newbie to REO flips need advice

Bernard B. · 2010-09-19T16:59:26-07:00

Hey Guy's and Gal's I am new to this REO flip niche can anyone give me basic step by step advice on what to do from start to finish. I am looking for the easiest and simple method scince this will be my first REO flip then I will go on to more advanced ways without using outside money. This is what I know so far.... 1.Build a list of cash buying investors 2.Find a REO broker or agent and have them feed you porperties. 3.Once a good deal is found put the property under contract with a EMD of about $1K? Here is the point where it gets fuzzy for me. Do I? How do I tie-up the property to keep the investor from going around me. End buyer aor NCND greement or.... A. use transitional funding for the A-B to secure the property (first closing purchased from the bank) then have the investor pay cash to the TF at the B-C closing for the price I have set, pay them back the principle plus points and get my check from the title company for the profit. B. Use a hard money lender. (sounds like it would go down the same way but be more expensive) C. Land trust: Sounds complicated but I wouldn't have to pay any TF or HM fee's Help! Whats the best way to do this step by step. Please be specific. Thanks for your help.

Bernard B.

OP

Lender · Conyers, GA · Member since 2010 · 5 posts · 3 votes

16y

Sorry, for the Type-Os my hands are moving faster than my mind LOL!

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

You prevent your buyer from circumventing you by getting the properties under contract. Write a purchase contract with the listing agent and give them the earnest money they request. Once accepted by the bank, offer it to your buyers. You will need to use transactional funds to double close. You will also have short inspection periods (typically about a week). So be sure the property works for your buyers before putting it under contract.

There is lots of discussion about this topic in the wholesaling forum.

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

16y

Keep in mind that some banks (Fannie Mae is most notable) will not allow you to resell the property for more than 20% what you purchased it for for at least 90 days, so figure that into your model as well when wholesaling REOs...

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Stephen N.

Accountant · greenwell springs, LA · Member since 2009 · 177 posts · 43 votes

16y

Originally posted by J Scott:

Keep in mind that some banks (Fannie Mae is most notable) will not allow you to resell the property for more than 20% what you purchased it for for at least 90 days, so figure that into your model as well when wholesaling REOs...

i don't think that's true anymore. they suspended the 90 day seasoning rule for flips for a year. they just require an additional appraisal and my require documentation for work performed on the property.

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

16y

Originally posted by Stephen N.:

Originally posted by J Scott:

Keep in mind that some banks (Fannie Mae is most notable) will not allow you to resell the property for more than 20% what you purchased it for for at least 90 days, so figure that into your model as well when wholesaling REOs...

i don't think that's true anymore. they suspended the 90 day seasoning rule for flips for a year. they just require an additional appraisal and my require documentation for work performed on the property.

I think you are confusing FHA and Fannie Mae. JScott is correct, and there are many threads already on BP regarding flipping Fannie Mae REOs.

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

16y

Yes, the two have been confused here. FHA 90 day rule has been suspended, however, in essence, it still remains because they take so long and ask for so many things when you flip inside the 90 days. For Fannie, you still can flip for more than 20%, but you must provide evidence of work performed and costs associated with it.

One key point missed in the OG post is in order to get a contract locked up on an REO, you must show proof of funds and an approval letter from a transactional funder will most likely not get it done. OG poster also mentioned progressing into more advanced ways without outside money. That is not a more advanced way, it is actually more simply when you have your own cash.

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Chris L.

Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes

16y

I want to know what value the OP is presenting by tying up an REO and then reselling it with a higher price without doing any work.
Flipping REO's is generally, buying them, rehabbing, and flipping to an end retail buyer.
Why would an investor cash buyer pay someone to negotiate an REO for them?
I think someone else said it best: That is the equivalent of buying a product at Wally world and then relisting the product at a higher price on EBAY.
I see no value added here.
Am I missing something?

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

16y

Chris, I believe you are missing something. The OG poster is attempting to become a wholeslaer and as such, the value is the locating and contracting of an REO which is a value to another rehab investor.

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Chris L.

Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes

16y

Will,
I understand (or at least I think I do) the wholesale concept.
I guess if the OP can locate REO's prior to hitting the MLS then maybe he has something to offer.
What I have seen is "wholesaler's" buying REO's from the MLS and then trying to resell them on craigslist.
My point is: what value does that bring a rehabber when they have acces to those same houses on the MLS without the markup?
I don't think most people trying to get started in wholesaling have the horsepower, contacts, or resources to access pre MLS deals that would bring true value to a rehabber. At least, not that I have seen.

(Will, I have great respect for what you do on BP so please don't take this as argumentative.)

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Don Hines

Investor · Little Rock, AR · Member since 2010 · 628 posts · 251 votes

16y

Chris got a vote from me. I have said it many times before, the wholesalers I meet are trying to sell me stuff I have already turned down. Stuff I found on the MLS my self. I don't have anything against the concept. I just need to see some value in what you are doing.
Don

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

16y

Originally posted by nationwidepi:

Originally posted by JScott:

I think you are confusing FHA and Fannie Mae. JScott is correct, and there are many threads already on BP regarding flipping Fannie Mae REOs

For Fannie, you still can flip for more than 20%, but you must provide evidence of work performed and costs associated with it.

Actually, that hasn't been my experience...

In fact, I just put a Fannie Mae property under contract today, and received the addendum about an hour ago. Here is the exact wording from the addendum (I am purchasing for $31,500):

"Grantee shall herein be prohibited from conveying captioned property for a sales price greater than $37,800 for a period of 3 months from the date of this deed. Grantee shall also be prohibited from encumbering subject property with a security interest in the principal amount of greater than $37,800 for a period of 3 months from the date of this deed. These restrictions shall run with the land and are not personal to this Grantee."

So, at least according to this addendum, there is nothing that says that I can sell for more than 20% regardless of how much money I put into the rehab.

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Marc Freislinger

Flipper · Phoenix, AZ · Member since 2009 · 973 posts · 679 votes

16y

I've seen the addendum J is referring to several times. I never saw anything about being able to sell after performing work.

I've also never been able to negotiate the clause away. Some of you are probably better negotiators than myself though.

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Marc Freislinger

Flipper · Phoenix, AZ · Member since 2009 · 973 posts · 679 votes

16y

Originally posted by Chris Luithly:

Will,
I understand (or at least I think I do) the wholesale concept.
I guess if the OP can locate REO's prior to hitting the MLS then maybe he has something to offer.
What I have seen is "wholesaler's" buying REO's from the MLS and then trying to resell them on craigslist.
My point is: what value does that bring a rehabber when they have acces to those same houses on the MLS without the markup?
I don't think most people trying to get started in wholesaling have the horsepower, contacts, or resources to access pre MLS deals that would bring true value to a rehabber. At least, not that I have seen.

(Will, I have great respect for what you do on BP so please don't take this as argumentative.)

I'm just starting to wholesale some deals, but from what I've seen, investors tend to appreciate wholesalers bringing them deals.

There are 369 multi-family properties that meet my search criteria on the MLS right now. 178 on my SFH list. Both of these lists are tailored to specific investor needs. The value that I can add is sorting through those properties. Visiting them, getting comps, estimating rehab, getting contractor bids, and negotiating with the bank.

When I offer an REO property to an investor, it's tied up. The negotiating is done, and they're getting it for less than it was offered on the MLS. They'll also know that it meets the exact specs that they gave me, and that the property will make them money. This saves them time, and allows them to do more deals and buy more houses.

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

16y

Originally posted by Marc Freislinger:

I've also never been able to negotiate the clause away. Some of you are probably better negotiators than myself though.

Agreed with Marc that it's REALLY hard to negotiate this clause away...

That said...

On about 1/3 of the properties, I'm able to negotiate the clause away (it's not easy, and I generally need some strong leverage). On about 1/3 of the properties, they completely forget (or choose not to) check the box that activates that clause. And on about 1/3 of the properties, I'm stuck with it and can't negotiate it away.

On this particular one, it appears they didn't check the box...yay! :D

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

16y

Originally posted by Marc Freislinger:

... they're getting it for less than it was offered on the MLS. ...

That is a clear added value, since it is not being offered by you for what anybody could have purchased at off the MLS. No markup over the MLS price - and that is what Chris was stating, that the ones offered to him come in with a markup above the MLS price.

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Chris L.

Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes

16y

Marc,
I would consider your services to be value added. If you are giving good rehab estimates, comps, and screening the properties, this would be a valuable service.
I consider Will's deal from last weekend to be a value added proposal.
What I have seen in Ft Wayne is an investor buys a property from the MLS (I have been outbid on a few of them) and then puts the property back on Craigslist without any work, estimates, comps or anything. Just marking the property up hoping someone else will pay more than they did. I do not consider this to be a value added proposition.
I hope that makes sense because it was not my intent to offend or start a disagreement.

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Bernard B.

OP

Lender · Conyers, GA · Member since 2010 · 5 posts · 3 votes

16y

Good input! I can see the pro's and con's from both sides. I guess the best way to offer the investor a benefit is to get these properties from a seller at the lowest price possible or get the properties from a Realtor before they hit the MLS.

Either way I think a busy investor would appreciate getting properties sent to him or her without having to haggle, pull comps ect. I know I would, so I could make efficient use of my time elsewhere.

I have seen that those who try to do it all themselves to keep money in their pocket are doing nothing but working another job. Isn't that the whole purpose behind having virtual assistants?

I would rather have someone hunt down bargains for me and send them to me so I could spend time doing what I want to do. But I also agree that those properties would have to be worth my time to look at.

But back to my OP. Should I put down my own EM or have the Investor do it?
and is letter A. in my OP the best way for my level of experience?

Thanks

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

16y

I didn't at all and thank you for your kind words. You actually pose a great question and in most cases, the wholesaler example does NOT offer any value. I believe the key to a good wholesaler is to have the ability to get properties under contract that fit other's criteria and for less than they were MLS listed or before they were ever listed. The other added value is the research (if performed) which was already mentioned.

J - I agree with what you stated, but again, on the cases where you agreed to the stipulation, it was your choice, you didn't have to. You can get these removed, although not very easily and you can get them overlooked as well. In the circumstance where you sign on the dotted line with the stipulation, then of course you are dead in the water with anything over 20% more inside of the timeframe.

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Joey P.

Real Estate Investor · Pasadena, CA · Member since 2010 · 16 posts · 12 votes

16y

I haven't read the other replies yet, but I just wanted to point out that once your offer is accepted by the bank and your EMD of $1k (or whatever amount you agree on) is in, you can't be circumvented by your buyers.

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

16y

Originally posted by FlipClub:

I haven't read the other replies yet, but I just wanted to point out that once your offer is accepted by the bank and your EMD of $1k (or whatever amount you agree on) is in, you can't be circumvented by your buyers.

Exactly and that is the difference bewteen a real wholesaler, and a bird dog or some other middle party asking for NCNDA's before receiveing property info. If somebody asks you for an NCNDA executed before sending you info on the subject property(s), then they are not the owner or seller, just another person in the daisy chain.

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Bernard B.

OP

Lender · Conyers, GA · Member since 2010 · 5 posts · 3 votes

15y

Ok, if I put up the $1k for the EMD and secure the property, how do keep the buyer from pulling out and me getting stuck with the property. I know that some of these banks have an inspection period that they allow you. Is that my window to find a buyer for the property? If I use Trans. Fund. or HM to purchase on the A-B thats even worse if they back out.

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Colin Bochicchio

Real Estate Investor · Burke, VA · Member since 2008 · 42 posts · 6 votes

15y

I like to take a stab at the land trust option since it was asked in the original post.
Well, the property would be put into a land trust and the wholesale investor would be assigned a % of beneficial interest.
As to the assignment of beneficial interest all negotiable between the parties. The seller or grantor would typically hold 10% to make it a viable LT transaction.

This would legally circumvent the seasoning issue however you would need to make sure the title/escrow company understands land trusts and can insure a land trusts some do some don't so you need to pre-flight the deal first.

The buyer you are wholesaling to would be assigned an interest in the trust upon putting up monies in escrow. No transaction funding needed on this.

LT can be a little more involved but once understand them it can be a much better way to wholesale your property..
The trustee being the owner would legally sign through the escrow on behalf of the trusts beneficiaries.
When the buyer is funded for the wholesale all the beneficiaries would vote to the trustee to sell the property at the agreed to price so in that way no party is circumvented by another due to the trustee would only act up unanimous vote from ALL beneficiaries.
You would not need to obtain the A--B transaction funding using a land trust..

Using a land trusts you are following federal law specifically 12 USC 1701 d j (3) commonly called Garn St Germain Act of 1982.
You are acting as a principal in the transaction and provide anonymity and privacy for your investors in the transaction. The beneficiary can hold their interest by way of a LLC or corporation or self-directing 401K for that matter.
The 3rd party trustee( very important) would pay you upon settlement per the trust/beneficiary agreements to your % held and any rider/addendum agreement in place..
You also protect the property from liens against title and you have a exit strategy since if you for some reason can not sell you can lease it out as needed.

You just wish to have your buyer lined up BEFORE you go to setup a trust on your clients property so you can wholesale it as planned.

If you can do a A--B deal then do what works..

Hope this helps..

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

15y

Originally posted by SDR2k10:

Ok, if I put up the $1k for the EMD and secure the property, how do keep the buyer from pulling out and me getting stuck with the property. I know that some of these banks have an inspection period that they allow you. Is that my window to find a buyer for the property? If I use Trans. Fund. or HM to purchase on the A-B thats even worse if they back out.

Easy. Make sure your buyer puts up a non-refundable EMD large enough to "prevent" them from cancelling. The key is to have them fully committed to the transaction and complete their DD BEFORE you execute the contract. It may also help if you have another back-up investor as well.

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newbie to REO flips need advice

newbie to REO flips need advice

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