As a real estate investor, you can stand to make serious amounts of money. But these days, with 5.4 million Americans behind on their mortgage payments and pending home sales dropping, you might think real estate is a bad bet.
I’ve made over 350 real estate deals in the past 14 years – many of them in this terrible market. And in my experience, one of the best ways to cash in on real estate is by wholesaling foreclosures.
I remember one house that had a value of $1.9 million but had been standing vacant for four years. I ended up buying it for $1.2 million and wholesaling it for $1.5 million. In just a few days, the seller was relieved of a crushing financial burden, the buyer was patting himself on the back for getting a great bargain, and I was on my way to the bank with a check for $219,797.58.
In real estate, wholesaling means entering into a contractual agreement with another party for the purpose of purchasing a property, and then assigning your interest in that contract to another investor in exchange for compensation.
The business of wholesaling is not just a trend in the real estate market. It is progressively gaining momentum and popularity with both new and experienced investors. No license is needed, so just about anyone can do it. Plus, turnaround time is quick. The basic idea is to get in, get out, and get paid.
Foreclosed property is especially attractive to wholesalers because it’s owned by a bank, not an individual. The bank wants to get rid of it as soon as possible – and that gives the investor an advantage.
The foreclosure process varies depending on whether the state is judicial or non-judicial. In judicial states, foreclosure requires legal action; non-judicial states do not deem it necessary.
In non-judicial states, the borrower can grant the power of sale directly to the lender. After the borrower fails to make several payments on his loan, the lender files a Notice of Default (NOD) and the foreclosure process is put into effect. After about three months, the lender files a Notice of Sale (NOS). The property is now in control of the bank – listed on its books as Real Estate Owned (REO) – for 21 days until the actual foreclosure sale.
Depending on where the property is in the foreclosure process, you can buy it by approaching the homeowner directly, purchasing it at a public auction, or buying it from the bank.
Approaching the homeowner directly gives you the ability to negotiate terms and offers the potential for huge profit margins. But you have to deal with title, liability, and legal issues.
Public auctions, too, give you the potential for huge profit margins. But, again, there are some significant negatives. For one thing, you have to make the purchase with cash (unless you are purchasing from a real estate disposition company, such as the auctions you see put on by USHomeAuction.com and HudsonandMarshall.com). For another, the property is sold “as is.” If you want to have it inspected by a professional, you have to incur that expense before you even bid on it.
The profit margin can be substantially higher when you buy from a bank. You can (usually) get the property inspected after you’ve made the deal and void the contract if the inspection uncovers anything seriously wrong. Plus, there is no need to worry about title assignment or other legal issues.
When you are making an offer on a bank-owned property, you can write up the offer in the name of a land trust, and then simply assign your beneficial interests in that trust to your wholesale buyer. Or you can write the offer in your own name and, at the bottom of the contract, include this clause:
“Vesting to be determined at close of escrow.”
This allows you to take title in any entity, including your wholesale buyer’s name. The reason you want to do that is because banks will not let you assign your contract to a specific person. If you put “and/or assigns” on your contract, your offer will not be accepted.
The deal is now complete, and you can go on to the next one that is just waiting to be found.