Profit From Foreclosures Part 1

Wholesaling is one of the most popular approached to real estate investing. It appeals to both beginning and seasoned investors.

Current market conditions are driving investors to bank owned properties, also known as REO's. The single biggest advantage associated with REO's is the fact that equity can be created instantly either by finding a hot deal or through shrewd negotiation. There is no one telling the bank that they owe too much on a property and can't lower the price.

There is really only one downside to wholesaling REO properties..."Non-Assignability". When an investor gets a bank-owned property under contract it always comes with multi-page addendums that make the deal "non-assignable". This will turn a lot of investors off when it comes to flipping bank owned homes...not realizing that there are ways around this "bump in the road".

We will discuss four different ways this can be accomplished. Since they are quite in depth...to keep it simple we will address two today and the other two in my next post...

1.] Add to the Contract, then Quit Claim...

Most banks do not have an issue with adding an additional party to a contract..they just do not want the original party removed at any time. Investor "A " gets a property under contract for $40K. Investor "A" then goes to Investor "B". They negotiatate and discuss the terms of the contract. Investor "B" then agrees to a price of $50K. Investor "A" then calls the bank and requests an addendum be drawn up that adds Investor"B" to the contract. The bank agrees and all parties show up for closing. Investor "B" brings two checks. One check for $40K for the purchase of the property and one check of $10K made out to Investor "A". Investor "B" gives the check for $10K to Investor "A" and Investor "A" then signs a quit claim deed over to Investor "B".

The advantage to this method is that there is only one closing...saves on closing costs...simple and straight forward. It also works around the 90 day deed restriction that comes packaged with many Fannie Mae/Fredddie Mac properties.

The disadvantage to this method is that this will not work for HUD proerties because HUD does not allow any changes to the parties that are on the original offer and the end buyer usually cannot get a mortgage, because a mortgage company won't allow you to be on a title if they are lending someone else money against the home.

2.] Simultaneous Double-Close

The simultaneous double-close is actually two transactions. An investor is buying from the bank and then instantly reselling to a third party in a separate transaction. The "twist" that comes with this method is that the wholesale investor never actually brings any money into play. The end-buyer's funds are used to fund both transactions. This is possible because, as along as both closings take place on the same day, it doesn't matter which one closes first for the title company's accounting puposes. What really matters is that the deeds are RECORDED in the proper order when filed with the county. It is very important to have the first transaction filed first and the second transction filed second.

This works well for those who have zero cash as long as they have a good title company that will still do these types of transactions. It still works even with end buyers that are getting conventional financing if the end buyer is getting their financing through the right lender. This method is NOT an option if the end buyer is getting FHA financing. This method also does NOT work for Fannie Mae/Freddie Mac foreclosures in most cases, because these super-banks put a deed restriction in place that prevents you from reselling the property to ANYONE for at least 90 days.

Bear in mind that with the simultaneous double close, you will have two sets of transfer taxes, recording fees, and other associated closing costs that will work into the budget. The shrewd negotiator will build that into the price by lowering your offer to the bank to overcome those costs.

The biggest road block nowadays is finding a title company that is comfortable with this type of transaction...no money brought to the table by the wholesale investor...often they are refusing to close these types of deals...Too many concerns over fraud...

In my next post we will discuss: "The True Double Close" and "Sell The LLC". Stay tuned...