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

As more and more investors return to the market, they will bid for properties against more experienced investors. This bidding, especially on new REOs (bank properties) can get fierce. Once an investor understands the Phantom Offering strategies, they can use them to their advantage just like the pros.

The term phantom deals likely originated from a disgruntled realtor that was compounded by local investors bidding on properties, getting a contract on them, and then not closing when the time came. Often times, these investors would cancel the contract under their inspection period clause.

For the investor, this was a good strategy because he did not take any market risk to resell the property nor did he have to contribute the money to close. So you were 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, an informal group of wholesalers use what I call phantom deals to their maximum advantage. It should always be remembered that buying a property is the last thing a wholesaler wants to do. I would rather put the property under contract and sell it to an end buyer who will actually bring in money at closing to buy it. The investor then gets the “margin” or profit from the trade.

This can be done in a number of ways, the two most popular ways are by assigning the wholesaler’s contract to the ultimate buyer and, second, by transferring the beneficial interest in a land trust to the actual buyer of the property. There are actually 17 ways to transact real estate with little or no money required by the investor.

Local wholesalers have taken phantom deals to a new level similar to what happens in courthouse auctions. When an REO property is offered for sale for the first time, the group launches 6 to 8 different offers that essentially surround the sale price of the property. From the rejected offers, the group can tell what the contract property is likely to be priced at.

Since they do not intend to buy the property, their offers can be completely silly. A totally silly offer is usually higher than the initial listing price. The listing agent for the property is fooled into thinking that there is great interest in the property. If one of the group members obtains the property under contract, the entire group markets it on their email list and sometimes sells it.

However, if the investor who obtained the contract is not in your group, this “outsider” obtained it by bidding against phantom offers 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 offering, consider the source because it is bad news for real estate agents and worse news for inexperienced investors trying to get freshly listed REOs. The people who fall the most victim to this tactic are the rehabilitators who tend to overpay for properties because they believe they can create equity in the property by repairing it. 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 bundled appraisers.