There is more than one way to sell your house
Home sellers can avoid the stress of a complicated and time consuming selling process and sell to an investor. You are already familiar with the “We Buy Houses” ads. And you’ve no doubt seen the hand written signs on the side of the road. These kinds of sales may allow sellers to bypass things like inspection contingencies and avoid appraisal concerns or buyer financing issues.
Even if you planned to sell to a traditional buyer using an agent, you might end up getting an offer from an investor. The offer will likely be for cash with minimal or no contingencies and a quick close. But before you accept, it’s important to understand how the process differs from a typical transaction.
What you should know
Selling to an investor saves time and hassle, but it’s NOT for everyone. The people that can get the most benefit are people with situations they cannot solve alone or that have property in poor condition that doesn’t sell quickly when stacked up against other properties in the MLS.
- Situations that are best serve people selling to an investor are things like:
- inherited property,
- job relocation,
- bad tenants,
- and pending tax sales either local or Federal
to name some of the more common ones.
People in these situations generally are so desperate they try to do something, anything to solve the problem first. In the interim they spend so much time doing that, they don’t leave enough time to sell it the traditional way. Investors can close quickly with an “As is” all cash offer and save them from the embarrassment and take away all the stress of the situation.
When selling to a private investor without a listing agent, you need to do your research to protect yourself. There are plenty of companies that buy houses — make sure to use a reputable one. See my blog on this.
How are these buyers different?
The term buyer is used to broadly describe people who buy homes, but buyers can come in varying forms — traditional buyers, and investors. There is a third category now called iBuyers. But these are essentially investors backed by large funds and on a larger scale. The type of buyer you choose to deal with will determine the sales process and the speed of the transaction.
Who are traditional home buyers?
Traditional buyers are people like you when you bought your current home. They’re looking to purchase a property to reside in, either as their primary home or as a vacation home.
A traditional buyer will make an offer based on how they see your home fitting their needs and their research on its market value. There’s also an emotional component to the purchase. If you don’t believe this try selling a home that has a remediated sink hole. Your home may have items on their wish list, like a big fenced yard for their kids and pets or a layout conducive to entertaining. Traditional buyers may pay more for these features, or they may be willing to pay above asking price if faced with competition from other buyers.
Who are the “we buy houses” investors?
A professional home buyer is either an individual or a company that buys residential properties as part of an investment strategy. Traditional home buyers may own just one or two investment homes, but companies that buy houses usually do so in bulk. The we buy houses investors usually employ one or more of four strategies.
BUY-AND-HOLD INVESTMENT – Landlording
A buy-and-hold investment strategy helps an investor grow a real estate portfolio over time. Investors use this strategy to buy a home to rent for passive income. They evaluate the property based on condition and income generation (cap rate or capitalization rate) in their due diligence to see if the numbers make sense and/or meets their investment goals. A larger corporate investor may buy a home without renting it if they’re simply trying to grow their portfolio or want to wait for improved market conditions or appreciation to kick in. For a local investor they also look at opportunity cost. If the house won’t return anymore than what they could make with a stock or bond they will look even more closely.
Investors who buy properties and then resell them very quickly use a strategy called wholesaling. The actually do NOT buy the property. That is a big misconception held by traditional agents. Wholesalers get a house under contract at a price lower than what would make the deal attractive to an investor. They then “assign” the contract to another investor for a higher price. The investor becomes the actual buyer under the terms of the assignment. The wholesaler collects an “assignment fee” which is the difference between the actual contract price and what the investor paid to the wholesaler. Successful wholesalers usually have a large list of buyers lined up beforehand and use direct marketing to identify inactive or off-market homes they can buy inexpensively.
HOUSE-FLIP INVESTMENT -Retail Investing
Individuals or companies who buy houses, renovate them, and then sell them at a higher price are called home flippers. While the level of renovation needed and completed varies by the individual home and the local market, the goal is to make a profit on the resale, even after clearing all renovation expenses. These companies borrow money at high interest rates for short periods so time is of the essence in getting the house improved and back on the market. The price also has to leave room for the unexpected repairs that will be discovered. After flipping dozens of houses I can assure you there is ALWAYS something unearthed when you start tearing a house apart.
BUY/FLIP/HOLD INVESTMENT – Buy repair rent repeat (BRRR)
This type of investment is a hybrid of the strategies covered above. In this case, investors buy a property, renovate it, and then rent it for at least a year at a premium. A the end of the year they sell it or refinance it and hold onto the house.
Why sell to an investor
While most people sell their home the traditional way, there are a few scenarios where selling to an investor might make the most sense.
If you’ve inherited a property from a family member and you don’t plan to live in the home, you won’t want it to sit empty for too long. Not only can a vacant home be a target for vandalism, but if you sit on the property in a fast-moving real estate market, you could be on the hook for capital gains taxes. The Personal Representative also doesn’t want to drag out the probate case any longer then necessary. They want to settle the estate and get back to their normal lives.
If you’re behind on payments, the foreclosure case is on the docket and you need to sell quickly, an investor might be a good option. It will not only stop the foreclosure process but if sold the right way it will also improve your credit allowing you to get another house sooner.
If your home requires a lot of updating or repair work to be attractive to a buyers, you may want to sell your home as-is to an investor. Or you can let it sit on the traditional market until it does. If you have the time and your health is not being adversely affected by conditions in the house you may still want to go the traditional method.
No financing possible
If the home you’re selling doesn’t meet safety or permitting standards, most lenders won’t finance a loan for the property. The most predominant one we se is for roofs. If there is not at least 5 years of life left in the roof the insurance company won’t insure it. Without insurance the bank won’t lend on it. This can make it impossible to sell to a traditional buyer.
Need timeline flexibility
If you’re selling on a very specific timeline, such as in a job relocation, you have more control over the close date with an investor, since they’re not moving in you can set the close date you want or close early and sign a short term rental agreement.
Currently in escrow
If you’re purchase of your new home is contingent on the sale of your old home, going with an investor can speed up the process of selling your old home.
Relocating for work
Often a job relocation requires a faster-than-average timeline. Selling to an investor to get it done and move on without worrying about when the old place will sell.
Divorce settlements require both parties to divide the assets, and selling the house fast and splitting the cash is an easier way to go. If there are no kids you will never have to speak to them again.
Tenant in place
Doing repairs, taking listing photos and scheduling showings with tenants living in a house can be complicated. Many times the existing landlord doesn’t want the tenant to know they are selling. I’ve been the “insurance inspector” many a time.
Or there is always the other case where the tenant is SO BAD the landlord is willing to sell the property just to get out of the situation. In both case the landlord turn to investors when it’s time to sell. The investor sees things in terms of income vs the situation. ( See Buy and Hold – Landlording above)
Pros of selling to an investor
Even if your situation doesn’t meet any of the common reasons listed above, you might benefit from selling a house to an investor. Here are some of the biggest benefits.
No prep work
With a traditional home sale, you have a lot to do before you list. Removing personal pictures, cleaning out the clutter, most likely painting and then staging for the photos. And let’s not forget the curb appeal. The average seller spends $6,570 getting ready to sell according to a Zillow study.
Investors are more focused on the financials than how your home looks. After all, they’re going to improve and resell it quickly or rent it out.
Don’t forget even the investor still needs to find you. You will still need to get it out to all the online advertising sites like Zillow and Trulia and possibly the MLS with a “flat fee” listing at a minimum. Be sure to have professional photos of the big ticket items like, roofs, kitchens and baths. Include terms like “fixer upper” or needs “TLC.” There will still be showings, negotiating on price, and probably an inspection, just like if you were selling to a traditional buyer.
Or you can find them. Just Google terms like “we buy houses” or “sell my house fast” or “cash for houses” and the investment firms will pop up. Pages and pages will appear. If you do that you can skip all the stuff in the last paragraph. The investor will take a look, make an offer and once you accept , set a closing date.
Quick escrow period
Unlike an agent sale, where the bank requires a 45-day escrow period to allow time for inspections, appraisals and mortgage contingencies, an investor can close in in as little as 14 days. Since they are using cash the only thing that holds up the closing in most cases is title issues.
Because the home is being sold as-is, no need to worry about making any repairs. I an agent sale it’s common for buyers to request repairs as part of their contingencies. This usually due t the fact that they are pouring all their resources into the purchase and will have scant little left to do any repairs before they move in. There are also bank and insurance requirements that will demand repairs be made before lending or insuring the property.
Additionally, 21 percent of sellers offer to pay some or all of their buyers’ closing costs according to Zillow. Realtor.com says most sellers pay 1% to 3% of the buyers closing costs. This is especially true when the buyer is using an FHA, VA or USDA loan. Investors generally include paying all the closing costs in their offer.
All cash offers
Investors usually pay in cash. Since there is no appraisal there is no danger of the deal falling through due to an appraisal coming up short. Normally, cash deals close more quickly. This is especially true if an agent sale is being financed with an FHA loan. The “as is” house may not meet FHA standards. In these situations cash is king.
In an agent sale, you have to agree upon a closing date that works for both parties, because if the deal is being bank financed the bank calls the shots. When the closing date arrives you must be gone — no exceptions. Investors can be flexible with the close date and your move out date. You’ll close on the selected ate and then rent or you’ll just change the date.
Cons of selling to an investor
Although the process is faster and less complicated, if you’re looking for top dollar and have time to wait, selling your home to an investor isn’t the best idea.
The offer you receive from a professional home buyer will almost always be lower than what you would receive in a Realtor sale. An investor will still give you a fair offer, but keep these factors in mind:
- You won’t pay to get your house ready to list
- The offer reflects needed repairs:
- There is no emotional needs to be met
How to avoid scams from home investors
Unlike real estate agents, who have to be licensed to represent buyers and sellers, investors don’t need any credentials to buy property. This lack of licensing requirements or professional affiliation leaves sellers open to unscrupulous investors. This is especially true in the “we buy houses” space where many of the investors are new, especially after the latest guru has left town. (I have another blog on this spelling out the tell tale signs.) Always do your due diligence. f you decide not to have a listing agent represent you, you’ll need to do a lot of research to make sure the offer you’re considering is legitimate. Here is how to conduct your due diligence:
- Call their office and ask for a list of recent purchases and the sellers contact info. If Google Voice answers hang up and move on.
- Check their website. If they don’t have a website, ask the investor to send you a Proof of Funds.
- Read reviews online.
- Check your local Better Business Bureau.
- Never give any money to the investor. All money should be run through the Title company or lawyers escrow account.