Looks like I am going to be wholesaling this property on Cherie. The appraisal came in quite a bit lower than I needed it be ($75k vs my initial est of $90k) and the trend doesn’t look promising., something I’m not willing to live with in today’s market. The big issue is that there are far more pre-foreclosures and foreclosed properties on the market than I thought there were for this area. The other issue I have is that last week Bank of America decided that it would be a great idea to slash my personal credit lines from $75k down to $25k (when do I get my bailout?) and I still have been unsuccessful in securing a private lender with terms that will work for me. The thing that really bugs me is the credit line being slashed as it will affect my credit scores for quite awhile as my debt usage to availability ratio is now significantly higher than it was before just cause the bank wanted to reduce their risks. I should have taken the step of cashing out the credit lines and depositing the funds into a bank account, but now I am where I am.
I will continue seeking private funds as that is now the best way for me to go for future purchases and I don’t believe in quitting.
All is not lost, however as I can still wholesale it to make some cash. The good thing I learned from the appraisal is the fact that rents have not dropped in the area that the house is in and are stable This trend supports my wholesale buyer’s cash flow based strategy.
Wholesaling a bank owned property is a pretty straight forward process. The trick to doing this type of deal is that I can’t assign the contract or do an option on it, nor do I want to tie up my money on a deal that I wont be holding. That said, I’ll have to do a double closing which will cost a little money, but not so much that it kills my deal.
A double close is done when you have a house under contract between you and the seller for one low price, that you will resale to a third party buyer at a higher price on the same day. In this situation you are going to take title to the property just for a few minutes and then sell it and transfer that same title to the third party for a higher price. Normally it’s done when you are forced to take title because of the nature of the deal or when you don’t want either the buyer or seller to know what your profit is going to be.
Double closing in GA requires the person doing the deal to bring what’s called “wet funds” to the table. This means that you have to have the cash needed to buy the house to get title before you can transfer it to your end buyer who will also bring cash to the table to buy it from you. If you have the cash on hand you can use your own to fund it or you can borrow it from another person (some attorneys will do this) just for the day.
You have to have wet funds because some states have made it illegal to use the end buyers funds to cover both the cost of your initial transaction as well as theirs, which is how many of the ‘gurus’ out there claim that you can easily do; trust me it isn’t.
Now my buyer wants to pick up the property at a cost, purchase, rehab, closing expenses and my fees are no more than 50K. He also wants the deal to be one where the net annual income (total rents less expenses like taxes and insurance) bring in at least a 20% return on his investment each year.
Based on his due diligence the estimated rents for the area are in the $850-$875 range and the repairs are a little higher than I estimated ($13,500 vs $11,280). He agreed to the tax rate, though it will most likely be a bit lower due to his purchase price, and is able to get the hazard insurance for a couple bucks less each month. Thankfully he won’t factor in a vacancy factor nor will he be using a management company to deal with tenants. That said I have to make some adjustments to my figures to get him where he needs to be.
His Est Rent $850 x 12 months = $10,200 (year)
Tax $92 x 12 months= $1,108 (year)
Insurance $45 x 12 months = $540 (year)
Total Net Income $713 x 12 months = $8,556 (year)
To determine what his bottom line on income will be, all I need to do is take the net annual income and divide it by 20% to find out the max the deal can cost him. Then I can work my way backwards to see what I’ll make.
The math works like this:
$8,556/ 20%= $42,780 which is the most he can pay in total to get the deal to work for him.
To get my fee and his purchase price, I take that 42,780 and deduct the costs:
Buyers max cost $42,780
Less repairs $13,500
Less Closing Costs $1,200
Equals Buyers Purchase Price $28,080
From this number I have to back out the costs to get my profit. At first glance it looks like I’ll be making about $7,080 from the wholesale proceeds as his purchase price of $28,080 less my contract price with the Wells Fargo Bank is $21,000; unfortunately it will be a little less as I’ll be doing a double closing on the deal.
The cost of doing a double close for consists of two components, the admin fee and the use of funds fee. The admin fee is just $500; it is what the lender charges me just for setting up the deal and wiring the funds into the closing attorney’s account on the day of closing. The interest charge is a percentage or flat fee on the amount borrowed. In this case I’ll be borrowing $22k just for a day and the lender will charge me $1,500 for the use of his funds. Normally he charges the greater of 10% of the amount borrowed or a minimum of $2,500, but since I have worked several deals with him in the past he will give me a break. My total cost for the double close will be $2,000 ($500 + $1,500), the buyer will pay his own.
After all of that is factored in my profit on this wholesale should be $5,080 which is as follows:
Buyers purchase price $28,080
Less my Purchase price $21,000
Less my double closing costs $2,000
Equals my net profit $5,080
The buyer has agreed to buy this house from me in it’s as is condition for $28,080 and has signed the contract, which is written up on a standard purchase and sale agreement with the buyer paying $1,000 in earnest money to me with a closing date on or before March 26, 2009. The only stips are that I must be able to get clear title on or before the date of closing. The buyer will also pay all closing costs on the 2nd closing.
He has agreed to use my closing attorney which I have instructed to check title. Hopefully the bank was able to clean up any issues when they foreclosed on it. If not the closing attorney will have to clean up the mess or the deal won’t close. we’ll see.
As for the remaining properties here are the statuses:
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Exeter: asking $54,900, my MAO 37,350, my orig bid 31,748, bank countered at 48k, I up my offer to 33k. Bank countered at 47k, not very motivated and slow to get back with me. Update2: bank countered at 45k and I raise my offer to 34k. Update: this house is in the same area as the house on cherie so I am very concerned about the value. The bank is still sitting at $45k and I am sitting on my offer of 34k. I’ve resubmitted at that price and will check in with them in 2 weeks.
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New Castle: asking $55k, my MAO 21,415, my orig bid 18,203, bank countered at 45k, I up my offer to 19k (might not get this one). Bank countered at 40k, still too high; I’ll let the bank eat silence on tis one as well. Still waiting for bank to get real, I’m upping my offer to 20k. I noticed that they lowered asking price on MLS to $49k from $55k and that it was originally priced at 70k; meaning that the bank really is interested in moving this one. Update: someone beat me to the punch and now has it under contract.
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Burnt Leaf: asking $60k, my MAO 35,299 my orig bid 30,004, bank countered at 48k, I up my offer to 32k. I’ll stand at $32k and have re-faxed the offer and left the realtor another message as the property is still actively listed at 60k. Update: Bank finally responded and countered at 45k. I stand at 32k and will followup in two weeks as well.
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3867 Trenton Dr, Snellville, GA (FMLS # 3788896): asking $59,900k, my MAO 29,330 my orig bid 24,931, bank countered at 31k, I up my offer to 26k. Update: bank is standing firm at 31k, I’ll stand firm at my offer of 26k and see who blinks first (won’t be me). b]Update: reo realtor called and said that its under contract as of March 2. Pending close date is March 25. I liked this one too, sad I couldn’t get it. I’ll monitor to see if it actually closes later in the month.[/b] Update: still waiting to see if this one closes.
Well, this has been an interesting experience. As you have seen it is not as easy as it looks to get a deal that makes sense for you. Yes it is very easy to today’s market to buy a house, but to get it at a price where you can make the profit you want isn’t. Market values are dropping and the things that we usually take for granted (like our usual lenders or credit lines being there) aren’t as we expect them to be. That being the case however you still have to go forward.
At the moment I am stuck by my reliance on using private lenders to fund my deals. I don’t want to risk or use my cash or credit to fund my deals, as they can be tied up for a long time. I can still wholesale, but retailing will be an issue til I resolve the funding issue. The places that I normally would seek private lenders (real estate investor associations and meetings) are not of much use as the experienced investors want too much in return and the inexperienced ones aren’t as anxious to get into a deal. So I’ll have to expand the circle; it’s not a problem, but a challenge that I’ll have to meet.
To do that I’ve gone back to the old tried and true method of writing down a list of everyone that I know of and calling them to let them know of the opportunities that I have access to. I’ve also joined a couple of professional groups that are not related to real estate investing to start building relationships in. It’ll take a little more time than I originally anticipated, but it’ll work.
In the next post I’ll explain the strategy I’m using in more eloquent terms. I’ll also give updates on the statuses. I noticed that some of the readers of this post have had their doubts about it and my ability; but that’s ok. Not everyone is going to agree with my methods or goals and that’s also ok. What’s important is that one sets their goals and does what ever it takes to ethically achieve them. The means by which one gets there will of course change to reflect actual conditions in the market and you learn from it.
Til next time…
good luck and good hunting.