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. Here’s what to consider:

The Max Allowable Offer must be higher the debt.
Finding out what the total amount or debt owed.
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<Total Outstanding 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:

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.)
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=($300,000×0.70)−$50,000

MAO=$210,000−$50,000

MAO=$160,000

Calculate Your Offer to the Seller:

Offer to Seller=MAO−Your Assignment Fee

Offer to Seller=$160,000−$10,000