I’ve got one of those uncles. A real old kind of uncle, the kind who asks you to pull his finger and teaches you how to palm an ace. You don’t know where he got that stuffed peacock. Even though he’s told you several times, the story always seems to differ. He’s the kind who’ll always be a millionaire, no matter what temporary circumstances may have him embarrassed. Don’t worry, he tells you—the only day’s today and tomorrow’s always new.
He’s the kind of uncle you eventually stop listening to.
It doesn’t stop him from talking, though. Now that I’m a professional real estate investor, it’s always some new way to “supercharge” or “dynamize” my business, too. “This idea’s nitroglycerin,” he tells me. “You and me, we’re gonna be wholesaling preforeclosures, see?”
You can see where this is going. I’ll just take it point by point, and there are several. Before we get started, though, here’s some safety information: wholesaling preforeclosures is liable to blow up in your face.
Why You Shouldn’t Take Advice from Your Uncle on Wholesaling Pre Foreclosures
My uncle is a good man with a good heart. But, you have to take what he says at face value. Wholesaling preforeclosures poses more challenges than my uncle—or you—might imagine. Here’s why.
Problem #1: Bad Math
If a house is in preforeclosure, you can bet that the owner probably owes more money on it than it’s worth. Don’t forget what we’re here to do. Buy a house for less money than we can sell it for. That’s very hard to do if it costs more than its market value.
Why do these homes cost so much? Because the bank gets its money. To take possession, you have to pay all the back mortgage payments the homeowner didn’t make. You’ll also have to pay any and all fees incurred as penalty for late payments. And, if a homeowner can’t make their mortgage, it’s likely there are back taxes to be accounted for as well.
Problem #2: Can’t Fix Bad Math
You typically make repairs or renovations to raise the value of a house before you sell it. The cost of the repairs is overbalanced by the increase in market value. On a normal project, you have the room to do that, because you bought the house below market value. But, if the house already costs more than it’s worth, even if repairs raise the sale price, they’re unlikely to make the project profitable. You’ll just spend even more money on an unprofitable project.
Problem #3: Romancing the Vault
“Nah, nah, nah, kid,” say uncles everywhere, “you’re forgetting the short sale! We’ll get the house for dinner and a song!”
Thing is, I’m not forgetting the short sale. I’m disregarding it as a viable long-term business strategy. Very different. The idea is such: with charm and tact, and by offering a pleasant alternative to an unfortunate situation beyond the control of any party involved, you convince a homeowner to convince their bank to let them sell their house for less money than what they owe the bank.
Sub-Problem #3A: Convincing the Homeowner
Remember, this is a person who may or may not be losing their house in the near future. In order for them to consider this offer, they have to accept that they won’t get out of foreclosure on their own. You might be offering the homeowner an out, but that out still involves losing their home. That’s a wormy apple, no matter how you shine it.
Even if they have listed their house as preforeclosure, approach with caution. The deal might save them money, but they might not want to hear it, nor might they want to be around the person they hear it from. Especially in trying times, people cling to their dignity. Be understanding, and make a fair offer.
Sub-Problem #3B: Convincing the Bank
If you’ve made a reasonable offer on a house listed as preforeclosure, now it’s up to the homeowner. They have to convince the bank that it’s best for everyone involved to take a loss on the mortgage and save themselves the headache of foreclosure, court, and the auction block. Banks have entire divisions dedicated to foreclosing, going to court, and selling houses on auction. It’s not so much a headache as it is part of their routine operations.
Also, none of those jobs are the job of the bank officer who decides whether to authorize the short sale or not, so it’s really not their problem at all. What is their problem is the extra paperwork they have to do to convince their boss that the short sale is a good idea. So, like I said above, you really better make a fair offer, or else—what’s the point?
By the way, that paperwork is your problem, too, insofar as you’re not gonna get that house until it’s done.
Problem #4: Okay Now Do It Three Times a Month
While the typical investment strategy is fix-and-flip—buying, repairing, and selling a home for profit. The other way to do it is flip-and-flip, more commonly known as wholesaling. That’s my uncle’s idea—he’s gonna find so many of these perfect preforeclosure short sale deals that he’s not even gonna need to touch them up. He’ll just mark them up a couple of grand and pass them right along to his long line of waiting investors.
I’ll admit that it’s not impossible to land a preforeclosure short sale. I’ve landed a preforeclosure short sale myself. That’s right—exactly one of them in ten years of investing professionally. This is not the sort of deal, for the reasons listed above, that you can walk down the street and pick off a tree.
If you find one lying on the ground, great. But I wouldn’t try and build a wholesaling business on it. To really make a living from wholesaling houses, you need to work in volume. That’s why I’ll tell you what I told my uncle: “I’ll believe it when I see it.”
I don’t know if it’s because I’m his little brother’s kid or what, but the guy just seems to not even see me sometimes. He knew I was a successful real estate investor. He knew I’d been in the business for seven years at that point. But does he ask me how I do it? Does it occur to him that I already know how to enjoy a rewarding career fixing and selling houses on my time? Obviously not.
It’s Way Easier to Wholesale When the Deals Come to You
Funny thing, though. Five months later he calls me up and tells me he’s gotten a lead on something big. He said I’d be paying people to pick up my phone, I’d be getting so many calls. Do I know those “We Buy Ugly Houses®” billboards? I ought to, it’s a nationally-known and trusted brand.
I had to smirk at that one. I’ve been an independently owned and operated HomeVestors® franchisee for years now. So, when homeowners call the number on the billboard, they get me. I don’t need pie-in-the-sky dreams of wholesaling preforeclosures, I get qualified leads directly from distressed homeowners who have already decided to sell. They may be facing foreclosure, sure, but they’ve made a decision to do something about it before the situation gets worse. And, I get to provide “solutions for ugly situations®.”
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