Bank Deals Are Different From Private Seller Deals
Banks scrutinize your offer much more closely… but there is good news! You have probably heard the term “REO”, which stands for Real Estate Owned properties that get reclaimed by the bank or government agency which financed their mortgage after failing to sell at a real estate auction. There are plenty of those deals available in most markets for you to make real estate offers on! Banks (specifically “REO” departments) do a lot of deals. They are in the trenches every day and get “blown off” all the time. Because of this they are systematic in their approach.
Investor Tip: Their “BS meters” Are Finely Tuned
It can be extremely difficult to wholesale REO property. In most cases, you MUST do a “double closing” because they forbid contract assignments, whereas in a private seller deal, you should do an assignment and avoid a double closing.
Investor Tip: Banks Want YOU To Close
A private seller doesn’t care who closes, as long as it closes under the terms initially agreed upon. So when you are submitting an offer on a house to a bank, there are some differences.
The vast majority of banks will rely on their broker to list, negotiate, and manage the sale of the house… any red flags you raise in their mind, and you are toast.
Investor Tip: You Must Play By The Broker’s Rules
I get calls and emails on a regular basis from brokers who’ve received an offer on a property from one of my clients (like you) who’s using my proof of funds and transactional funding. They call me skeptical that the money is really available for my client or that we can close… so I quickly tell them exactly how Hard Money financing works and their guard goes down.
I hear stories all the time about “newbie” investors who are doing it wrong. They use the wrong contract, they use too many contingencies, they call “pre-approved” offers “cash” offers, and so on.
Take a guess at what a broker does with your house offers when they sense that a “newbie” is presenting it? If it is in multiple offers, they put your offer at the bottom of the pile. They get investors making offers on property day in and day out who make exorbitant claims but cannot back them up. This is actually good news for you!
While many investors are making offers on REO deals the wrong way… you can do it the right way and beat your competition. You can be new to Real Estate investing, and still look and act like a pro.
These rules are unique to bank deals because private sellers don’t think about these things… they are not “in the trenches” every day.
1. Offer Earnest Money
Offer at least $500. The more you put up, the more real you look… especially if you have no contingencies. Don’t go crazy though. Usually 1-2% of the purchase price is the agreed upon earnest money deposit.
2. Be Careful With Contingencies
Use as few contingencies as possible. You should always include a title search as a contingency, however. Every buyer should do that, on every deal. This is customary. This tells you that there are no outstanding debts, judgments, or “clouds” on the title. An inspection contingency isn’t out of the question either, but many investors feel that makes their offer look not as strong. The rest (financing, partner approval, etc.) are frowned upon and put up a red flag to banks.
3. Use THEIR Contract
Brokers want you to use THEIR form, not yours. If you make it easy on the broker and they like you, they may have other deals around the corner for you. And don’t ask them to send their blank contract to you. This makes you look like you have never done a deal. You should look for the local Realtor Board Contract online and send it along with your “proof of funds” on your first offer to buy.
4. Make Sure You Have Proof of Funds
If you can’t prove your ability to close, the broker will not submit your offer to the bank. They are the gatekeeper for the bank, and everyone is busy.
You need to include “Proof of Funds” with your offer, which tells them that you are able to do, what your offer says you can do.
If you have cash in your bank, in a retirement account, or any other place, print up your most recent statement, “black out” your sensitive info, and then include that with the offer to buy the house. This is what a broker is hoping to see.
If you do not have the cash (which most people don’t), then you will need to line up some funding. Funding sources like hard money lenders, private lenders and transactional funding are great alternatives depending on your deal and exit strategy. Find out more information on Hard Money Financing at www.pinefinancialgroup.com
5. Shoot For A 30-Day Closing Or Less
Some banks vary a little, but 30 days is the sweet spot. Banks want to know that you can close quickly (while giving them enough time to get their “ducks in a row”). They use systems to make the process easier for them to dispose of their REO properties. Make an offer for 30 days or less, but be flexible in case they ask for something different. Pine Financial can close faster than that depending on the deal, so please talk with your loan officer to see how much time is needed before making the offer.
6. Expect Addendums
Each bank has their own set of rules. The best way to make an offer on a house is by using the local Real Estate Board approved contract because that makes the broker happy. But that doesn’t mean that the bank is satisfied. They have processed thousands of these transactions, and they know what is important to them and what is not.
So, they have created their own contract which rides along with and supersedes your contract. This is what is known as an “addendum”. This is especially true when you are dealing with a major bank like “Bank of America” or “Chase”. They are lending and foreclosing all around the country, and they are getting offers from investors in all 50 states. Each state has several Board(s) of Realtors which means there are hundreds of different contracts.
The asset manager does not have time to read through each of them to make sure that there is no sneaky or otherwise unwanted language. So, they created their own addendum form and tell you that you have to abide by it, or they will find another buyer who will.
READ THE ADDENDUM! Then if there’s any question about what it says, ask the Real Estate Agent for clarification.
7. You’ll Be Buying The Property “As-Is”
Banks will not make repairs after you get a deal with them. Their addendum will make you purchase the property “as-is”. They aren’t going to do anything to the property prior to close and any attempt to re-negotiate with the bank after a few days of putting the property under contract will raise a red flag. Include some margin in your offers in case you find something “behind the walls”, etc. after closing. If you are wholesaling the property, you don’t need to be exact on repair estimates, but a little cushion built in makes your deal look more attractive.
8. Avoid Using “And/or Assigns”
Using “and/or assigns” is the fastest way to show the broker that you are “new”. In private seller deals, you would ordinarily include language in the contract that allows you to assign it. In bank deals, it’s a BIG ‘NO-NO’!
One way to wholesale an REO is to do a “double closing” for foreclosure properties. You will incur extra closing costs, but the margins on bank deals make it worth it. Plan to close on the property in the name of your entity and sell it the same day to your buyer. Pine Financial Group can provide financing for these types of transactions as well.
Conclusion – Making Offers On Houses That Are “Bank-Owned”
Now that you are aware of these 8 rules, you will be making offers on a house like a pro and you won’t make the same mistakes that most investors make when learning how to deal with each type of seller.
Private sellers tend to believe whatever you say… banks tend NOT to believe whatever you say. You need to PROVE it!!!
The next time you see a Foreclosure, Short Sale, REO or HUD listing – go ahead and make an offer using these 8 simple rules listed above to help you close a great real estate investing deal!