Purchasing Bank Owned REO Properties Making use of Private Investors’ Income

Copyright © 2009, Lex Levinrad

Several actual estate buyers are conscious that there are great bargains available in the actual estate marketplace. The massive amount of bank foreclosures has led to a tidal wave of bank owned REO properties which has flooded the market with low priced properties. Astute investors are taking advantage of this scenario to scoop up houses at bargain basement prices.

If you are contemplating investing in bank owned properties then you will require to be a cash buyer. This means that you are necessary to show “proof of funds” which is typically a bank statement which shows that you have the cash offered to obtain the house.

If you do not have the money accessible then you will need to borrow the funds from a person that does. If you have a relative or friend with access to money they may be willing to lend you funds to obtain a property in exchange for you giving them a first mortgage on the property. They will efficiently become the bank and you will be required to make a monthly payment to them.

There are experts in the actual estate company that make these kinds of loans to folks that are not relatives. They are called hard cash lenders. The only distinction between a hard funds lender and a private investor is the interest rate. Borrowing from Aunt Sallie may price you 8% per year in interest. A typical tough money mortgage in today’s market would be 15% plus three points up front.

Why would everyone borrow income at such a high interest rate? Let’s look at an example. Assume that you could obtain a bank owned REO property for ,000 when the house has a accurate marketplace value to a non money buyer of ,000. Paying 15% interest on a ,000 loan amounts to a monthly payment of only .

Assume that you waited 90 days for seasoning of title and then sold the property to an FHA initial time homebuyer for ,900. Assume that you paid a commission of 6% to the realtor and another 6% to pay for the buyers closing costs. You would still net ,000 from this transaction. Soon after paying off the tough funds lender the ,000 that you borrowed, you would still be left with a profit of ,000. Even if you held the home for six month just before finding a buyer you would only have spent per month in interest for 6 months. Your total interest cost would only have been ,000. This would leave you with a net profit of ,000.

Or expressed an additional way, making use of no cash down (borrowing all of the funds) you could potentially make a profit of ,000. How simple would it be to sell a home like this to a 1st time residence buyer? The answer is it would be very straightforward. The buyers are putting down only ,000 (3 ½%) to acquire a house with a monthly mortgage payment which is about the same as their monthly rent. You are paying all of their closing costs. And the government will give them an ,000 tax credit if they purchase just before the end of 2009. It is a win/win for everybody. The bank gets to sell their property rapidly to a cash buyer. The cash buyer gets to flip the property and make a quick profit and the end FHA buyer gets to own a property for the very same monthly payment as rent.

The trick to the above transaction is to discover an ,000 property that you can buy for ,000. This is the component that requires training, understanding and encounter. Discovering offers like this is an art form and the men and women that locate these deals are recognized as “bird dogs” or “property scouts”.

Many bird dogs sell their offers to money investors for a little profit. This is recognized as wholesaling. For example a wholesaler may well contract to purchase the above house for ,000 and then sell it for ,000 to yet another money investor. This way, the wholesaler does not will need to borrow cash from a difficult cash lender. The wholesaler merely finds a deal, signs a contract to get it and then flips the contract to a money investor for a profit. This is recognized as “assigning a contract” and the profit that is paid to the wholesaler is recognized as an “assignment fee”.

Banks do not want wholesalers flipping contracts on bank owned properties. For this reason, banks do not permit assignable contracts. This means that a wholesaler cannot assign a bank owned property to yet another cash investor. The reality is that there are still techniques that a property can be assigned. 1 way is to buy the property in a Land Trust and then assign the helpful interest in the land trust. Another way is to obtain the property in an LLC and then assign the membership interest in the LLC. Nonetheless the dilemma with these techniques is that the end buyer might not want to have a land trust or an LLC.

For this reason, the very best way to sell a bank owned property to yet another cash investor is to have what is known as a double closing.  This means that the wholesaler basically buys the house from the bank and then simultaneously on the same day sells it to one more cash investor. The disadvantage is that the wholesaler will be paying double closing expenses.

If a wholesaler has a signed contract and is wholesaling the deal to an end buyer, then if the wholesaler is short on cash they may require what is identified as “transactional funding”. Transactional funding is best for bank owned properties and short sales that a wholesaler is flipping to an end buyer. Because banks do not enable assignable contracts the wholesaler is going to require to schedule a double closing with the end buyer. Double closings also known as simultaneous closings permit a wholesaler to schedule two back to back closings for the same property on the very same day. The wholesaler will require to have a source of funds to pay for the initial transaction. This is where transactional funding (also known as exact same day funds) is needed.

Our business provides transactional funding to all of our Private Mentoring Students. Nevertheless our students require to schedule both closing with our title business in order for us to provide the transactional funding. We will only provide transactional funding if both closings are with our title company (Independence Title &amp Escrow).

If you are looking to flip a bank owned property then you will have two contracts and two closings. The initial contract is between the bank (seller) and you (buyer). The second contract is between you (seller) and your end buyer (buyer). The end buyer is the person that will ultimately be the lengthy term owner of the property.

Example:

A – Bank
B – You
C – End Buyer

Assume that you have a contract with the bank to buy a bank owned property at ,000 (first contract). This is known as the A-B transaction.

You marketplace this property to your money buyers and you discover a buyer at ,000. You sign a contract with this buyer with you becoming the seller and them being the buyer (second contract). This is known as the B-C transaction.

The distinction between the two contracts (soon after deducting closing costs) is your profit which you will walk away with at the closing. Since there are two contracts there are two closings. This means you will pay double closing costs.

The transactional funding fee that we charge is 2% +five with a minimum fee of ,250. For example if you were to request ,000 your fee would be +5=,295. We will only supply transactional funding if you use our title firm (Independence Title) for both closings.

To understand more about transactional funding please check out  http://lexlevinrad.com/transaction_funding.html

 

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