Wholesale Pre- Foreclosures. Is it really possible?
Real Estate Investor · Atlanta, GA · Member since 2014 · 23 posts · 2 votes
I make offers on foreclosures with equity every week. I don't mess with pre-foreclosures because from my experience, people in this part of the process more often than not believe they can pull themselves out. That rarely happens. But, it's not worth the argument from my standpoint. I wait till they are about 60 days out from having their house sold at auction. If they have sufficient equity, I drop a yellow letter on their a$$ with their auction date and how I can save them from this fate.
First, there are federal laws concerning foreclosures after notice, I suggest that newbies not get involved in these with anything other than a straight cash type sale, don't touch them with a ten foot pole.
Secondly, that's not a deal for an investor to buy at. Rehabbers want it at 70%, landlords at cash flow which isn't given but most likely at a 20% discount as well. Doesn't leave much room for the work involved IMO, especially after taxes on earnings. :)
Thanks Bill I really appreciate your feedback. So if the buyer could get the property for 70% or less of the actual property value then maybe it's a deal that could work.
I like the ideal of wholeselling to learn the ropes but using pre Foreclosures may be a bit to advanced for me at the moment. Thanks for the insight
The answer, at least from my perspective, is it is possible. Not probable, but possible. From your example numbers, I'd say keep your day job. Even at a $1 assignment fee, I doubt you'd close a deal like that where I am.
There are lots of deals that are not worth pursuing. Many Wholesale Pre-Foreclosures are opportunities not worth pursuing.
To improve your odds, you can use databases of cases to weed out the 99% bad deals. And of the remaining 1%, you still need to get the owner to sign off on the deal. For the work involved... most of the time its an opportunity not worth pursuing. I am speaking from experience (at least where I am.)
I make offers on foreclosures with equity every week. I don't mess with pre-foreclosures because from my experience, people in this part of the process more often than not believe they can pull themselves out. That rarely happens. But, it's not worth the argument from my standpoint. I wait till they are about 60 days out from having their house sold at auction. If they have sufficient equity, I drop a yellow letter on their a$$ with their auction date and how I can save them from this fate.
Thanks Everyone for the insight. Really interesting stuff.
Andrew thanks for your feedback. I think hitting someone 60 days away from foreclosure is a pretty good strategy to entice them into selling. How do you know when they're 60 days away? County Assesor?
I subscribe to a very informative website, which provides all of the foreclosure info from around the country. It's also where I typically pull my comps to determine ARV.
Insinuating you'll save someone in foreclosure is a real good way to get in some serious trouble.
Don't get sucked into this strategy, those who promote them won't be in front of a federal judge!
Many who are in foreclosure will have seen an attorney, they have been warned about scams, if they mention your letter that attorney can bait you and eat you alive. If you're new, stay away from foreclosures until the hit the auction. :)
Why would they want to do this? You are trying to help them from being foreclosed on. I do this regularly and from my experience, most of these homeowners do not have attorneys. And, since they have sufficient equity, they are not in the short sale process, either. It's a perfect scenario. If you want, just disclose what you are going to do - attempt to find a buyer to pay cash and close quick, avoiding foreclosure. By this time, they have no other choice. They can sell to us... or go down with the ship.
It's how you go about it and what the buy strategy is. Andrew, you said "how I can save them from this fate" since there is federal law specifically addressing folks claiming they will save people from foreclosure, those words should never be uttered in a letter or otherwise to anyone facing that ordeal.
Offer to purchase, out right, with cash or financing is fine. If you appear to be counseling these people and you don't have a HUD license or you're not an attorney, you can be violating the law. You can't advise, counsel, claim you'll save them, or talk about any strategy to avoid foreclosure.
If you do anything that makes an insured lender believe a property is being sold and they put off a sale, (generally they won't) and you fail to close, with them seeing your deal was some convoluted assignment deal, you have then interfered with the foreclosure process, a violation.
Some states are judicial states, highly likely that owners with equity will have or have at least talked to an attorney. Others certainly speak to attorneys, they also seek out other lenders to refinance, they speak to non-profits that advise and credit advisors. Few with equity in a home sit on the couch and never utter a word to anyone and just wait to get kicked out. You never know who people have sought advice from, including internet forms.
Liability; a ruthless type losing a home could very easily claim that you were responsible for delaying them from seeking other alternatives if you fail to buy and close. They may get more out of you than from a sale!
There are things to avoid, if you are not skilled in negotiations and are unaware of the violations of various laws you can step on it, something that newbies should not get involved in, IMO. You can't really follow some script when an owner starts asking questions or they go into the "this will save us from foreclosure" talk, as you can't go there. If anything, I'd first give them a disclosure to the contrary upon learning from them they had such issues. I'd never approach them, cold, with the fact that I was aware of their situation as it is irrelevant to me asking if they are willing to sell.
Dropping a letter on their a$$ about saving them is a bad way to go now. IMO. This just takes you into an arena full of scammers that are being cracked down on, you may have great intentions, but if you fail or clog the process or don't perform it will be easy to get tagged as a scammer and suffer the consequences.
I know what gets said in these situations, I've been on both sides as a lender and buyer many times over the years. :)
I never actually use the statement "save you from foreclosure." I just say I can help by purchasing your home with cash, closing quick and taking it as-is. But, I think you are making this much more complicated than what it really is.
All we are trying to do is help someone, by either purchasing their home or finding a purchaser, before the house is sold at auction. And, assignments are perfectly legal, especially with cash transactions. We aren't attempting to interfere with the foreclosure process, either. Just trying to get the house sold prior to the auction.
Banks do not want to foreclose. And, in many cases, they end up taking the house back at the auction. Foreclosed houses are bad debts on the banks' ledger. So, again, I ask, why would anyone take offense to what we are trying to do? We are helping the homeowner AND the mortgage holder. And, if we can't, we can't. Their fate remains unchanged...
My personal opinion is you are focusing much more on the potential consequences, rather than the potential results. If you want to crush in this business, you need to reverse that. Again, IMO. Just my two cents...
I understand your position in defending what you do and your business of coaching. I'm all for making a profit and staying out of trouble. I'm not going to type pages explaining what can interfere with a banks operation, if a bank employee talks to you and gets paid and you wasted their time, the bank lost money. Interference is what they say it is. Assigning contracts is a very bad strategy as you then rely on another buyer to perform and it's not their obligation to perform with that seller, it's yours.
Ask your attorney if they think getting involved in foreclosures with assignments is a good idea in your area. I've outlined the issue, if you close and perform all can go well, the risk is not closing and IMO it's too high facing federal laws for a newbie to even try. :)
I think you are misunderstanding what I do. I do absolutely nothing with the banks. I simply search a database of foreclosures, while adding in the filters of LTV and auction date within 60 days. I view the properties that fit that criteria, and then contact the homeowner directly. I then attempt to wholesale their house... before their auction date.
This is a win-win for all parties involved. The seller gets out before he is foreclosed on. The bank get paid in full, so it doesn't need to auction the property and/or take it on as an REO. And, I make an assignment fee, whatever I can get.
I make no attempts to stall the foreclosure process, or allude the auction. I simply offer the homeowner the option of selling to me at a discount, rather than losing their home at an auction, which is at most 60 days away. And, if he chooses to go with me, I bust my *** trying to assign the house in time.
It's really not even an issue if I can't find a buyer. I mean, he's going to lose it, anyway. I'm not putting the seller out at all.
It's not an issue, okay, I understand. I contract with you to sell my house. Three days later a Realtor calls saying he may have a buyer or wants to list it, but I tell him no, I already have it under contract. Depending on the assurances I got I might even say thanks, bit I already sold it.
I also call my bank and tell them I have it under contract, they just say good for you, otherwise we will see you at the auction.
Weeks pass, no closing appointment has been set, so I call and I'm told it's almost done. (or maybe I'm told the guy I contracted with has assigned the contract to a buyer, he wants to see the house) Whatever the story is, we let folks in to see the place..
The new buyer wants something fixed. I'm really low on money but since I didn't make the last payment, I call a guy and get it fixed, I can eat soup since my place is sold and I'll be getting some money.
Few days later another Realtor calls and says he has an investor with cash if I'd like to sell, we can still beat the clock. No, I have it sold, I'm under contract already.
Well, now I'm pretty upset, 3 days before the auction, but I got a call from a title company to close. So, I go down to my bank, hat in hand, show my contract, show the closing date and they agree to hold off if I can come up with money to pay all the costs they have.
I get busy, never wanted to but call aunt Edna, she agrees so long as she gets her money back from the sale. She wires the money that afternoon, done, I have a chance to pay everyone off. The bank gets the money and sits on it, as the closing appoint is for 10:00 am and the sale is set for 1:00 pm, that sneaky banker!
My real buyer finds a better deal, so he uses his inspection period to back out, he's not buying it, but my contract with my original buyer doesn't inform, the auction is tomorrow. Ahh, but that night he calls, sorry, I did my best, my buyer backed out.
The issue is you don't know what can go on after you promise a seller you'll be buying their home. You don't know and you can't know what they may do relying on your contract to buy.
So, I call aunt Edna and tell her what happened. She is jumping mad, she doesn't have enough money to payoff the house but she has enough to hire a good attorney to sue the daylights out of that guy who put my house under contract, made me pass up two other possible sales, had me make repairs and dump my aunt's money down at the bank.
Well, the sale goes on, the bid is then entered with an adjustment to aunt Edna's deposit, the property sells, come to find out to the Realtor who called me, $100 over the entry bid.
Our attorney files charges, interfering with a homeowner after a notice of foreclosure against that original buyer. We also sue in civil court for damages as we were led to believe that buyer that he would purchase or have the property close before foreclosure.
So, you didn't put the seller out at all because he was going to lose it anyway?
That's exactly why these whiz bang, no money, guru following, smooth talking carpet bagging, totally uniformed wholesalers who can't perform needs to stay away from foreclosures. They have absolutely no control over the transaction, they can't assure a seller the property will close and by having it under contract it keeps the seller from even thinking they could sell it to someone else, much less show it to other buyers! On top of that, they have no idea to what extent a seller might go to in relying on that contract, what they may assume was done in good faith or the other financial hardships they may enter into while relying on the contract and presentations made to them.
To be in violation of the law you don't need to speak with the bank, the bank may not have anything to do with it, you screwed with the seller, that's as much as a violation as messing with the bank.
Which also goes to show someone doesn't have a clue as to these interference laws.
This law is fairly new, but it's generally know by attorneys doing foreclosures, it's been put in the public domain with warnings about foreclosure scammers. So, of those deals that didn't close, where it didn't matter since they were losing their house anyway, if I were you I'd be looking up the statute of limitations and when you approached those failed deals, you might still get nailed.
Newbies need to stay away from wholesaling foreclosures, period! :)
PS. I'm done, if that doesn't get the message across, nothing will. Just won't argue the point or listen to "we don't do that".
Possible! Yes, but with short sales, you can't assign the contract per the bank addendums in most cases. Rookies should be very careful going after short sales if your intent is to wholesale without first coming to the table with closing funds in hand.
I'm not talking about short sales. I don't touch those.
But, @Bill Gulley , again you seem to be hell bent on finding every possible thing that could go wrong with one of these deals, instead of looking at the myriad positive results. In addition, I'm not sure you have the faintest idea what wholesaling is. I mean, get a grip. It's just flipping houses. Flipping a house in foreclosure is no different than flipping any other property. They are all in distress for one reason or another. If not, they wouldn't be selling to us. They'd list it with a realtor.
Things can go wrong in every deal. Should I refrain from an attempt to ever flip a house? Maybe I should sit in my house, cuz I may get hit by a bus if I go outside...
So far, I agree with most (99%) of what you have stated.
I think Bill is on a different take than what you are speaking of... I deal with homes in foreclosures very frequently and do concur with you that most of my calls will come in the 11th hour.
As for shortsale options, I can't stand them but sometimes they are a necessary evil. I am currently working with a client whose house is probably not worth $30K in its current condition. We've completed the shortsale application/package (at the bank's request per their investor's stipulations) and six months later after fulfilling every bank request and demand, they decide after their appraisal (aka BPO)*, they are going to test the market for 90 days on MLS first then if necessary shortsale the home.
*BPO supported my numbers.
Yup, typical move... They'll jerk everyone around just to milk every penny out of the deal. Their next move will probably be to place it in bulk selling it off for what it truly is worth in the end once they foreclose. The loss mitigation reps are clueless to the area and the condition of the home... But it is their house.
Good news is, I have helped the client in every way possible, she is very happy, and now it is the waiting game on the home. The bank will list it for what she owes which is between $65K-$70K and the home is worth on tax appraisal about $90K...
So Andrew, I don't blame you for not touching shortsales or much less pre-foreclosures.
As for Prince Conley 's property you have in sight on your post, the numbers are too tight for what you are trying to do and as the very wise Will Barnard mentioned, it may have to be a shortsale and that will be a situation where you will have to come up with funds via private, hard money, or transactional funding. Unless you have cash under the mattress and want to fund your own project... Hehe.
Prince, there is just not enough meat on the bone. There are other ways to get paid but that is for a different subject and day.
Keep looking and try to find a property with a little bit more room for a deal.
Just my two pesos.
Big Henry
I think Bill has good information. What I think triggered him was the general attitude of Andrew's original comment that he "drops a yellow letter on their ***".
That shows a predatory attitude toward the homeowner that isn't necessary or laudable. Andrew is just trying to backtrack on that by saying he is just trying to help the homeowner.
We all know there is a very fine line between helping a HO and taking advantage of him. You want to really help him? Take no wholesale fee out of the deal. That would help him a lot!
Now we all know we do this to make money so that isn't realistic to take no fee but don't hide behind the whole "just trying to help the HO" BS.
Bill is correctly trying to highlight that wholesalers really do walk a very fine legal line. They are often very close to being unlicensed Realtors and other times are very close to being predatory with homeowners. You should be aware of these issues so that you can stay legal.
Eric,
I was going to PM you but thought this would be interesting and a learning tool for someone like Prince Conley and others here on BP.
Speaking of transactional funding or as you put it "Flash Funding", I reviewed your website and read the following section:
-----------------------------------
THE BORROWER/INVESTOR MUST:
1. Close both transactions through the same title company. No quit claims.
2.Provide full details of both the A-B and B-C transactions including proof that the A-B transaction has been disclosed to the C buyer and the C lender.
3. B-C contract must have all contingencies satisfied and funds "in house" with the title company prior to the A-B closing.
4. Both closings must be the same day with the same title company.
-----------------------------------
My question is for the second half of #2: "proof that the A-B transaction has been disclosed to the C buyer and the C lender."
Can you clarify this stipulation?
Additional question: If C lender is the C buyer's lender, why is it important to disclose the A-B transaction to each of them?
I understand from a CYA standpoint considering you the "flash-funder" are wanting #3, the funds "in-house" at the title company in advance from B-C, however, this may kill some deals when it comes to allowing the C buyer to learn there is in fact a spread worth investigating. Especially, a large spread. It almost defeats the purpose of an A-B and B-C transaction or double/simultaneous closing.
To play devil's advocate, why not just have an A-C transaction with B earning an assignment fee..? Hence, saving on the 1.5% (no offense). Unless of course, the deal is a short-sale or other transaction which requires outside funding.
I hope you enlighten us as I only ask with good intention and for more educational purposes.
Btw, I have closed similar transactions via a HML and other methods without C knowing A.
PS. Lol. Proofreading this makes us in the business sound a little strange.;) And yes, there are actually three questions.
I ask Respectfully,
Big Henry
Things can go wrong in every deal. Should I refrain from an attempt to ever flip a house? Maybe I should sit in my house, cuz I may get hit by a bus if I go outside...
Hell bent? Absolutely I am and for damn good reason. It's about risk, especially for newbies. Either you don't explain the real risks because you don't have a clue, or, explaining risk is counterproductive to your business of mentoring or coaching. Like most gurus you counter with a cavilier attitudes and comments about not taking any risk or don't do RE, unrealistic exaggerations.
I will never not counter someone who tries making money off newbies who gives bad advice or uses poor or even predatory approaches. Grip on that.
Comments as if I don't understand what wholesaling is, are you kidding me?
I don't need to defend my experience or knowledge.
I'll put it this way, from what you have posted here, you aren't, IMO, qualified to be in this arena, much less teach it.
Want to change my opinion? Dig deep in legal aspects related to this subject and demonstrate knowledge beyond that of a straw man dealer with sizzle. But you probably can't drill deeper as to the risks and you'll become more defensive with more personal insults. The pearls have been cast. :)
We are in danger of hijacking this thread since it is not about transactional funding but I will answer in the interest of spreading knowledge.
#1 The main reasons to use trans funding instead of an assignment is because many times a seller or sellers lender will not allow reassignments. Also, the larger the "fee", the more scrutiny it gets from everyone. People generally have the opinion that you can justify a large profit (say >10K)on a flip but not a large "fee" for yourself. Next, taking a "fee" as a wholesaler (or bird dogger) starts to look a whole lot like a commission. This is where you can easily cross the line and appear to be acting as an unlicensed realtor. People have been prosecuted for this many times. Not putting the fee on the HUD and therefore hiding it also leads to problems. Many a wholesaler has been stiffed on the fee he agreed to take outside the closing.
As for disclosure, if you read Real Estate laws in general, you will find one MAJOR theme runs throughout and that is DISCLOSURE. Sellers have many obligations to disclose, Realtors have many obligations to disclose, borrowers do to, etc, etc. So full disclosure is ALWAYS in your best interests even if it kills a deal. If it kills a deal, chances are you were trying to be too greedy. If you are scared to disclose it, chances are you shouldn't be doing it. Lack of disclosure leads to someone getting surprised and feeling taken advantage of. This leads to lawsuits. I don't want to deal with lawsuits. You don't need to be sneaky or deceptive to be successful. Most people have no problem with someone earning a reasonable profit for their work. Be proud of your work and deserve the profit you make and be up front about it.
Most Trans funders require this disclosure and I initially started requiring it because Short Seller lenders were getting very vigilant about not getting screwed by flippers. They were checking up on resales and nullifying transactions they suspected were flips or were the profit was too large. They ultimately cracked down so hard that they rarely even allow short term flips on any short sales at all anymore. So it is not a major issue anymore but I continue to require it because it is good business. If my borrower is trying to hide stuff and pull one over on the other people in the transaction, why would he not pull something on me too?? About 1 out of 3 applications I get for funding turn out to be fraud of some type and I turn it down. So I have to be wary.
The C lender has to know the chain of title and the transaction history of the property. They are concerned about fraud and proper valuation and the law says you MUST disclose pertinent information to them. They have undoubtedly had an appraisal done on the property they are lending on and a large, overnight increase in valuation that is not yet recorded is very pertinent to that apprasial. Hiding this could easily put you at risk of being charged with fraud. These types of flips where a shady appraiser and straw buyers buy and flip a property at inflated value and pocket the loan money were very rampant the past decade and lenders are very wary of it. A legit 1 day flip looks JUST LIKE a fraudulent straw buyer flip on paper to an underwriter so the legit guys have to go the extra step to show they are legit.
I highly suggest you read ALL the paperwork on a mortgage document some day. They require a lot of things of the parties of a transaction that you might not be aware of and that open you up to problems if you cut corners on this stuff.
Where have you been the last 5 years????
This statement is completely wrong. It is very different and you need to read up on some RE law
We are in danger of hijacking this thread since it is not about transactional funding but I will answer in the interest of spreading knowledge.
I highly suggest you read ALL the paperwork on a mortgage document some day. They require a lot of things of the parties of a transaction that you might not be aware of and that open you up to problems if you cut corners on this stuff.
Eric,
I agree with most of your response (75%) and truly thank you as it is very informative for all those who are new to the business.
Bottom-line, due diligence is key, so those interested in closing transactions creatively should, as you alluded to, educate and research for themselves before placing themselves in compromising positions.
Thank you again and I really do appreciate the response.;)
Sincerely,
Big Henry
Quite possibly the funniest rebuttal I have ever read
All jokes aside, I will say that one post in particular by you saved my a$$ and kept me from seriously violating the Safe Act (not to mention how many other federal laws). I thank you for that. I encourage all to read it! In my humble opinion, it is far safer to avoid a rattlesnake, than to walk by it and assume that it will not strike.
Great thread guys!
Sebastian