As more and more investors return to the market, they will bid for properties against more experienced investors. This bidding, especially on new REO (bank owned properties) can get fierce. Once an investor understands Ghost Offers strategies, he will be able to use them to his advantage just like the professionals.
The term phantom deals likely originated from a disgruntled real estate agent who became annoyed with local investors who would bid on property, get a contract, and then fail to 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 he did not take any market risk to resell the property nor did he have to raise the money to close. So he was never exposed to any market risk. This is a powerful investment strategy, but for real estate agents, 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 on properties: sometimes you can see them, sometimes you can’t.
In our area, a group of wholesalers use what I call phantom bidding to their full advantage. It should always be remembered that purchasing a 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 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 assigning 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 investor money needed.
Local wholesalers have taken phantom bidding to a new level similar to what happens in courthouse auctions. When an REO property is first offered for sale, the group launches 6-8 different offers that essentially surround the sale price of the property. From rejected offers, the group can learn at what price the property is likely to come 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 fooled into thinking there is a lot of 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 sells it.
However, if the investor who got the contract is not in your pool, 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 foreclosure auction field since public auctions began hundreds of years ago.
In short, if you hear the term phantom offer, consider the source because this is bad news for real estate agents and worse news for inexperienced investors who are trying to land newly listed REOs. The people 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 up to a point of diminishing returns where the maximum price they can get is hampered by conventional lenders and appraisals done by joint appraisers.
