When an Investor is asked if they have been pre-approved???

Question

Good morning to all,

I am a new investor. I have been studying real estate investing for about a month, and feel very optimistic about my future in this business. I also am very excited because I am actually understanding the concepts and strategies.

Like most newbie investors, I have decided to start out my career assigning contracts. I have recently made my first few phone calls to realtors inquiring information about a couple properties. Although, a question has arose through these initial conversations.

I have had both realtors ask me if I have been pre-approved for a mortgage? how do I handle this question if I know that my investment strategy is to get a home under contract and then assign it to another investor? of course I wouldn't tell the realtor that this is what I am planning; however, I must still be honest about being an investor....this is obvious by my "all cash at closing" offer. But if I have not been pre-approved for a mortgage, and I'm offering all cash at closing, how does the realtor trust me in knowing that I will actually come through with the cash at closing? the realtors also asked me how I would be able to come up with the cash at closing.....how do you respond to that?

I hope that my question is not too confusing...hell, I'm confused just trying to type it the way my mind is analyzing it. So, if I've confused you, I apologize.

Anyway, I think this is a great forum for investors to connect, and I so look forward to your responses to this.

Thanks a bunch!

Michael Rossi · Answer

Let's say that you find a good deal and put it under contract.  You find a buyer almost immediately.  Just before closing, you find out that he doesn't have the money and the deal falls through.  Would you ever deal with him again?  I know I wouldn't!

What do you think is going to happen to you when you sign contracts with a few sellers and YOU weasel out (because your buyer bailed out)?

I NEVER use weasel clauses in my contracts.  If your buyer can't close at the last minute (which happens OFTEN), then you need to be prepared to close yourself.  Otherwise, your reputation and your new business will be ruined.

I would never tell a seller that I had cash if I didn't.

Mike

N/A N/A · Answer

Thank you everyone for your responses to my question. I greatly appreciate it!

Wow, I almost feel like the bad guy...actually bad girl for using a Purchase Agreement with a weasel clause. I actually never looked at this as an unethical thing to do being that it was included in a very well-known and respectable course that I purchased. Actually, the course recommends it for beginning investors. NOTE: I am a newbie to this and a "weasel clause" was something that was taught to me through the course I took.

I will however start locating some hard money lenders and take it from there.

Thanks again!

N/A N/A · Answer

MikeOH,

Thanks for your input. However, I am fully aware that one cannot believe everything that someone says just because they are labled a "guru"; that would make me completely naive...and I definetly am not.

The point that I was trying to make was in reference to the course that I purchased, and since I mentioned contigencies I simply stated that the agreements included with the program had a "weasel clause". I am a newbie to RE investing so it's not like I would have known that "weasel clauses" are deemed as a bad thing with some.  That's why I am here communicating with other fellow investors to broaden my knowledge so that I won't depend soley on the information from the program I purchased.....see....I would never trust only one source; it's just not my style.

I appreciate your comment!

Michael Rossi · Answer

Charles,

My point was that those are not the ONLY expenses  -  NOT EVEN CLOSE!

Mike

Michael Rossi · Answer

A lot of the information hyped by some of the popular gurus is nonsense.

One guru says "the less I do, the more I make".  I'm sure that he says this because he realizes people want something for nothing.  However, that concept is simply nonsense.  "The less I do, the more I make"  -  RIDICULOUS!  IF you believe that, try doing nothing and see how much money pours in.

Many other gurus teach that cash flow is determined by subtracting taxes, insurance, management, maintenance and vacancy allowance from gross rents.  This is also RIDICULOUS!  If you build a rental property business on this cash flow equation, you will soon be broke and your properties foreclosed upon!  Yet, I've heard and seen this from the "gurus" over and over.

I could go on and on, but my point is that just because some "guru" says it, does not make it true.  In fact, the gurus are in business to sell expensive courses and bootcamps.  That is often in conflict with telling the entire truth, which is not as attractive as the hype.

Mike

Ryan Webber · Answer

I don't think there is anything wrong with a contingency.  95% of real estate contracts have them.  Now I do think that the offer is obviously more appetizing to a seller with no contingencies.  It's become part of how I do my business.

I will give you less for the house than most people, but I can close this week, and as long as the title is clear you WILL have your money.  No hassles, no haggling, no contingencies.

Ryan Webber · Answer

I personally don't use contingency clauses, but I do recommend that beginning wholesalers should to protect themselves.

I have never, yes that's never, had a buyer for a double closing back out, and I've done quite a few of them.  Now I am VERY clear of my expectations upfront.  I verify their financing myself if I haven't done business with them before.  I also have multiple contacts for hard money lenders if they are having trouble with financing.  I also require non-refundable earnest money on most all of my contracts (some of my bigger repeat cash customers I don't require earnest money for).

My strategy is that I do everything I can to help them not only understand exactly what they're getting into but to also help them understand how to get it done.  I want them to think about it as long as they need to, but when they sign that contract and give me earnest money they understand that I have full expectation that they are going to close on this certain date.  No contingencies, no excuses, no nothing.

EWilliams, in reference to how to verify financing/funds to a realtor, I would recommend Tom's approach of using a hard money lender.  That is if you don't have the cash in your own account to be verified.  Most realtors will require either a preapproval letter or a proof of funds letter from your bank.

Either way, you probably aren't going to find many wholesale deals through a realtor.  You best bet will always be to track down motivated sellers directly.

Tom Wood · Answer

Another great option is to go to a hard money lender and get a pre-approval.  You can use this when making any offer to a realtor and it satisfies that question.  The other thing that's great about using a hard money lender is that they will evaluate the deal.  If they think you have offered too high and/or under estimated the repair cost they won't approve your financing.

I realize the goal is not to buy the house but to assign it, using a hard money lender as a backup gets you down the path.

Jim Gordon · Answer

E there is an item called a proof of funds letter that you can get from your bank. They state that you have enough available cash not tied in long term investments in your account to fund the transaction.

N/A N/A · Answer

Thank you for responding.....

Well, to answer your first question, no, I don't have cash...that's the beauty of the double escrow strategy and assigning a contract, because you don't need it. I would never get into something until all of my ducks are in a row...meaning that I have already established a solid network of investors waiting for my deals (which I have), and having a custom Purchase Agreement with enough contingencies to cover me whether I cannot find an invester to assign my contract to (this is the worse case scenerio)...if it were completely impossible for me to assign my contract, my agreement allows for me to walk away from the deal without any risk to me (although this is not fair to the seller).

However, I think you got a little confused by my intial post because you asked me how would I get the cash at closing. My answer is that I don't need cash at closing because I am not the one closing on the deal...I'm simply assigning my contract, and my assignee puts up the cash at closing...hope you understand.

Thanks again for your reply