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Investing Strategies

Can’t Assign That REO? Here are 3 Ways Around It …

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One of the earliest things every new investors gains an appreciation for is the fundamendal (and very easy) process of wholesaling a house by way of assigning a contract. And contrary to what you may have heard elsewhere, you can pretty much legally assign any property that you get under contract by default, even without the "and/or assigns" clause in the contract.

However, we all know one big, fat exception to this: REOs (bank-owned or foreclosed properties).

At some point in the dark ages, tsome bank executive or asset manager decided they didn't want you, the sleazy investor that you are, to actually quick-turn the property for a fast profit. At least not on the same day. Go figure.

So as a standard practice, REOs come out of the box with a "thou shalt not assign" clause tucked tidily into one of the contract addendums they require you to sign. Thanks a lot, bank gods.

Have you ever wondered if there's a way you can get around the non-assignment feature of REOs, and still turn a quick buck with a same day flip?  If the banks won’t play ball, how can you still make the deal work? Well today I'm going to share 3 ways you can flat-out get around this. Take notes. Now let's get to it.

Workaround #1: Do a Simultaneous Closing Instead

A simultaneous close simply means two back-to-back real estate closings happen at the same time – usually on the same day. It works like this:

  • You have the seller, which in this case is the bank who owns the REO. (think of them as "A")
  • You are the buyer of the property. (you're "B")
  • The third party is your end buyer who is willing to buy the property from you for a slightly higher price than what you’ve agreed to pay. (that's right, "C")

So you’ve set up a purchase contract between you and the seller (A - B)  and you have a second contract to sell to the end buyer (B - C) for a higher price, contingent to your purchase. The proceeds from C is enough to close on your purchase from the lender (A), so essentially your end-buyer's money funds your purchase.

Your profit is the spread between what you receive from C and what you pay A. And since these two closings take place "simultaneously" (same day), your closing attorney or title company just moves the funds around so everyone gets what they want and need, but you (part "B" in the middle) don't have to actually come to the table with any money.

And this, grasshopper, is one simple way to sidestep the problem of assignment of contract.

Only here's a common problem: More and more nowadays, the banks selling REOs are requiring you to do a "wet" closing, which means they want verification that you're brining your own funds (not an end-buyer's funds) to the table. And this is where way #2 can come in handy...

Workaround #2: Use Transactional Funding (i.e. flash cash)  

shut up and take my moneyOne way to remedy this problem is to use transactional funds to close your deal, also known as "day funding" or "flash cash".

If you're not familiar with transactional funding and how it works, here's an entire lesson I previously posted for you that pretty much covers it. The short story is, typically a transactional lender is willing to provide flash cash on hand long enough to close the deal, so long as you have a solid, bankable buyer at the ready, with their own funds ready to go.

The problem with this solution is that it’s expensive, often costing you 1%-2% of the loan amount.

So for instance, if you’re buying a property for $100,000 and you sell it for $105,000, you stand to make a $5,000 profit. But if you borrow flash cash and you pay two points to use that cash, you’ve used up $2,000 of your profits. Yowza!

It's better than not doing the deal at all...but still, you’ve thrown away two grand just for the cost of funds. That’s kind of a big bite out of the apple, don't you think? There’s got to be a better way, right?

Workaround #3: Sell Your LLC

Here’s how you can side-step the whole problem and you can still keep all the profit. It has to do with creating an LLC just for this purchase.

Here's the deal: Banks are used to investors buying properties in and LLC, right? Sure, it happens all the time. No eyebrows raised whatsoever.

So here's how it works: 

The first step then is to create a fresh, new LLC. In most areas you can setup a "shell" LLC in literally minutes by going to the Secretary of State website for your state. Type in the info, pay the fee (typically $50 or so) and voila! it’s done. 

You will not need the packet of information that would be necessary if you were setting up a business. This is merely a vehicle for selling your property to another investor. Essentially, the LLC becomes the Buyer (B) of this REO property.

Quick tip: Name your shiny, new LLC the property address: i.e. 123 Main St LLC

So next you simply have your LLC buy the property. The bank that owns the property (A), signs a contract with your LLC (B), and now instead of doing a double closing you will siply sell your LLC to the end buyer (C) for the same amount of money you were going to make for your flip.

So for example, if you're aiming to make a quick $5,000 on your wholesale flip, then you will sell the LLC to your end buyer (C) for $5,000. They step into your shoes as the new owners of the LLC, then close to the same real estate contract. Because now it is their LLC.

Why does this work so well? Because the sale of your LLC (and entity) isn't on the settlement statement anywhere, nor does it need to be disclosd to anyone. It's not the bank's business! All they need is a Managing Member of the LLC to show up at the time of closing and consumate the deal... and when closing day arrives, that person is no longer you, it's your end-buyer.

Boom, Kapow!

This is in my view the funnest and sneakiest way to get around an assignment of contract block. You can put cash in your pocket and never have to turn to pricey flash cash or – worse yet – use any of your own money to make it happen.

But bottom line, all 3 of these work. Keep them in your aresenal, and next time you want to quick-flip that REO, pull out your notes and make it happen. These are time-tested, proven, and completely above-board ways to do it.

What do you think? Got any thoughts, questions or comments about any of this? Talk to me below.


Do It To It! Immediate Action Steps
  • Go to the Secretary of State website in your home state; set up a shell LLC; pay the fee.
  • Name the LLC the address of the property you will be selling, i.e. 123 Main Street LLC.
  • Sell your LLC to the end-buyer for the amount of money you planned to profit for your flip.
  • Deposit profits in the bank and move on to the next deal!

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