Pre-foreclosures: Making offers
If you are using wholesaling as an exit strategy and filtering pre-foreclosures as motivation you need to learn the formula required to make a suitable offer. Hereās what to consider: 1. The Max Allowable Offer must be higher the debt. 2. Finding out what the total amount or debt owed. 3. If the MAO is exactly for as much as the seller owes then the seller walks away with nothing. Here is the correct formula to use: MAO (Paid by End-Buyer)=Sellers Debt Payoff - Sellers Cash to Walk Away - Assignment Fee The Deal-Breaker Scenario Revisited If you run your formula and find that: MAO<TotalĀ OutstandingĀ Debt This is called being "Under Water" or a Negative Equity Position. In this case, the seller cannot sell the property in a standard transaction, and your wholesale deal is dead, unless you pursue one of these two specialized strategies: 1. Short Sale: You contract the property and ask the lender to accept the sale price (your MAO) even though it is lessthan the full debt owed. (Complex and time-consuming.) 2. 3. Subject To (Sub2): You take over the payments on the existing mortgage, and the seller deeds you the property. (Requires specialized legal knowledge and is not wholesaling.) Formula Example Let's assume the following: ARV: $300,000 Estimated Repair Costs: $50,000 Your Target Assignment Fee: $10,000 Calculate the MAO: 70% Rule MAO=($300,000Ć0.70)ā$50,000 MAO=$210,000ā$50,000 MAO=$160,000 Calculate Your Offer to the Seller: OfferĀ toĀ Seller=MAOāYourĀ AssignmentĀ Fee OfferĀ toĀ Seller=$160,000ā$10,000 OfferĀ toĀ Seller=$150,000 You would offer the pre-foreclosure seller $150,000 for the house.