Wholesaling Bank Owned Properties (REO’s)

A reader just called me from California about how to wholesale bank owned properties.  Now first thing, keep in mind, I’m not an attorney and I’m not dishing out legal advice here, especially for the great state of California which seems to have their own rules for everything related to real estate.

If you plan on taking advantage of wholesaling REO’s, then you need to know what your up against.  The Banks try to make it as difficult as possible for anyone to wholesale a deal.

We used to be able to treat REO’s just like any other property and “assign” the contract.  The banks caught on and dissallowed any contracts with an assignment clause.

…So investors started “double closing” deals.  Double closing works like this:  Lets call the Bank, party A, the wholesaler is Party B, and the end buyer/rehabber/landlord is party C.

Party B contracts with Party A to buy an REO property.  The REO agent sends the contract to the title company.  Party A and B are principals in the deal.  Party B then markets the property as a wholesale deal and finds a buyer (Party C).  Party B then contracts to sell to Party C and send the contract to the title company.

Both Closings happen at roughly the same time at the same title company (or another one, but let’s keep this example simple).  Funds in escrow from Party C to buy from Party B are also used for Party B to fund the purchase with Party A.

The title company has 2 transactions, 2 sets of settlement statements, and 2 sets of closing costs.  (side note: if doing a double closing, ask your title co. for a “hold open” policy – this will save you money on the “B” side transaction – OR in the first closing have the seller pay closing costs, in the second, have your buyer pay closing costs)

You get paid the difference in proceeds from the price you bought it from Party A and the price you sold to Party C, less any applicable closing costs.

Keep in mind some states have as much as 3% transfer fees for transferring ownership of real property – double closes in those states might not work!

Lately Banks are even wise to the double closing game.  Some investors took the “B” side transaction to another title company and wired proceeds from one to the other but sometimes this won’t work either.

You CAN get around bank addendums that tell the title company, they cannot double close – not in so much words, but basically they state the buyer must close with their own funds, not funds from another transaction.

So how do we get around that?

You could just show up with your own cash for 5 minutes till you resell to Party C and get all your money back plus your wholesale profit.  This of course assumes you have the cash on hand to do that and you aren’t doing multiple deals at at time and need multiple amounts of cash to buy houses.

You can use “Flash Cash” to fund your buy side transaction.  Flash Cash is basically hard money that you’ll likely pay 1-3 points for the use of, even if it’s for only 5 minutes.  If your buying for 100,000 and selling for 110,000, this could cost you $1,000 – $3,000 of your profit.  That SUCKS!

Here’s a workaround.  Use a Trust or Entity such as an LLC to go to contract on the REO and then, SELL your Trust/Entity, a personal property transaction, for the equivalent of your assignment fee.

Trusts can be the easiest way, however, some investors, even seasoned pros, can be leary of dealing with trusts.  The LLC might be the best way to go.

I had my real estate attorney create a nice, safe agreement to facilitate the sale of the LLC that covers the same points necessary in a real estate transaction of this nature, that’s easy to understand by both parties.

Assuming you’ll do repeat business with many of your wholesale buyers, getting past the first “rodeo” with your trust or LLC sale process will be a hurdle, but once you both understand why it’s done this way, your buyer will be much easier getting along with on future transactions.  And wholesaling, like any other business, truely is about relationships.

Many of my wholesale buyers have been with me for years and are very easy to get along with.  We Each make Each Others Life easier by being good customers.

The wholesaler’s part is to provide good deals and an easy process to close on them, the buyer, on the other hand is to be a good and reliable buyer for the wholesaler.  Good relationships stem more good business.

I now buy wholesale deals as well as wholesale some myself.  Sometimes I buy deals from buyers I’ve wholesaled to.  A property that’s right for me might not be right for someone else and vise versa.

Do good business and your business will get easier and easier.

Enjoy,

Michael Jake

http://www.localmentor.com Go here for more free real estate invsting training resources!

My New Blog is also up and regularly updated at http://www.michaeljake.com

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4 Responses to “Wholesaling Bank Owned Properties (REO’s)”

  1. Eric Hundin Says:

    I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin

  2. Secrets to Finding the Best Bank Owned Properties to Wholesale « Wholesaling Houses Mentor Says:

    [...] I forget, don’t forget to read: http://wholesalinghousesmentor.wordpress.com/2008/11/10/wholesaling-bank-owned-properties-reos/ on wholesaling bank owned [...]

  3. James Liu Says:

    Do you establish the entity “LLC” prior to making the offer on the property or after?

    My realtor came across a fine line that when getting into a contract using an entity that does not existing does void the contract.

    Can you clarify a bit how the process works!?

    Thanks

    • wholesalinghousesmentor Says:

      yes – you have to create the LLC first. Doesn’t mean you have to hire an attorney, draft membership certificates, etc. You can (in most states) register a new LLC online (secretary of state’s website) – here in Colorado, we can search the name database, reserve a name, file the articles of organization and pay all online.

      Please understand – I am not an attorney, I highly suggest you get legal advice from qualified professional. I had my attorney draft me a document that is a very solid LLC buy sell agreement that clearly states no membership certificates have been issued – we basically create a shell LLC just to go into contract as a buyer. We then SELL the LLC (using the buy/sell agreement) – and this cleverly drafted doc, covers basically all the same stuff we’d have in a real estate buy sell agreement, but covers it as an LLC buy sell. You need to cover deposits vs. earnest money, etc.

      My attorney drafted mine after interviewing me for about an hour on how the transactions occur – this agreement didn’t exist that would cover what it needed to cover and he charged me a little over $1200 bucks for the whole deal. Now I can re-use that over and over, just filling in a few blanks each time.

      I don’t know what state you’re in – in CO – it’s $50 to create an LLC online. If your state costs 700 bucks to create one, you might try using a trust to go into contract and then assign the beneficial interest in the trust. Refer back to my post on this though – some buyers just don’t “get” trusts. You may scare away a buyer – if you can get your buyer through the first “dance”, then you won’t have an issue with that buyer down the road. Main problem is many times a confused mind says no – OR – they pass the decision on to an advisor who then charges them $250 an hour to say no for them. (better to scare the hell out of them and cover my a$$ then “recommend” someone go out and get a good deal). I’ll get off my soap box now.

      I hope that helps to clear the muddy waters a bit. Thanks for you question, James! I noticed you signed up for my free mini-course and free audios on http://www.localmentor.com. Let me know what you think.

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