Everything You Need to Know About Wholesaling Bank-Owned Homes
If you’re interested in real estate wholesaling, you’ve probably heard about REO properties and wondered if you can wholesale them. The short answer is yes, you can wholesale REO (Real Estate Owned) properties, but the process comes with unique challenges and rules compared to wholesaling privately owned homes. In this guide, you’ll discover exactly how wholesaling REO properties works, what you need to watch out for, and how to set yourself up for success.
What Are REO Properties and Why Are They Wholesale Targets?
REO properties are homes that have gone through the foreclosure process and are now owned by a bank or lender. Banks are often motivated to sell these properties quickly, sometimes at prices below market value, making them attractive opportunities for investors and wholesalers.
You can think of REOs as “distressed” properties, but instead of dealing with individual homeowners, you’re negotiating with institutions. This changes the game, but it doesn’t mean you can’t play. In fact, many wholesalers specifically target REOs because banks want these properties off their books, and that urgency can lead to deals with strong profit potential.
Can You Legally Wholesale REO Properties?
Yes, you can wholesale REO properties, but you need to understand the legal and practical differences compared to wholesaling traditional homes. Wholesaling, in general, is legal in most states, but the specifics—especially with REOs—depend on your location and the bank’s requirements.
Here’s what you need to keep in mind:
- Assignment Clauses: Many banks that own REOs use contracts that prohibit assignment. This means you can’t simply assign your purchase contract to another buyer, which is the classic wholesaling method.
- Double Closing: If assignment isn’t allowed, you may need to use a double closing (buying and immediately reselling the property) or an entity assignment (selling the LLC that holds the contract).
- Licensing: Some states require you to have a real estate license to wholesale properties, especially if you’re doing multiple transactions or marketing the property publicly.
- Disclosure: Full transparency is required. You must clearly disclose your intentions to all parties, especially if you’re not the end buyer.
How Does Wholesaling an REO Property Work?
Wholesaling REOs follows the same basic principles as traditional wholesaling, but there are a few extra hoops to jump through. Here’s a step-by-step breakdown of how you can wholesale an REO property:
1. Build Your Buyers List
Before you even start looking for REOs, develop a list of cash buyers—usually investors—who are interested in distressed properties. Knowing what your buyers want helps you target the right deals and move quickly when you find one.
2. Find REO Properties
You can find REO properties through:
- MLS (Multiple Listing Service)
- Bank and lender websites
- Online auction sites
- Local real estate agents who specialize in REOs
- Public records and foreclosure lists
Look for properties that have been on the market for a while or need repairs. These are more likely to be discounted and attractive to your buyers.
3. Analyze the Deal
Do your homework! Calculate the after-repair value (ARV) of the property, estimate repair costs, and determine your maximum allowable offer (MAO). Remember, your buyer will want to pay no more than 70% of the ARV minus repairs and your fee.
4. Make an Offer and Get the Property Under Contract
When you make an offer on an REO, be prepared to show proof of funds and possibly put down a larger deposit than you would with a private seller. Banks want to see that you’re serious and capable of closing the deal.
Tips for getting your offer accepted:
- Offer a larger deposit (10% is often recommended).
- Waive inspections if you’re confident about the property’s condition (this can make your offer more attractive to the bank).
- Be ready to move quickly—banks don’t want to wait.
5. Understand the Contract Terms
Carefully review the bank’s contract. Many REO contracts do not allow assignment, so you’ll need to plan for a double closing or entity assignment if you can’t assign the contract directly.
- Double Closing: You buy the property from the bank and immediately resell it to your end buyer, often on the same day. This requires you to have access to funds or transactional funding.
- Entity Assignment: You form an LLC, put the property under contract in the LLC’s name, and then sell the LLC to your buyer.
6. Find Your End Buyer
Once you have the property under contract, market it to your buyers list. Since you’re dealing with REOs, your buyers will usually be investors looking for fix-and-flip or rental opportunities.
7. Close the Deal
Depending on the contract, you’ll either assign the contract (if allowed), do a double closing, or transfer the LLC. Once the deal closes, you collect your wholesale fee, which can range from a few thousand dollars to much more, depending on the property and market.
Challenges and Tips for Wholesaling REO Properties
Wholesaling REOs isn’t as simple as wholesaling privately owned homes, but it’s definitely possible if you’re prepared. Here are some common challenges and how to overcome them:
1. Assignment Restrictions:
Banks often use contracts that prohibit assignment. If you can’t assign, use a double closing or entity assignment. Make sure you have access to funding for the double closing, either your own or through a transactional lender.
2. Larger Deposits Required:
Banks want to see serious buyers, so be prepared to put down a larger earnest money deposit—sometimes up to 10% of the purchase price.
3. No Inspection Periods:
Banks may prefer offers that waive inspections, especially if they’ve had deals fall through before. Only waive inspections if you’re confident about the property’s condition or have done your due diligence.
4. Licensing Requirements:
Check your state’s laws. Some states require wholesalers to be licensed real estate agents, especially if you’re doing multiple deals or advertising the property to the public.
5. Competition:
REO properties attract a lot of attention from investors, so you’ll need to act quickly and make strong offers.
6. Working With Bank Timelines:
Banks can be slow to respond, and their processes are often more rigid than those of private sellers. Be patient but persistent.
Pros and Cons of Wholesaling REO Properties
Let’s break down the main advantages and drawbacks so you know what to expect:
| Pros | Cons |
|---|---|
| Discounted prices | Assignment often not allowed |
| Motivated sellers (banks) | Larger deposits required |
| High demand among investors | May need a license in some states |
| Potential for quick profits | Banks can be slow and inflexible |
| No emotional sellers | Competition is fierce |
Frequently Asked Questions
Can you wholesale REO properties with no money?
Technically, yes, if you use assignment and the contract allows it. However, with REOs, you’ll often need a larger deposit and may need to fund a double closing, so having access to capital or transactional funding is crucial.
Do you need a real estate license to wholesale REOs?
Not always, but some states require it, especially if you’re doing multiple deals or advertising properties. Always check your local laws and consider working with a licensed broker if needed.
What’s the difference between wholesaling an REO and a traditional property?
With REOs, you’re dealing with banks instead of individuals, which means stricter contracts, less flexibility, and more competition. However, the potential for profit is still strong if you know how to navigate the process.
How do you find buyers for REO wholesale deals?
Build a list of cash buyers—usually investors—before you start. Network at real estate meetups, online forums, and through local agents. The more buyers you have, the faster you can move your deals.
Is Wholesaling REO Properties Right for You?
Wholesaling REO properties is absolutely possible, and many investors have built successful businesses doing just that. The process is a bit more complex than wholesaling privately owned homes, mainly because of bank restrictions and contract terms. If you’re willing to learn the rules, build your network, and act quickly, you can profit from wholesaling REOs.
Remember, success in this niche comes down to preparation, persistence, and understanding both your market and the unique requirements of REO transactions. If you’re ready to put in the work, wholesaling REO properties can be a rewarding way to grow your real estate business and help investors find great deals.
So, can you wholesale REO properties? Yes, you can—and now you know how to get started!