The other day I had a “so called” wholesaler email me regarding doing a wholesale flip through a realtor. He is starting to feel some economic pressure lately as his regular day gig went away, and he is trying to make it doing wholesale deals full time. I applaud his tenacity, and I am a firm believer in necessity being the mother of invention, but there is a problem. He is a nice guy and I like him allot but unfortunately he is only about “Half Trained”. He bought a $100 online course that has no mentoring, no coaching and no real support after the sale and then wonders why he is forever calling me to fix his deals for him. Sadly, I have been unsuccessful in getting him to sign up and pay for my ongoing coaching. A word to the wise guys, if you are not coachable, you will fail; it doesn’t matter what business you are in, you are screwed before you start and you have done it to yourself. I do this full time and STILL to this day have coaches, teachers and mentors that I bounce deals, ideas and hair brained schemes off of. It is a simple rule of life and it works.
That being said, here is his question and my answer:
“I just made my first offer on an REO. Any thoughts on how to get a “proof of funds” letter or something like that for the offer? I don’t actually have the funds and if I did I wouldn’t necessarily want to show that to the bank. The offer is for $100,000 on a $177,000 house. Please advise …”
Problem #1:
I called him and got a little more info: He wants to flip it, he does not have the funds needed to give the realtor for “proof of funds” letter via his banker, and it needs 15k in repairs. So first off, according to my formula it isn’t even a deal. For those of you who don’t know my formula, I never offer more than 60-70% of the After Repaired Value, (ARV) not including repairs. 60% of 177,000 is 106,200. If you subtract 15k from that your maximum offer can be no more than 91,200.
Problem #2
Okay, let’s say that he offers 90k instead of 100k. This is great, he is within the Maximum Allowable Offer, (MAO) right? Wrong. Remember, he wants to wholesale it. He has no intentions of keeping it for a rental nor does he want to rehab it and retail it to an end user. This means he has to have a deal that is lower than MAO in order for him to attract another investor. If he doesn’t have this, he is using what I call the “greater fool theory” of real estate, which means he is trying to find an investor who knows less than him. Not hard to do, but it will ultimately get you a bad reputation around town and if you choose to go this route, you may find yourself relocating your business because nobody will deal with you.
Problem #3
So let’s say he makes an offer of 85k. This will make him 5k, not bad for a wholesale deal, considering he will never own the house, he doesn’t have to work on it, and he will not have to hold it and wait to sell in a slow market. But wait; he is dealing with a realtor. He WILL own the house! See, the realtor is not going to let him sell his interest in the contract to another investor. In fact, most Purchase and sales agreements from a realtor specifically say that you as the buyer cannot sell or otherwise transfer the contract to another person or company. That’s what the realtor’s purchase and sale agreement is all about, protecting the REALTOR’S interests. Don’t think for a minute it helps you as the buyer or as the seller. Read one all the way through sometime, you will see what I mean; the language is all about limiting the realtor’s and his broker’s liability.
Problem #4
Hey, if he has a buyer, why not just do a simultaneous close? Yes, I guess he could do that; however, here is the problem I see with a simultaneous close of that nature: First, when his realtor finds out what he did, this guy will get black balled from the realtors entire brokerage. Yes, I know many realtors are morons, but that is no reason to have everyone of them in town pissed off at you. Second, and more importantly, let’s look at his buyer. If the buyer has a brain cell one in his head, he will see the realty sign in the front yard. He will realize the wholesaler is making a few bucks off of him, and he will get pissed and walk from the deal or call the realtor to try and negotiate a better deal. MAYBE no laws are getting broke here, but do you really want all those people mad at you? By the way, depending on the state an argument could be made that you ARE breaking the law by engaging in “Tortious Interference” and/or “Restraint of Trade” and you may find yourself going to court. Yes you might win, but do you really want to spend $2000-$3000 for an attorney and waste all that time? It might just be easier to just find another deal …or ten.
Problem #5
If you are going to play with REO’s you are going to have to deal with the bank’s rules. Period. End of story. If you do not have proof of funds, all you are doing is wasting the realtor’s time, the banks’ time, and the most important time of all…your own. Actually that’s not true, if you email ME about it, you are wasting MY time which is far more important….ok, just kidding; but you see my point right? That being said, let’s look at a couple of ways to get proof of funds:
- Go to a bank and get proof of funds. If your numbers are right, (i.e. you used MY numbers not the ones we started with), and you don’t have crappy credit, you can by the house and flip it via a wholesale or a retail deal.
- Find a hard money lender and get proof of funds from him. You will pay more than with a bank, but again, if you used my numbers, you will still make a good chunk of cash and these sorts of lenders could generally care less about your credit score.
- Get a partner. Hey, a partner is great when you are getting started. They put up the money, you put up the work, everybody makes money. You might want to think about having two or three potential partners sitting backstage all the time.
The Bottom Line:
I think you guys can all see, that as this deal sits it is a “No Deal”. It is not feasible from not just one, but several angles. For myself, if I could get it at $90,000 I might consider it for a retail flip. 177k is just over the median around here, and that means I would be able to find a buyer who could get a loan, or perhaps a lease option tenant with plenty of cash, who could qualify and therefore cash out soon. Of course that is a completely different exit strategy than the one proposed by this wholesaler; and therein lies the point of this whole conversation. He only knows one way to do a deal. Like I said at the start, I admire his tenacity, but right now he is having all the effectiveness of a car stuck in the mud; lots’ of noise and crap flying everywhere…not allot of forward movement. You need to know EVERY exit strategy. You need to know ALL the ways to do a deal. Get trained guys. Once you are trained KEEP getting trained. Education in this or any business is a lifelong endeavor, it is the key to success, and it will pay you high dividends.
