As more investors return to the market, they will bid on properties against more experienced investors. This bidding, especially for new REOs (bank-owned real estate), can get fierce. Once an investor understands Ghost Offers strategies, they can use them to their advantage like the pros.
The term ghost bids likely came from a disgruntled real estate agent who became annoyed with local investors who made bids on real estate, contracted it, and then didn’t complete it when the time came. Often these investors would terminate the contract under their inspection period clause.
For the investor, this was a good strategy as they neither took market risk to resell the property nor had to raise the money to close. He was then never exposed to market risk. This is a powerful investment strategy, but to brokers, it’s kryptonite to Superman. Somewhere in the heat of the day, a real estate agent has 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 loose group of wholesalers are using what I call ghost deals to their ultimate advantage. It should always be remembered that actually buying a property is the last thing a wholesaler wants to do. He would much rather contract the property and sell it to an end buyer who actually closes money 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 being the assignment of the wholesaler’s contract to the ultimate buyer and secondly, the transfer of beneficial ownership of a property to the actual buyer of the property. In fact, there are 17 ways to conduct real estate transactions with little or no money from the investor.
Local wholesalers have taken ghost offerings to a new level similar to what happens at court auctions. When an REO property is first put up for sale, the group throws in 6 to 8 different offers, which basically include the asking price of the property. From the rejected offers, the group can see at what price the property is likely to be contracted.
Since they have no intention of buying the property, their offers can be downright foolish. An absolutely stupid offer is usually higher than the initial listing price. The real estate agent is duped into believing that there is tremendous interest in the property. When one of the group contracts the property, the entire group markets it to their email list and sometimes sells it.
However, if the investor who got the bid is not in their group, this “outsider” has snagged them by bidding against ghost bids and ends up paying grossly too much for the property. This technique has been used by major players in the foreclosure industry since public auctions began hundreds of years ago.
In summary, if you hear the term ghost offer, consider the source as this is bad news for real estate agents and worse news for novice investors trying to get newly listed REOs. The people most likely to fall prey to this tactic are rehabbers, who tend to overpay for real estate, believing that by rehabilitating they can create equity in the property. This is true to a point of diminishing returns where the maximum price they can fetch is being hampered by traditional lenders and peer reviewer ratings.