As more and more investors come back into the market, they will be bidding on properties against more seasoned investors. This bidding, especially on new REOs (bank-owned properties) can get fierce. Once an investor understands the strategies of Ghost Offers, he will be able to use them to his advantage just like the pros.
The term ghost offers likely was originated by a disgruntled realtor who was aggravated with local investors who would make offers on properties, get a contract on them and then not close when the time came. Often, these investors would cancel the contract under their inspection period clause.
For the investor, this was good strategy because he took no market risk to re-sell the property nor did he have to come up with the money to close. He was then never exposed to any market risk. This is a powerful investing strategy but for realtors, it is kryptonite to Superman. Somewhere in the day-to-day heat of battle, a real estate broker probably said that investors are like ghosts when it comes to closing on properties – sometimes you can see them, other times you can’t.
In our area, a loose-knit group of wholesalers use what I call ghost offers to the ultimate advantage. It should always be remembered, that actually purchasing a property is the last thing a wholesaler wants to do. He would much rather put the property under contract and sell it to an end-buyer who will actually bring money to the 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 are using an assignment of the wholesaler’s contract to the end-buyer and secondly, by transferring the beneficial interest of a land trust to the actual buyer of the property. Actually there are 17 ways to do real estate transactions with little or no money necessary from the investor.
The local wholesalers have taken the ghost offers to a new level that is similar to what happens at courthouse auctions. When an REO property is first offered for sale the group throws in 6 to 8 different offers that essentially surround the asking price of the property. By the rejected offers, the group can tell what price the property will likely go under contract.
Since they have no intention of purchasing the property, their offers can be outright foolish. An outright foolish offer is usually higher than the initial listing price. The listing agent gets fooled into thinking there is tremendous interest in the property. If one of the group gets the property under contract, the entire group markets it to their email list and sometimes they sell it.
However, if the investor who got the contract is not in their group, this “outsider” got it by bidding against ghost offers and winds up grossly overpaying for the property. This technique has been used by major players in the foreclosure auction arena since public auctions started hundreds of years ago.
In summary, if you hear the term ghost offer, consider the source because it is bad news for realtors and worse news for inexperienced investors who are trying to get newly listed REOs. The individuals who fall victim to this tactic the most are rehabbers who tend to overpay for properties because they believe they can create equity in the property by fixing it up. This is true to a point of diminishing return where the maximum price they can get is handicapped by conventional lenders and appraisals done by pooled appraisers.