Wholesaling Bank owned properites
Real Estate Investor · Oshawa, Ontario · Member since 2016 · 5 posts · 1 vote
Does anyone know the process to wholesaling/flipping bank owned properties? is there a particular way to maneuver around it. Thanks !
Leo Robinson
@Leo RobinsonYour best bet would be to find transactional funding. And do a Double close. From what I know, banks won't let you assign a contract. An added benefit is transactional lenders will give you a Proof of funds, which you will probably need to submit an REO offer.
Hi Leo! I see you are from Oshawa. Have you attended the the Durham Region Real Investment club meet-up? Held once a month it provides outstanding educational opportunities with high profile speakers and educators. Last night's meeting included a juicy discussion on wholesaling / assignment of contract and some similar strategies that involved many experienced members.
Sorry I can't help you personally -- but would highly recommend you consider the option of a local meetup REI Club for great resources and answers.
Good luck, Leo!
Cheers,
Debbie
Hey @Leo Robinson, I'd love to see this discussion fleshed out, too. I was under the impression that the "power of sale" laws that we have here in Ontario make it nearly impossible to fetch a deal from the banks. I passed over a half dozen bank-owned in my search (100% of them) because they offered nothing that the rest of the MLS didn't.
PLEASE someone prove me wrong!
@Leo RobinsonYour best bet would be to find transactional funding. And do a Double close. From what I know, banks won't let you assign a contract. An added benefit is transactional lenders will give you a Proof of funds, which you will probably need to submit an REO offer.
The way a foreclosure agreement is written by the bank they actually have to do their best efforts to prove that they are selling their property at fair market value, and document their efforts. If not the seller being fore closed upon has legal recourse.
They aren't a bad way to find deals for flips with smaller margins, but you are actually more likely to get a better deal from a seller directly. As sometimes they don't know market value and perhaps just want the derelict property gone.
Als
@Samuel SedoreThanks, that's exactly what I meant by the laws here in Ontario. The bank HAS to make a serious effort to sell at full retail.
My challenge is that I don't want to be a direct-mailer, but I can't seem to find via google anybody in London Ontario that seems to legitimately do that. I want to buy properties (soon, I'm just closing one right now) below market value but all of these American methods that I read so much about are either blocked by law or under the covers in Ontario!
Sorry if this has been a bit of a thread-jack - it is meant to be in response to the specific question about buying bank-owned.
Yeah technically if someone where to wholesale a bank owned property, the original owner would have a open and shut court case to sue the bank for the end price the wholesaler received.
Lets carry this over in PM's not to change the topic. Simply put @Leo Robinson, there is way around it in Canada without someone being ripped off or at potential for litigation, you must get your wholesales directly from the seller.
@Leo RobinsonYour best bet would be to find transactional funding. And do a Double close. From what I know, banks won't let you assign a contract. An added benefit is transactional lenders will give you a Proof of funds, which you will probably need to submit an REO offer.
This is how I heard it done on the Flip2Freedom Podcast Episode 14. Hope this link works. I'm still learning how to do it. I thought this episode had some good info about buying REO properties.
@Leo Robinson Wholesaling properties from banks isn't really an option in Canada.
It's not just that their contracts require them to get the best price, but that the law requires them to. You see, many properties in the US are foreclosed on by the banks. The bank then owns the property, and can sell it at whatever price they want.
In Canada, a mortgagee has three options when the mortgagor is in default. Mortgage agreements have an acceleration clause, so they are able to accelerate the mortgage and say you owe them the full balance. This lets them take action on the covenant for not paying. These are the three options:
1. Judicial Sale: This is often the least preferred option by lenders. Here, there is a sale of the property authorized by the courts. This can be a longer process, and takes control out of the lender's hands. With the additional costs of the judicial sale, the lender is likely to get less out of the property. Since a mortgage is also personally guaranteed, if there is a shortfall, the lender can still sue the borrower for the deficit. So if a property has a mortgage of $100k, sells for $90k, and had $10k in costs associated with the sale and court proceedings, the lender would sue the borrower for the $20k deficit.
2. Foreclosure: This is not often used in Ontario, and is really only used when the lender has a specific reason for wanting the property. In this case, the borrower would foreclose on the property, and own the property outright at the end of the process, but no remaining rights to sue for any deficit. This means that if the property has a mortgage of $100k, and is only worth $90k, the lender could foreclose and own the property. They could not sue the borrower for the shortfall. A lender might do this if they have some personal reason for wanting the property, such as it being the neighbour's property. If the property has a mortgage of $100k, and is worth $120k, they lender can start foreclosure as well. If they get through it, they will own the property outright, and not owe the borrower the other $20k. However, at any time in foreclosure proceedings, a borrower can request that the foreclosure becomes a judicial sale (above). This means they lenders almost never get to reach the point where they can keep that equity, and they get stuck in a judicial sale, which they don't like.
3. Power of Sale: This used 90-95% of the time in Ontario. The lender is able to take control of the situation. The lender sells the property, and if it is sold for more than the loan and sale costs, the lender will pay this to the borrower. If the property is sold for less than the loan and sale costs, the lender will sue the borrower for that shortfall. If there is default insurance (CMHC, Genworth), the insurer will pay the lender then sue the borrower. Here is why Power of Sale does not work for wholesalers: If the lender sells the property for too cheap, the borrower can sue them for improvident sale or improvident realization. This essentially is a right of the borrower to receive the fair market value for their property. This means the lender needs to sell the property for FMV. Lenders fear being sued for improvident sale, so they are very careful. This usually means they get multiple appraisals or broker opinions on the property. They will not stray far from those valuations until the property has been on the market for a long time. They will almost never accept the first offer, even if it is very fair. They often want to counter at least twice, to show they have tried to negotiate the best price. Essentially, it is very difficult to get a good deal on the property. If a lender has a loan for $100k, and sells the property for $90k with $5k in costs, they will want to sue the borrower for $15k. However, if the borrower can prove the property was worth $130k, the borrower will sue the lender for improvident sale, and claim $25k. A lender can defend against the claim by showing they completed the above steps, which courts will accept to show they got FMV. If a bank sold at a low price and the contract was flipped to someone else, this is a very strong way of showing that they sold at too low a price, and could be sued for the difference. They would never allow this.
In all of these methods, if the lender is able to pay everything owing before a sale closes, they are able to keep the property. This occurs even if there is no contractual provision that allows it, it is the equitable right of redemption.
That's the summary of what I remember from my Real Estate Finance class from my law school days. Sorry for the length, I should turn this into a blog post!
@Luc Boironplease do! We have a serious shortfall of Canadian content!
So this leaves only one way that I can think of to get below market properties - buying directly from motivated non-mortgaged people. Ideally someone who can't afford to repair a place to get full value for it - which is silly because if it is non-mortgaged they can get a HELOC, repair it an sell it.
Please please please prove me wrong.
@Luc Boironplease do! We have a serious shortfall of Canadian content!
So this leaves only one way that I can think of to get below market properties - buying directly from motivated non-mortgaged people. Ideally someone who can't afford to repair a place to get full value for it - which is silly because if it is non-mortgaged they can get a HELOC, repair it an sell it.
Please please please prove me wrong.
Luckily, that is not the only way! They can have a mortgage on the property, they will just pay the mortgage off with the proceeds. My (long) post above was just about what happens when a bank wants to sell a property in default.
With the way prices have been rising in Ontario, most homeowners who have owned the property for a few years likely have some good equity in the property. If they bought a house in London 5 years ago for $220k, put 10% down and ended up with a mortgage on it for $200k. After 5 years, the property might be worth $350k, and the mortgage will have been paid down to around $180k. That leaves a lot of equity in the property for you to get a good deal! The owner might not have the income to qualify for a refinance at a higher mortgage balance. Or they might just not want to.
The point is, motivated morgaged owners can still sell a property below market value. The only issue you would have is if they have a mortgage for 80-100% of the property value - they might not be able to sell it for enough of a discount to make it worth your while and still pay the mortgage off.
Thanks @Luc Boiron, I guess I went to absolutes without needing to.
So where exactly are the guys selling 100k houses for 35k because they've already paid 65k off the mortgage?
@Matt Geerts Finding homeowners with equity isn't that hard. I would think most owners who have been in the same property 5-10 years likely have a good amount of equity built up in it. Obviously, some may have refinanced, but for the most part, between appreciation and mortgage pay down, there should be a good amount of equity in the property.
Now finding motivated sellers, that's a problem! You would probably have better luck in worse areas or smaller town where things don't move as fast.
Also, you might not find quite as good a deal. However, as a buy and hold investor, if you can find a property at a 10 or 20% discount to the MLS, you're still better off than buy and hold investors buying off the MLS.
The ideas here are a bit off, search BP forums for Title States" and "Lien States", "Equitable Interests" need to be understood. Also "rights of redemption", "excess collateral" and "what a lender is entitled to".
Collateral taken to offset a loan must be exposed to the market for a sufficient period of time, the lender must show they made a good effort attempt to extinguish the loan amount remaining. Where a deficiency judgment may be sought by a lender they need to show they made a best effort attempt to payoff the loan by a sale.
Dealing with anyone who's goal is to buy at very little and immediately sell for a profit is not going to be well received by any lender, 1. they can't show good faith in disposing of the property and 2. they list properties to expose collateral to the market and 3. whatever they don't get is either a loss or they have to collect on an unsecured basis, so why would any lender look at an offer from a straw man? They don't. And if you're found to be selling immediately, they may resend the contract, no judge is going to enforce a wholesaler contract digging into the pockets of an insured bank and at a loss to a borrower.
My advice, stay away from banks and REO/ORE properties as a wholesaler assigning contracts. Wholesaling the way most do it is technically illegal or walking a very thin line. Consider speeding in your car, you might get away with out on a highway, try it in front of a police station and see how that works for you. In this case, a bank is like the police station, they can have federal laws slapped on you in several areas of getting involved in their loan and foreclosure activities, making claims you'll purchase, not having the ability or intent to do so.
After you learn how to take title and close in your name, then you can hunt all you want to in the REO/ORE areas. :)
To add to the comments of@Luc Boironand @Samuel Sedoreabove.
Canadian provinces are split down the middle with respect to those which using judicial foreclosure (NS, MB, SK, AB, & BC) and those which have adopted power of sale (NF, PEI, NB, QC, & ON).
As Luc mentioned, the actual process for power of sale is enacted more quickly than judicial sale/foreclosure which is a "good thing" from the lender's perspective.
Another key differentiation is "who owns the property". With power of sale, the lender need not take ownership of the property to have it sold. As a consequence, if the property sells for less than what the lender(s) is (are) owed, the borrower/owner is still under obligation to pay the balance. Conversely, if the property sells for more than what is owed the lender(s), the balance goes to the borrower.
In the case of judicial foreclosure and sale, when the lender forecloses on the property, they take possession and, in exchange, the borrower/mortgager is typically relieved of any further obligation to the lender(s) related to the property.
I will also join in the above chorus that the idea of wholesaling a bank/lender owned property in Canada is not a workable strategy. In addition to the lender's mandate to achieve fair market value for the property being sold (judicially or contractually), the lender required Schedule(s) executed in conjunction with an Agreement of Purchase & Sale (APS) on an bank controlled/owned property typically require the buyer to retain possession for 6-12 months (90-days is the shortest period I have seen), making it a violation of the contract to "flip" the property in the short term.
All that aside, always keep a little purse tucked away - when times get a little rough, the number of power-of-sale/judicial sales increase and you can often find a very reasonably priced buy-and-hold property.
@Luc Boiron Thanks a lot for the info. It seems as if the Canadian real estate laws are much different. @Matt GeertsHey Matt, have you ever thought of wholesaling American properties from Canada? This morning I heard there are ways to do it. Im looking more into it. @Debbie Gilbert Thanks Debbie , ill be sure to attend the next event. @Samuel SedoreThanks for the informative advice
Thanks for your insight, @Roy N. I've long ago rejected the idea of bank sales. I have a relative who works in a bank and oversees this stuff and she's not able to funnel anything worthwhile to me.
@Leo RobinsonI love that you're looking to chase the deals, and EVERY American market is more landlord friendly than Ontario, but I'm not up for the challenge as a new investor. Detroit is just over the bridge from me, so I could buy a dozen instead of a morning coffee, but no thanks.
@Leo RobinsonI love that you're looking to chase the deals, and EVERY American market is more landlord friendly than Ontario, but I'm not up for the challenge as a new investor. Detroit is just over the bridge from me, so I could buy a dozen instead of a morning coffee, but no thanks.
Matt:
California may challenge your theory. Here at home, Nova Scotia runs a close second.
@Leo RobinsonI love that you're looking to chase the deals, and EVERY American market is more landlord friendly than Ontario, but I'm not up for the challenge as a new investor. Detroit is just over the bridge from me, so I could buy a dozen instead of a morning coffee, but no thanks.
Matt:
California may challenge your theory. Here at home, Nova Scotia runs a close second.
How is the east coast more tenant friendly?
How is the east coast more tenant friendly?
Samuel:
I didn't say the East Coast was more tenant friendly, but that Nova Scotia is a close second to Ontario in the tenant friendliness of its Residential Tenancies Act. In New Brunswick, legislation and regulation is more balanced.
However, upon further reflection, I'm tempted to rescind my prior remark and restate that Nova Scotia is more tenant friendly than Ontario.
Some quick comparisons:
Deposits:
Ontario permits the collection of a Rent Deposit (which is often colloquially identified as "last month's rent"), but not a damage deposit {the deposit can only be used to cover unpaid rent}. The rent deposit is not to exceed one month's rent.
Nova Scotia permits the collection of a security deposit that is not to exceed 1/2-month's rent.
New Brunswick permits the collection of a security deposit that is not to exceed 1-month's rent.
Leases:
In Ontario, the landlord has 21-days to furnish the tenant with a copy of the written lease.
In Nova Scotia, the landlord must provide the lease within 10-days.
New Brunswick has no formal deadline {but does have a default lease which is deemed to be in effect}.
Notices (monthly tenancy):
In Ontario, the landlord is to provide the tenant with 90-days notice prior to a rent increase. Ninety-days or 3-months is the most common notice period across the country. In the case of termination, a landlord, or tenant, in Ontario must provide 60-days notice to end a lease.
In Nova Scotia 4-months notice must be provided to the tenant prior to an increase in rent. To end a tenancy, the landlord must apply to the Office of the Rentalsman, while the tenant must only provide 1-month's notice. Nova Scotia also has a provision which allows a tenant early termination of a lease (monthly or annual) based upon deteriorated health or reduced income. An estate may provide a 1-month notice in the event of the death of a tenant.
In New Brunswick 2-months notice is to be provided the tenant for an increase in rent unless the tenant is a long-term tenant {tenancy >5-years}, in which case the notice period is 3-months. To end a monthly tenancy in New Brunswick either the landlord or tenant must provide 1-month's notice.
BTW: Saskatchewan has the longest notice period for rent increase (6-months).
... and with that, I'm all done dragging this ship off-course.
Thanks @Roy N., it sounds like Nova Scotia is way more tenant friendly. I don't know how landlords there sleep with a 1/2M rent security deposit.
I'm surprised no one brought up financing. You might not be able to get a deal on the price with a power of sale, but you absolutely can get a deal on the financing.
Early on in my investing career I was looking at a 19-unit townhouse complex in Sarnia, Ontario. The price as I recall was about $550k and had been on the market for over a year. The bank offered $50k down, 2.5% interest (when the going rate for a commercial loan was more like 6%) and up to $200k wrapped into the mortgage for renovations.
Do keep in mind that Sarnia's market was in the basement at the time and the banks were desperate to get some performing loans going.
A very good point to bring up ... though it's not been part of our personal experience ... yet.
We are working on a deal now where the bank is being very enticing with financing terms - if it works, it will be a first for us where the bank has given considerably on financing.
@Leo Robinson Are you looking to buy?