Real Estate

What are the so-called phantom real estate investment deals?

As more and more investors return to the market, they will bid on properties against more experienced investors. This bidding, especially on new REOs (bank owned properties) can get fierce. Once an investor understands the Ghost Offers strategies, he will be able to use them to his advantage just like the professionals.

The term phantom deals was probably originated by a disgruntled real estate agent who became upset with local investors who would bid on properties, get a contract, and then not close when the time came. Often these investors would cancel the contract under its inspection period clause.

For the investor, this was a good strategy because they did not take any market risk to resell the property nor did they have to raise the money to close. So he was never exposed to any market risk. This is a powerful investment strategy, but for realtors, it’s Kryptonite for Superman. Somewhere in the heat of the day-to-day battle, a real estate broker probably said that investors are like ghosts when it comes to closing properties: sometimes you can see them, sometimes you can’t.

In our area, a group of wholesalers use what I call phantom deals to their maximum advantage. It should always be remembered that buying property is the last thing a wholesaler wants to do. I would much rather put the property under contract and sell it to an ultimate buyer who will actually put up the money at closing to buy it. The investor then makes the “spread” or profit on the deal.

This can be done in a number of ways, the two most popular ways being by using an assignment of the contract from the wholesaler to the ultimate purchaser, and secondly by transferring the beneficial interest from a land trust to the actual purchaser of the property. There are actually 17 ways to do real estate transactions with little or no money needed from the investor.

Local wholesalers have taken ghost bidding to a new level similar to what happens at courthouse auctions. When an REO property is first offered for sale, the group releases 6-8 different offers that essentially surround the sale price of the property. From the rejected bids, the group can learn at what price the property is likely to be put under contract.

Since they have no intention of buying the property, their offers may be totally foolish. An absolutely dumb offer is usually higher than the initial listing price. The listing agent is misled into thinking that there is great interest in the property. If one of the group gets the property under contract, the whole group markets it on their email list and sometimes they sell it.

However, if the investor who got the contract is not in your group, this “outsider” got it by bidding against phantom bids and ends up overpaying for the property. This technique has been used by major players in the field of foreclosure auctions since public auctions began hundreds of years ago.

In short, if you hear the term phantom offer, consider the source because it’s bad news for realtors and worse news for inexperienced investors trying to get their hands on newly listed REOs. The people who fall victim to this tactic the most are rehabbers who tend to overpay for properties because they think they can create equity in the property by fixing it up. This is true up to a point of diminishing returns where the maximum price they can get is hampered by conventional lenders and appraisals by joint appraisers.

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