the REOs.
However I've never tried to engineer a short sale directly with the seller and the bank -- I suppose that could be more lucrative, if you know how to do it.
Thanks everyone for your replies and comments. Another question I have is about the process. I hear you have to put down $1,000 EMD or even up to as much as $1,500, is this true? Also I've heard that the bank makes you hold on to the property for a certain period before it can be sold, i.e 30 to 120 days, is this true as well? Thanks again for your input, it is greatly appreciated.
Jeffery, if you're talking about what the bank requires, it can be higher than that sometimes. When I bought my property from Fannie Mae they required 10% of the purchase price as EMD, so I had to put down about $4000 EMD.
WOW!! 4 grand for EMD!!! Can you give me the numbers on that deal? Putting 4 grand down for a property must have meant you were going to make a killing on the back end.
WOW!! 4 grand for EMD!!! Can you give me the numbers on that deal? Putting 4 grand down for a property must have meant you were going to make a killing on the back end.
I think it is just a general Fannie rule--10% EMD for cash investors. Maybe someone else here knows if they are still doing that? They demanded the same thing on an offer I made on a different house, but I didn't like their counteroffer so I backed out. A high EMD requirement doesn't necessarily means it's a great deal--you still have to look at the numbers.
There was a lot of competition for it. I paid 41K for it, put about 9K in repairs into it, and it currently rents for $700/month. It does not quite meet BP's 50% rule but it shows great, decent neighborhood, and it's very easy to rent out. I plan to hold onto it for as long as possible.
WOW!! 4 grand for EMD!!! Can you give me the numbers on that deal? Putting 4 grand down for a property must have meant you were going to make a killing on the back end.
When I buy properties for $50,000 to $400,000 I always put down a $20,000 EMD. It shows I am serious and willing to put $$ into the deal. If you intend to buy the property, why wouldn't you put more $$ on the table?
To add some info and to clear up some misconceptions from this thread:
- You can *NOT* assign an REO, per the addendum you will sign along with the purchase contract;
- A few banks (most notably FNMA and BoA) have deed restrictions that say you can't resell under certain circumstances after you buy. Specifically, FNMA generally won't allow you to resell for more than 20% above your purchase price for 90 days (though you can resell for under 20% above the purchase price) and BoA generally won't let you resell within 60 days under any circumstances;
- FHA doesn't disallow resales within 90 days anymore, though you may have to get two appraisals and provide some documentation that proves you actually added value to the property if you wish to resell a property quickly to an FHA buyer;
- Putting 10% earnest money down on an REO is pretty standard, and some banks will require it (specifically FNMA). So, if you buy a $50K FNMA property, expect to put to put down $5K. Likewise, if you buy a $250K property, expect to put down $25K.
- Yes, you can definitely purchase a property with an LLC and sell your interest in your LLC to the end-buyer.
personally, i prefer REOs because they are clean cut, right to the chase. what you see is what you get.
short sales will take longer, what you see if not always what you get (price), but i've seen and experienced some of the best deals via short sale mostly because other buyers don't want to deal with them for many obvious reasons.
@J Scott if you purchase a home through an LLC are the rules still the same? Could I sell the LLC before the grace period is over or will the banks have a problem with that too?
If this is possible, how does this process typically work?
Banks generally use a deed restriction, which will limit your ability to transfer title to someone else for some period of time. By purchasing the property using a business entity (title in the name of the business), you can sell the entity, thereby transferring control of the property to someone else without transferring title.
This gets around the title transfer issue (the deed restriction), while still allowing you to transfer control of the property to your end-buyer.
Happy to answer any other specific questions you may have...
Thanks J. I guess the next question would be trying to wholesale REO's? Is it really possible? I hear all the time from people that it is but these are the same people who are trying to sell you a product. Do you have any type of knowledge on this process or should I work with a private money lender to go ahead and close on the property and resell it afterwards?
Just wanted to give this thread a bump. I was hoping to hear some answers for Jeffery's last questions. I'll ask one of my own questions as well. Is there a way to find REO's without using an agent and what kind of leg work would a newbie need to do to start looking into REO's to wholesale? My reason for asking is, as most know, agents won't give someone new in the industry the time of day and the only way to get a good name for yourself is to be able to close the REO deals. The catch 22 no agent help=no deals=no way to prove yourself=no agent.
First, there are several ways to wholesale an REO:
1. Purchase in an entity and sell your interest to your buyer;
2. Purchase in a trust and change the beneficiary/trustee to your buyer;
3. Purchase in multiple names and quit-claim your interest to your buyer;
4. Double close with your buyer (using your own or borrowed funds).
The first three of these ways will allow you to get around deed restrictions, if the seller has them. The fourth will not.
As far as finding REOs without an agent, there are ways:
- Have an agent set up an automated query for you;
- Search the REO sites directly (Homepath, HUD, etc);
- Find a brokerage that syndicates listings onto their website.
All that said, there are plenty of agents out there who would be thrilled to work with you, ASSUMING you are a serious buyer. And by serious, I mean that you either WILL close the deal or WILL find an end-buyer to close the deal. If you're going to put properties under contract and then not close 50% of them, you're NOT a serious buyer, and it will be hard to find an agent to work with.
But, if you're a serious buyer, find a good buyer's agent who has experience with REOs and start working together.
Thanks for the quick and very informative answer. I'm new to all this and still learning (been "learning" for a long time and need to get over my fear and do it). Of the ways you mention wholesaling REO's, which seem to work best for you? What would be the advantage of doing one vs. another? I would think 3 would be the easiest.