Wholesaling Real Estate Defined - Investors Need to Know

What is ‘Wholesaling Real Estate’? It is simply the act of providing discount priced real estate deals to ready, willing and able investors, and sometimes ‘retail’ buyers as well.

Read on to find out what you should already know about wholesaling real estate and how you can make sure you are reaping the rewards.

Let's begin by differentiating between an investor and a ‘retail’ buyer. For the sake of defining ‘wholesaling’ you need to know if you are actually a candidate for a wholesale deal. An investor is someone who purchases real estate solely for the purpose of making money. A ‘retail’ buyer purchases, often to get a good deal, but ultimately, to live in the property.

A ‘wholesale’ deal is not always only for investors; in certain situations a retail buyer can purchase it. It all depends on how the ‘wholesaler’ has control of the property. You see, a wholesaler is no different than a company that buys a product in bulk from the manufacturer in order to get a discount, then marks up the price and resells to a retail vendor, such as a grocery store. However, in most wholesale real estate situations the wholesaler doesn’t actually purchase the property. Instead they control it using a real estate purchase and sale contract.

If you are not familiar with the different ways of ‘controlling’ a piece of real estate, that’s fine, just know that there are different ways. As an investor this only matters to you to the extent of how you can purchase it: traditional financing, cash, private funding or hard money. (Of course there are also partial financing options that allow you to take a property ‘subject-to’ the current financing, or if the seller will hold a note (financing) for you.)

So this brings us to the question of why a wholesaler gets paid. I mean, he only found a desperate seller and had them sign a piece of paper, right? Actually, as a true investor you are either putting your money into the deal, or your business experience to run a rehab or manage the property as a rental. The wholesaler is your marketing expert. Just like a wholesaler in the grocery store chain works in bulk, so does the real estate wholesaler. He, or she, goes through hundreds of leads to find the best deals (using specialized marketing tactics), and then markets to find you, the investor. And all this marketing is not free.

Knowing how the system works, you need to know a couple of rules when it comes to working with wholesalers. First of all, they are bringing you a commodity that is very valuable and if others knew about it they would snatch it up in a second! Consider yourself lucky to be given the opportunity for these deals. (Of course not every wholesaler, or wholesale deal is worth its weight in gold; you have to use your own judgment.)

A good wholesaler also does a lot of background work by providing comparable sales, assessed values, repair estimates, pictures, rental breakdowns, tax and insurance info, and even sometimes videos of the property.

The first thing you need to do to keep getting these real estate deals is to do what the wholesaler says. If they say don’t bother the tenants, don’t do it. If they ask you to be discreet about your intentions, be discreet. And if you ever think of trying to cut them out, you should probably just drop out of the game now and save yourself the aggravation.

What you really need to know is that real estate wholesalers are providing you, as an investor, a great service; saving you time and aggravation and keeping your pipeline full so you can keep making money however you choose to do it. Wholesaling is a fulltime business if done right and produces great opportunities for good investors. So even if someone makes a million dollars on a wholesale deal that fits your buying criteria you should not even think of feeling like you should have gotten more. They are only getting paid in proportion their skill level; just like everyone should.

Understanding Foreclosure and Bankruptcy Implications

I’ve personally talked to bankruptcy attorneys who give you two options, chapter 7 or chapter 13; There’s no consultation, and not even always accurate and correct advice. I had an attorney tell me two things that later turned out to be incorrect, and it could have cost me thousands of dollars!

Most attorneys: "That'll be $2,000 and we'll fix your problem."

WRONG!! If your problem is your credit is too good, then that problem is solved. But seriously, sometimes bankruptcy seems like a good option because you don’t have all the information, or sometimes the attorney will just push you into it by scaring you with a bunch of legal-ese.But the bankruptcy does nothing to stop your foreclosure. And you can still end up with a foreclosure on your credit report (despite what your lawyer may say; they don’t know any more about credit reporting than you do most of the time). If you are facing a foreclosure, this is a situation you definitely want to avoid except in the most extreme situations.

In most cases, the best thing for you to do when facing foreclosure, assuming that your inability to pay the mortgage is not temporary, is to SELL THE PROPERTY AND SELL IT FAST!

In doing so, you will avoid having a foreclosure or a bankruptcy on your credit report. You'll be able to get on with your life and avoid having your foreclosure and bankruptcy haunt you for years to come!

There are two things to be on the look out for when using a short sale to sell your property. The first is the income tax implications. You may be ‘1099-ed’ for the “Forgiven Debt”, this is a capital gains tax on the ‘Phantom Income’(when you sell for less than what you owe), unless the property is your principal residence, the mortgage was used to purchase or improve the property and the difference is less than $250,000. (This is not an all inclusive explanation, just a guideline; the tax codes are infinitely more complicated.)

The second thing to look out for is the possibility of a “Deficiency Judgment” brought on by the foreclosing lender, or PMI (private mortgage insurance company). If they believe that you have assets, the lender may initiate the legal proceedings for a judgment in the amount of the money they lost due to the short sale. There are two items to note here:

1. The lender can only pursue a deficiency judgment if you have not signed a 'promissory note' agreeing to pay them money, or if they did not accept the short sale payoff as 'payment in full'.
2. A deficiency judgment can be pursued by the lender (or PMI company) even if they foreclose on your property. Let me say that again. You can get a foreclosure on your credit and still be sued for the deficiency amount. If there is a foreclosure there are many more expenses involved, thus the deficiency amount is greater as well.

There is no "Miracle" solution, just a better one. Your credit will be affected and you will need to rebuild it to save you money in the future. The important thing is for you to find someone who can give you the information that you need so you can protect yourself as best as you can.

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Common Misconceptions: Debt, Foreclosure, Bankruptcy and Your Credit

Although your immediate financial situation may be consuming you completely, you need to be informed of your options and how they will affect you, not only now, but in the future. Unfortunately there is not enough reliable information out there, and depending on who you talk to you, you will get a lot of conflicting opinions.

I have put together some information that may help. Through my own experience with foreclosure, bankruptcy, and credit issues I have come across several misconceptions that are commonly held. Hopefully this will help you make an informed decision before choosing to do a bankruptcy, foreclosure, short sale, or none at all.

Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing my own knowledge gained from experience.


Misconceptions:

1. A Foreclosure is better for my credit than a bankruptcy

Maybe; maybe not. It actually depends who you talk to on this what answer you get, but ultimately it depends how the action is reported to the credit agency, and how many other negative reports are filed; like the number of ‘late payments’, or ‘non-payments’ related to your mortgage.

A bankruptcy may even “hide” a foreclosure if the property is included in the bankruptcy. This is no guarantee though. To be safe, always try to sell your property, and use a ‘short-sale’ if necessary (if it is included in a bankruptcy) rather than let it go to foreclosure. If the short sale is reported it will show up as a ‘settled debt’ rather than a ‘foreclosure’ (basically a repossession for non-payment, with none of the debt being satisfied). This will also lessen your liability for a ‘deficiency judgment’ later on.


2. I can save my house from Foreclosure if I file Bankruptcy

Actually one has nothing to do with the other. The only thing a bankruptcy does to a foreclosure is that it will slow the process and may help you reduce the amount of your payments to the bank, but you MUST PAY ON-TIME. If you don’t, you lose the protection of the bankruptcy, and the foreclosure process resumes.

However, this is only in a chapter 13. In a chapter 7 your house gets no foreclosure protection – you either keep paying or you’re going to lose it to a foreclosure. (I would recommend a short sale here instead to limit your liability to further credit damage and a larger ‘deficiency judgment.’

3. To Avoid a Bankruptcy, I should use a Debt Management Program to lower my Payments

I’m not supporting bankruptcy necessarily, but an attorney has more leverage to negotiate a lower debt payment for you, as in a chapter 13. If you want to avoid bankruptcy all together, be VERY careful which debt management program you choose to use. If they require a payment upfront HANG-UP the phone immediately; NO MATTER WHAT they tell you! Avoid these services like the plague; I didn’t and my mistake cost me $1400 and a lot of headaches. Don’t let this happen to you. Use a Non-Profit company that only charges a small monthly fee.

If your ultimate goal is to keep your house, and you have the income to do so, your best option is to work with the bank first to see what options are available, and then a chapter 13 bankruptcy. If you are out of money, just focus on saving your credit. To do this don’t let the bank foreclose, instead, find someone you trust to handle selling your house using a short sale as quickly as possible. You may want to file a chapter 7 bankruptcy depending on your amount of other debt and your amount of assets; Or if you can afford it, work with a debt management company to lower your payments on your unsecured (credit cards) debts.

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Bankruptcy, Misconceptions and My Finances

When facing a foreclosure, or even worse, a bankruptcy, you have to take into account more than just your current financial situation; you have to be aware of the future financial implications. There is some other information you should have before deciding which road to take; there are some future liabilities that you need to be aware of that your attorney, or even your accountant, will not offer information on, that is if they even know at all.

I am going to go thru some common misconceptions you should be aware of before choosing to do a bankruptcy, foreclosure, short sale, or something else.

Misconceptions:

1. If I file Bankruptcy I will be relieved of all my financial obligations.

Not likely. If you file a chapter 13, you are just reorganizing your debt and getting a lower monthly payment. If it’s a chapter 7, a ‘discharge’ of debt, you will not have to pay anything, right? Wrong! You are only protected up to $1000 of personal property (cars, furniture, bank accounts, etc.) unless you relinquish you personal ‘homesteaded’ home, which will give you an additional $4000 (in my home state of Florida) of exempt property. Everything you own gets a value, and above the max $5000 exemption, you must pay for. (This may still be a better way to go than having the liability that comes with a foreclosure, or even a short sale depending on your situation.)

2 . A Short Sale will Satisfy my Debt to the Lender, ending any other Financial Obligation related to the property

Don’t ever let anyone convince you of this! Unless the lender puts in writing that the short sale payoff is “payment in full”, you may be liable for a ‘deficiency judgment’. Unless the property is your primary, (homestead), residence for 2 of the last 5 years, the mortgage (s) were used for purchase and or improvement of the property itself, and the debt is under $2million you are liable for ‘cancellation of debt’ tax. Similarly, you will liable for tax on “Phantom Income” of the difference between the total debt incurred and the short sale payoff over $250,000 even if the home is your primary residence and you didn’t take out an equity line to buy a Porshe.

You may also be required by the bank to sign a promissory note as a condition of the short sale. This means you will make payments to the bank every month to satisfy some of the financial losses that the bank had incurred. Of course, a short sale is ALWAYS better than a foreclosure. The amount of forgiven debt with a foreclosure is always going to be higher (as long as you were ‘upside-down’ in the first place).

3. No Matter What I Do, I’m Going to Owe Money to Someone

Surprisingly, No. As in the above situation for a short sale, there are a couple of ways you can get out without owing anything. Only certain lenders, in certain situations require a promissory note, and if you are “insolvent” you don’t have to pay taxes on the cancellation of debt, or phantom income tax. And if you don’t have any assets, then the bank will not spend thousands in court and attorney fees to sue you for a deficiency judgment.

A bankruptcy, on the other hand, will cost you from $1800 - $3000 or more, depending on the chapter 7,11,13, etc. and if you are doing so for yourself, you and a spouse, your business, or you and your business. This is all upfront, before they even file the paperwork. After that, you will likely be liable for future expenses as discussed in misconception #1.


Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing the knowledge that I have gained as an individual who has dealt with foreclosure, bankruptcy, and credit issues first hand.

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Want to Save Your House from Foreclosure?

Just because you are having financial difficulties doesn’t mean you have to sell your home or lose it to foreclosure. There are other options that you should know about. They aren’t all going to work for your situation, but just one may save you from foreclosure!

Reinstatement - when lender accepts a lump sum by a specific date to stop the foreclosure; the money may come from a hiring bonus, investment, insurance settlement, a tax refund, or some other source

Loan Forebearance - often combined with a reinstatement; when your payments are reduced or suspended for a short period of time in order for you to find the money you need for a reinstatement

Repayment Plan - an agreement to resume making your monthly payments plus a portion of the past due payments each month until you’ve caught up the debt
Mortgage Modification - when the terms of your original loan are modified to accomodate your financial situation; you may get a new interest rate, or a longer term, and your back payments will be added to the loan amount

Partial Claim - if you have an FHA insured loan, you may qualify for a one time interest free loan to bring your account current; your loan must be 4 to 12 months delinquent; you would pursue this option if you are able to make your normal mortgage payments again

Refinance - a good option if you have an adjustable rate loan as long as you don’t owe more than the property is worth; HUD has a program called FHAsecure if you have not yet fallen behind on payments, or if you have fallen behind due to the adjusting of your interest rate

For more details on these options, or other Foreclosure Prevention Methods, such as 'How to Sell Your House with a Short Sale', contact us by calling 1-800-470-4988 ext. 181, or by filling out a contact form here: http://firstchoicehomesolutions.com/contact-us/