How to contract and wholesale an REO
Real Estate Investor · new york, NY · Member since 2008 · 127 posts · 6 votes
How to contract and wholesale an REO
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18yThe trick you're missing is that you're looking at listed properties. You need to find houses that people want to sell that are not listed.
Those gurus who are saying you can do it with $10 in earnest money aren't dealing with REOs. REOs are going to require real earnest money and proof of funds. They will only cash the earnest money check once a contract is accepted, but at that point, they will cash it. And, they will generally not let you assign the contract. So, you'll need to double close with your end buyer.
The gurus who talk about $10 are talking about buying directly from the owner. You have to find people who will sell. Almost always, these are people in some sort of distress, usually foreclosure. Their houses aren't listed with anyone. You have to market to find these people, so this is not a zero dollar proposition, either. Some sort of marketing is needed, like "We buy houses" signs, letters to people in foreclosure, ads in the paper, or web pages. Once you find these folks, and negotiate a deal, you can find people who will take $10 as earnest money and that will allow you to assign the contract.
Jon
28 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes18y
The trick you're missing is that you're looking at listed properties. You need to find houses that people want to sell that are not listed.
Those gurus who are saying you can do it with $10 in earnest money aren't dealing with REOs. REOs are going to require real earnest money and proof of funds. They will only cash the earnest money check once a contract is accepted, but at that point, they will cash it. And, they will generally not let you assign the contract. So, you'll need to double close with your end buyer.
The gurus who talk about $10 are talking about buying directly from the owner. You have to find people who will sell. Almost always, these are people in some sort of distress, usually foreclosure. Their houses aren't listed with anyone. You have to market to find these people, so this is not a zero dollar proposition, either. Some sort of marketing is needed, like "We buy houses" signs, letters to people in foreclosure, ads in the paper, or web pages. Once you find these folks, and negotiate a deal, you can find people who will take $10 as earnest money and that will allow you to assign the contract.
Jon
- Real Estate Investor · Katy, TX · Member since 2008 · 430 posts · 22 votes18y
Wheatie has it right on. It is VERY hard to wholesale a REO, someone may not say that is true, but for some of the same reasons your frustrated.
Little to no money wholesaling means getting out there and finding sellers of houses that arent listed with an agent. They are out there to. Marketing is the name of the game to get these sellers to call you. Once you get some motivated sellers calling you, many times you can get them under contracts for NO earnest money.
I would not recommend wholesaling a REO unless you plan on financing it yourself.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes18y
The other downside to REO's and other MLS listings for wholesaling is that they're already visible to everyone. My experience is that anything that's really a good deal, either a new listing of a recent price reduction, gets snapped up very quickly. Anything that's already been setting there is rarely a good deal.
Jon
- Residential Real Estate Agent · Los Angeles, CA · Member since 2008 · 1k+ posts · 9 votes18y
I would have to agree with Jon, Lenders are typically very hard to deal with when it comes to wholesaling a deal of theirs (it most likely will not happen)! Good luck though.
- Real Estate Investor · Mobile, AL · Member since 2008 · 19 posts · 2 votes18y
Jon and crew, I have been preaching that the "gurus" are full of crap saying that you can wholesale without any money. You can, but by the time you can do it that way you have already spent a sizeable amount of money marketing and building your network. It is like the banks they won't give you money if you need it. You can wholesale with little out of pocket once you have the pieces in place.
It is just not as popular to say you can't to the newbies. If you say you can then they buy whatever you are selling.
- Real Estate Investor · Katy, TX · Member since 2008 · 430 posts · 22 votes18y
Except you can...
It may not be as easy as having a huge marketing system such as HomeVestors, but it is indeed possible to wholesale real estate with little to no money at all.
I know many feel like the only way to find motivated sellers is by spending a lot of money on marketing. And although I do agree that you get what you pay for, and that big budget marketing will dramatically change a wholesalers business once they can afford it, but there are plenty of opportunities for wholesalers to wholesale with not much of a marketing budget. You just have to be diligent and put a little elbow grease into it.
- Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes18y
I've wholesaled several REO's. You have to double close them because the bank won't allow you to assign them. Yes, you need to provide proof of financing/funds and an earnest money check, which when you are starting out might not be feasible. Proof of financing could be a hard money lender, but the earnest money check is hard to get around if you don't have it.
As Jon pointed out, yes, they already have been marketed some through the MLS, and you are really looking for the price reductions and the new listings, but you would be surprised at how few investors check the MLS regularly. I have wholesaled about a dozen properties that I bought off of the MLS.
Some of Jon's other advice is huge here, too. Wholesalers joke that if there's a For Sale sign in the yard then its NOT a deal. Now, that isn't completely true, but the point being that you need to focus on getting to motivated sellers before there's ever a sign in the yard.
I would completely agree with Jason that you CAN find wholesale deals with little or no money, but it takes elbow grease. Yes, a substantial marketing budget makes it a lot easier, but it absolutely can be done with just gas in your car and internet access.
I actually have a couple friends who did exactly that. Time and gas is all they had in the deals. One of the guys actually did 2 or 3 deals with no marketing and no money. He'd find vacant properties, track down the owner's phone number, and ask them if they wanted to sell. Unfortunately he never understood the idea of reinvesting his profits. He spent his money, lost his drive, and he was done.
- Real Estate Investor · Katy, TX · Member since 2008 · 430 posts · 22 votes18y
The only problem is many of the people probably don't have the general $1000 earnest money. Also, most of the REO's that I have dealt with, the listing agent and lender already have a title company that they want to use. Which scares me because what if the title company that they have choses doesnt do double closes, some don't do them thinking they are illegal. So then what happens to your earnest money when you cant finance the deal yourself?
I am sure it can happen though, I am interested in more how you did it to be honest. I would love to wholesale some of the REO's that I find without having to worry about financing them or lose my earnest money if I don't.
- Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes18y
I understand the earnest money issue, and there's not really any way around that. The very first house that I put an offer on was a HUD, and I put $500 earnest money down on it. At the time $500 was A LOT of money to me. It was pretty much all the extra money I had at the time. I ended up chickening out and backing out of the contract, and I lost my $500. :cry:
If you can get over putting up earnest money then the title company/agent is the key to a double closing. There's a couple different options here. Some lenders will let you pick the title company if you pay for title policy. This would depend on which lender it is.
On a side note, technically, by RESPA laws the buyer has the right to pick the title company, but I've never pushed it much. I talked with an investor once that said that after he had a contract he demanded in writing to pick the title company, citing RESPA 2608??? I think, and the lender let him and still paid for the title policy. I've never done that though.
The other option is to see if the predetermined title agent would be open to a double closing. With many REO's they will have a central title company do the actual title work and then have a "courtesy" closing at a local title company. The agent who is doing the "courtesy" closing is the one that needs to be open to the double closing. Many times on the listing page on the MLS the listing agent will reference what title agent/company they want to use. Go ahead and call that title agent and ask them if they are willing to do a double closing. Yes, many agents are not open to it, but many agents ARE open to it.
Two of the REO's that I can think of that I double closed were with agents that I had never done any business with, but when I asked if they were open to doing a double closing they said yes.
I would recommend that you have your financing set up if you're looking at REO's. Losing $1000 earnest money and a good deal because you can't find a buyer quick enough is a shame. I've always been of the mentality that if its a good deal, I'm going to buy it whether I can find a buyer before I close or not. Obviously with that mentality you need to know for sure that its a good deal or you're likely to get stuck with a lemon.
I always recommend to beginning wholesalers to never buy a property. Use contingencies in your contracts and if you can't resell it before you close, back out. The last thing you need to do is get stuck with something you think is a deal but is really far from it.
Now when you've gained some experience and you know for sure its a deal, you need to be able to purchase the property even if you can't get it resold before you close. If you don't, you are leaving a lot of money on the table with lost deals, and you are also jeopardizing your reputation.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes18y
If you cancel the contract because of something covered by a contingency, you will get your earnest money back. I canceled one because the inspection turfed up some unexcepted problems and the bank wouldn't adjust the price enough to cover them. I had to sign a form, then got a check back in a few days.
The earnest money just shows up on the HUD-1 as money coming from the buyer. So, if the buyer's part of the total deal is, say, $10,000, and you put in $1000 in earnest money, then you would have to bring $9000 to the closing. If it was a 100% of purchase plus rehab, and you were getting some of the rehab money at closing, you would also get the earnest money back.
Jon
- Los Angeles, CA · Member since 2009 · 717 posts · 50 votes17y
I hear of some guru's saying that if you buy their course they will provide you with proof of funds letters. Is there a place or somewhere I can get this? This is my only problem with wholesaling reos. Any advice would be great
- Los Angeles, CA · Member since 2009 · 717 posts · 50 votes17y
I hear of some guru's saying that if you buy their course they will provide you with proof of funds letters. Is there a place or somewhere I can get this? This is my only problem with wholesaling reos. Any advice would be great
- Real Estate Investor · Fontana, CA · Member since 2009 · 36 posts · 4 votes17y
Jordan,
As someone who is currently jumping into the world of wholesaling REO's, let me be the first to tell you that the term "wholesaling" is used loosely when dealing with REO's.
First, you won't find an REO that isn't listed with an agent, so right off the bat you are in a completely different world then when you practice "standard" wholesaling as you WILL have to deal with agents on a regular basis if you want to flip REO's.
Second, you ABSOLUTELY need at least $1,000 down on an REO if you expect the agent to submit your offer to the bank. The only way around this is to have a buyer lined up before your offer gets accepted by the bank, at which point your buyers down payment would be used as your down payment, but this is a risky move as everything would have to be timed perfectly.
Third, you do need proof of funds for REO's but there are companies that offer something called a "bridge loan" that will usually provide you with as many free proof of funds letters as you want, so this hurdle is actually easy to overcome.
The bottom line is that you can kind of wholesale REO's only because you won't be actually buying the properties before you sell them to your buyers, but standard wholesaling rules do not apply to the bank owned homes world.
- Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes17y
The definition of wholesaling is selling something for lower than its retail value to a non-end user (i.e. an investor).
It doesn't really matter how you are buying the property. Whether you are buying through short sales, direct marketing to homeowners, REO's, foreclosures, MLS or any other purchase method, IF you are reselling the property at a discount to another investor then it would be wholesaling.
Whether you are assigning, double closing, or actually buying and closing on the property first doesn't really matter. Its all wholesaling IF you are reselling at a discount to another investor.
Now reselling your contract through an assignment or simultaneously reselling the property through a double closing are the two main wholesaling strategies discussed and taught by guru's because, if structured properly, they minimize your risk dramatically. But every wholesaling guru I've seen has different strategies for finding properties.
Steve Cook is probably the most popular wholesaling guru and the primary method he teaches for finding deals is REO's listed on the MLS.
Just remember that wholesaling has nothing to do with how you find the property and everything to do with how you sell it.
I'm not sure exactly what a bridge loan is but any hard money lender will give you a proof of funds/financing letter (POF).
Wholesaling REO's does require earnest money, a POF, and a double closing (so you really need to be able to pick the title company), but other than those factors, wholesaling an REO is just like wholesaling a property from an individual seller. - Real Estate Investor · Fontana, CA · Member since 2009 · 36 posts · 4 votes17y
Ryan,
I am well aware of the merriam-webster definition of the word wholesale. My point was that you can't follow the typical rules of wholesaling a house when you are wholesaling REO's.
And a bridge loan is a loan that is used just to close the first escrow in a double closing. The companies that provide them make it very clear that the loan will only be allowed for those doing a double close.
I have never personally used a bridge loan, but I use their proof of funds letters all the time.
- astoria, NY · Member since 2009 · 5 posts · 0 votes17y
Originally posted by Joe Picarella:
Ryan,
I am well aware of the merriam-webster definition of the word wholesale. My point was that you can't follow the typical rules of wholesaling a house when you are wholesaling REO's.
And a bridge loan is a loan that is used just to close the first escrow in a double closing. The companies that provide them make it very clear that the loan will only be allowed for those doing a double close.
I have never personally used a bridge loan, but I use their proof of funds letters all the time.
Hi Joe,
What kind of companies provide the bride loan POF letter? And how can I find them? How much are the Fee's for the POF letter? - 17yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
Greg,
You are missing the point here. Do you think the bank is going to accept a generic proof of funds letter you get from some Guru? You might as well create your own letter using an microsoft word doc.
The only way to wholesale bank reo's is you have to actually have earnest money and have proof of funds. The bank will not jack around with you. This goes for everyone. The only way you can assign a contract or put down $10 in earnest money is a fsbo property.
Bank REO"s are for wholesale investors who do this for a living. Assigning contracts are for the new or broke investor who does not have any money.
Everyone has done a great job for the most part trying to explain this but I still notice questions that have been answered in previous messages.
Curt Davis - KAIZEN Realty538 Reviews - Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes17y
Originally posted by Joe Picarella:
I am well aware of the merriam-webster definition of the word wholesale. My point was that you can't follow the typical rules of wholesaling a house when you are wholesaling REO's.
And a bridge loan is a loan that is used just to close the first escrow in a double closing. The companies that provide them make it very clear that the loan will only be allowed for those doing a double close.
I have never personally used a bridge loan, but I use their proof of funds letters all the time.
Joe, my point is that wholesaling encompasses more than just what some guru's teach the "typical" rules to be. Wholesaling REO's is not "loosely" wholesaling. It IS wholesaling. Some guru's even teach REO's as the primary buying strategy for their wholesaling program.Yes, the typical rules are different for different properties, but its all wholesaling.
Bridge funding, sorry I am more familiar with it being called flash funding. I would guess you are probably using a hard money lender who also offers bridge funding.
I would still argue that searching out a hard money lender would be much easier then searching out someone who specializes in only bridge funding.
I've personally never used bridge or flash financing on any of my double closings. My title agent has never required it and I would question whether it is actually required by law in any state.
George, I have used a hard money lenders POF to make offers on REO's and other listed property, and there was never any charge for the POF. I would google hard money lenders or bridge/flash funding for your area. If that doesn't work try your real estate investment club. There are usually one or two lurking there or at the very least someone will know one.
Curt, I don't think the banks will scrutinize it that much. I've used some fairly generic POF's from hard money lenders and no one ever questioned it. If it says So and So Funding Company at the top I really don't think you will have any problems.
And as for questions being answered in previous messages, I would say that probably 70-80% of the posts on the forum could probably be answered by looking through previous messages. That used to frustrate me where I felt like I was saying the same thing to a new person every month or two. I've now quietly accepted my fate of endlessly repeating myself. I do appreciate the "Related Discussions" that Josh has added. That feature definitely helps with the repetition, but the burden still remains.
- Real Estate Investor · Fontana, CA · Member since 2009 · 36 posts · 4 votes17y
Ok, I can see I have my work cut out for me here.
First off to Curt, I have ONLY used what you refer to as "generic proof of funds" letters and I have had three offers accepted by banks while using these. In fact, I have NEVER had a bank not accept my offer due to my proof of funds letter.
Second, I know plenty of wholesalers who are far from broke, so why don't you check yourself next time before you blurt out a blanket statement such as that.
Now to Ryan, I understand what you are saying but for the sake of Jordan, I thought it was best to not get into the semantics of the word wholesaling as it would probably just get too confusing. Based on how he worded his question I could tell that he was under the impression that wholesaling meant to buy a property for no cash and then flip it to an end buyer for a profit and so I just thought it would be easiest to go with that.
Also, I want to impress on you that I only use the PROOF OF FUNDS letter from a bridge lender. Because I am wholesaling the REO, I don't actually need the bridge lenders funds as I use my buyers funds to close with the bank. So yes, if I were to actually be purchasing the properties, then I would probably go with a hard money lender but as a wholesaler, this is not necessary.
Now to George, I would put a link here for the POF letter that I use, but I believe adding links is against BP rules. Do a google search for Coastal Funding, and on their homepage you will see a link that says proof of funds, click on it, fill out the info, and you will receive a very professional proof of funds letter in your e-mail in about two minutes.
I use this letter all the time, as does my mentor as well as some other very successful REO wholesalers. It has never once been an issue.
Oh and George, don't pay attention to negative a-holes who tell you what you can't do when they have never even tried it themselves. The world is full of these people and they will only drag you down. As they say, misery loves company.
- Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes17y
Joe, so you're saying that you only use a bridge funder for a POF? So what's the difference then? What does it matter if you get the POF from a bridge lender or a hard money lender?
Another factor to consider is are you planning on wholesaling every property you get over the next five years or do you think you might rehab or keep some for yourself?
If you are pondering doing some rehabs yourself or long term holds as you develop in your business then building the relationship with local hard money lenders would probably be more valuable to your business then using a bridge lender that you won't ever do any business with anyway.
This business is all about building the network and if you have the opportunity to build a relationship with someone that may be important for your business in the long run, I would do it.
- Real Estate Investor · Fontana, CA · Member since 2009 · 36 posts · 4 votes17y
Ryan,
You are absolutely correct in saying that it would be wise to build a relationship with a hard money lender since you are probably going to need the services of a hard money lender at some point in your career as an investor. I agree with you completely on that point.
But, since I am only wholesaling REO's as opposed to actually using funds to buy them right now, I don't want to build a relationship with a hard money lender and give them the impression that I will be using their funds just to get a POF letter as that would be a sure way to burn a bridge. I actually do have a hard money lender that I have a great relationship with, but I only use a POF letter from him on deals where I actually intend to use his services.
The reason I use a company that ONLY does bridge loans, aka transactional funding (It is not a hard money lender that also does bridge loans, they ONLY provide bridge loans) is because they make it ridiculously easy to get POF letters directly from their web sites without ever having to even speak with them, let alone having to build a relationship with them under false pretenses.
Also, I didn't say there was a difference between a POF from a bridge lender and a hard money lender, you did. You said it would be "much easier" to search out a hard money lender than it would a bridge or flash or transactional (or whichever term you prefer) lender. As far as I am concerned, you may be right. I have no idea which is easier to find as it took me all of two seconds to find the company I use and I no longer needed to search so I had no way of comparing which would be easier to find.
p.s.- Ryan, I am beginning to thoroughly enjoy our little discussions and I mean that sincerely. I love a good challenge. until your next post, later dude. - astoria, NY · Member since 2009 · 5 posts · 0 votes17y
Originally posted by Joe Picarella:
Ryan,
You are absolutely correct in saying that it would be wise to build a relationship with a hard money lender since you are probably going to need the services of a hard money lender at some point in your career as an investor. I agree with you completely on that point.
But, since I am only wholesaling REO's as opposed to actually using funds to buy them right now, I don't want to build a relationship with a hard money lender and give them the impression that I will be using their funds just to get a POF letter as that would be a sure way to burn a bridge. I actually do have a hard money lender that I have a great relationship with, but I only use a POF letter from him on deals where I actually intend to use his services.
The reason I use a company that ONLY does bridge loans, aka transactional funding (It is not a hard money lender that also does bridge loans, they ONLY provide bridge loans) is because they make it ridiculously easy to get POF letters directly from their web sites without ever having to even speak with them, let alone having to build a relationship with them under false pretenses.
Also, I didn't say there was a difference between a POF from a bridge lender and a hard money lender, you did. You said it would be "much easier" to search out a hard money lender than it would a bridge or flash or transactional (or whichever term you prefer) lender. As far as I am concerned, you may be right. I have no idea which is easier to find as it took me all of two seconds to find the company I use and I no longer needed to search so I had no way of comparing which would be easier to find.
p.s.- Ryan, I am beginning to thoroughly enjoy our little discussions and I mean that sincerely. I love a good challenge. until your next post, later dude.Joe,
You are funny lol to say the least, talk about putting someone in their place, nice job!!!!. It is amazing how so many people like to make their own definitions of other peoples comments
- Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes17y
Well I researched Coastal Funding and I have to admit that the ease of getting a POF from them makes it a much more appealing choice than a hard money lender (HML).
Now to put another point out there, I would never recommend that you build a relationship with a hard money lender or anyone else under false pretenses. If you aren't planning on ever using a hard money lender then don't worry about it. My point is that if you are eventually planning on using the services of an HML then start building the relationship now and proving yourself. By being clear and maybe not even using their services right now, you still can build trust in the long run. If you tell your hard money lender that you are going to wholesale 5 to 10 houses and then work into doing some rehabs or rentals yourself and then you go out and do exactly that, then you will build the trust with that lender. They will trust that you do what you say you are going to do. That you get it done.
That is exactly how I established myself with my banker. I told him I would be wholesaling most of them but a certain number of them I would be closing on and then fixing them up myself which is exactly what I did.
By any lender seeing that you are doing what you said you are going to do, even if you aren't necessarily using their money right now, it can establish the relationship on a very good footing. Now they may not want to mess with you until you are ready to actually to close on something, but most HML's are looking to build relationships with solid investors that they can count on their word. This gives them and you the opportunity to build a relationship. I would be upfront with the lender about your intentions and see where they go with it.
Now if you already have a solid relationship with a HML and you'd prefer to use a transaction funding company like Coastal Funding for the POF (which I agree is surprisingly easy) then this is all a mute point.
- Investor · Atlanta, GA · Member since 2009 · 18 posts · 4 votes17y
Great tips in here fellas!
- Real Estate Investor · Fort Lauderdale, FL · Member since 2009 · 14 posts · 9 votes16y
Just Google "transactional lender" and you will find what you are looking for.
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