How to Wholesale Bank-Owned (REO) Houses
No, it's not impossible.
In my last post, I explained how to wholesale a house. That post covered what wholesaling is and how to assign contracts and double-close. That post handled wholesaling as it pertained to working with motivated sellers (buying from private owners, not banks or listed properties).
Today's post is going to cover wholesaling houses that are bank-owned. Bank-owned houses are also known as REOs (real estate owned).
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Wholesaling REOs Basics
The basics of wholesaling REOs involves finding listed bank-owned properties and putting them under contract, only to sell them as-is to other investors. You are not flipping houses in the normal sense. You aren't intending to close on the house, fix it up and sell it. You are simply making offers, getting one under contract, finding a buyer and selling the house to them. I'll break this down into a process below.
The Typical Process
- Get a List of Bank-Owned (REO) Houses
You've got to get a list of houses to look at to make offers on. The best way to do so is by contacting REO Realtors. A good place to get contact information for these Realtors that list bank-owned real estate is by visiting the NRBA.com Member Search. You will likely need a buyer's agent to schedule to see the houses. If you contact an REO agent, they should be able to recommend somebody in their office.
- Visit the REO Houses
Go and take a look at the houses and figure out what you will spend on repairs. If you are not sure what repairs will cost (as most people don't), try to bring an experienced investor (possibly your best potential cash buyer) or take an investor-friendly contractor. Have whomever you take give you rough ideas and rules-of-thumb regarding replacing everything (even if that particular house doesn't need it). This way you will have a list of repair costs for the other houses you go and see. Keep a separate list of the repairs that particular house needs though so that you can calculate how much you can offer for it.
- Calculate and Make Offer
In order to calculate your maximum allowable offer (MAO), you need to know how much your investor buyers are going to be willing to pay for it. Typical investors want to buy flip properties for about 70% of what they will sell for after they are fixed up, minus the cost of repairs. So if the house will sell for $200,000 and it needs $20,000 in repairs, they will likely be willing to pay $120,000 (200,000 * 70% - 20,000).
This is the most they might pay (if they base their purchase price on the 70% formula) and you still need to include your wholesale fee.
For your wholesale fee, you might want to shoot for $10,000. If that is the case, the most you could offer for it would be $110,000. Don't offer that much. You need room to negotiate and the banks will want to negotiate. I'd offer about $100,000 and slowly go up from there.
Here is where a big difference is between buying from banks versus motivated sellers. You will not likely be able to get away with $10 or $25 as earnest money. You will probably need $1,000 and sometimes even 10% of the offer amount. This amount will usually be spelled out in the listing for each house (how much they expect for earnest money). Of course, everything is negotiable, but it can be difficult to get them to accept less.
You will also need to know whether your offer will be all cash or involve a loan (hard money loan or a loan from a private money lender). If all cash, they will want to see proof of funds (usually a bank statement - tip: it doesn't have to be your bank statement). If a loan is involved, you will need a pre-approval letter (private and hard money lenders will be able to provide you with one).
- Offer Is Accepted
Once the bank agrees to your offer, you will be required to sign addenda (forms specifying all sorts of things about how you are buying it as-is and cannot assign the contract - usually).
VERY IMPORTANT: Make sure the contract and addenda that you have to sign does not have a restriction that will keep you from being able to immediately resell the property. If it does, you can either refuse to accept it and cross it out (which they might/might not accept) or just back out of the deal.
The bank will usually dictate which title company must be used. Once again negotiable but can be difficult to get them to accept using one you want. You must tell them you want to use your title company when you make the offer.
It's best to use a title company that you have found beforehand that will do double-closings. It's not the end of the world if they won't let you specify which title company you want to use. Even if you have to use theirs, you can tell the title company that they want to use that you want to close your side of the transaction with your closer (at your preferred title company).
- Find a Buyer
You've got it under contract now and will need to find a buyer. Cash buyers are who you need to find. Don't even think about dealing with people that need to get a conventional loan. You want investors that can either pay cash, are using hard money, private money, line of credit, etc.
You should have already been looking for a cash buyers while you were looking for deals. You should also have been secretly rating how strong they are as buyers (cash and buy a lot buyers go on the top of your list).
Start by calling up the top ones one-at-a-time and offering the deal to them. If you just email blast a list, sometimes the serious buyers won't want to waste their time competing with newbies for the deal (whether a valid assumption or not) and will just delete your email.
If a buyer likes the deal, you will need to contract to sell to them. You will sign the contract as the seller of the house and them as the buyer. Demand non-refundable earnest money from your buyer so that they are less likely to walk away and not close (which means you can't close - yikes!). $2,000 or more should do the trick.
Make sure your contract states that it is "subject to you being able to provide clear title" (which you can't if, for whatever reason, the bank doesn't close - in which case you can't sell it - which is a shame, but not yikes). You also need to make sure your buyer plans to close the deal themselves and are not going to try to wholesale your wholesale (put a clause in the contract stating it cannot be assigned). Take this contract to your title company and get it receipted.
- Simultaneous Close, or Double-Close
You can't assign a contract on a bank-owned REO deal. You can however simultaneous close or double-close. Both of which were discussed in our post on wholesaling - click here to read more.
- Get Paid
Your wholesale fee (difference in your purchase price from the bank and the amount you sold to your buyer) is paid to you at the closing of the B transaction (see last week's post for details on simultaneous and double-closings to understand what the B transaction is).
Wholesaling REO's - Timelines and Tips
- Typical time frames
Typically, a bank will take 4 weeks to close. This gives you a good amount of time to make sure you have a buyer ready to go to close the deal.
If the deal is a good one, you should have no problem finding a buyer willing to buy it. If you are having a hard time finding a buyer, you are probably asking too much and will have to lower your asking price (your wholesale fee must be reduced at this point to be able to lower your asking price).
You can have your end buyer agree to pay all closing costs. If you just specify they are to pay all closing costs on your contract, they will only have to pay for the closing costs incurred in the B transaction. If you specify that your sales price to them is to be the NET to you, they will be responsible to pay closing costs for both transactions (they must know there will be two transactions and that they will be paying closings costs for both - don't surprise them with that!).
Other closing methods include buying the house in a land trust and then assigning the beneficial interest to the trust over to the new buyer. The same can be done by buying in a new LLC you set up for that property. You then sell your membership in the LLC to the new buyer. Both of these strategies involve you selling your interest in an entity versus selling the property. Woah, Nellie! These techniques are beyond the scope of this article though and have ins and outs that you need to know about. Just wanted to let you know they exist.
Brand new REO listings tend to have a lot of competition. You might want to target listings that have been on the market a little while (typically around 45-50 days). You will start to notice trends on whether price changes occur and you want to hit them with your offer right before this price change. Once the price change happens, you could be facing more competition.
Wholesaling bank-owned houses can be done, but it's a little more difficult and complicated than wholesaling houses from motivated sellers (private sellers). You can now see why I recommend buying from private homeowners. That and there is just so much darn competition right now with listed properties. Go forth and wholesale!