Pros and Cons of Selling your Home to a Real Estate Investor
If you live in a metropolitan or rural area in fact, anywhere in America; chances are you have seen many versions of the infamous bandit sign, We Buy Houses for Cash.
Who are these terrible people or companies littering your neighborhoods with bandit signs and filling your mailboxes with yellow letters? Claiming to buy your home for cash right now!
If you ask me, this sounds way too good to be true. Do you really want to buy my rodent-infested, cat pee, in disrepair, need to be condemned house?
Matter of fact, do not worry about buying it, I will give it to you for free under one condition, you get those squatters out that have been living there for months.
All jokes aside this is a serious matter. Remember the housing crash of 2008?
Some cities like Detroit were practically giving away homes. I am not kidding read this article if you don’t believe us, why take my word for it.
Furthermore, some cities were paying people to take over abandoned houses. Jump forward 12 years to a booming real estate market and the idea seems absurd.
I recall during that period the government was allowing an $8,000 tax credit for new home buyers. In case you wanted to know, yes I took full advantage of it.
We Buy Houses: How it works?
How it works: Cash buyers and ibuyers use technology and experience to expedite and streamline the home selling process.
The investor uses knowledge of the market and algorithms to create an estimate based on the current and potential value of your home.
The homeowner is selling directly to the investor, a realtor is not required but used in some instances.
Homeowners need to be fully aware that cash home buyers are investors seeking to make a profit. It is a business and any business that cannot generate and sustain a profit will fail.
Cash home buyers are no different from Walmart, Amazon, or Target. Where a product is purchased at a discounted price then resold at a higher margin for a profit.
This is a very important part to understand so I will restate it again. Cash home buyers are in the business of purchasing homes at a discounted price to be resold at a higher price.
Many of these homes have a common circumstance, a seller who is in distress or a property that is in distress.
A distressed homeowner is a seller that needs to sell their home urgently often to pay debts, medical expenses, or other emergencies.
A distressed home is a property in a poor state of repair or needs to be updated.
Purchase offer calculation: An offer is calculated based on a few common industry practices.
Aftermarket repair value (ARV) the purchase price of the home plus the value from renovations.
(purchase price) + (renovation value) = ARV
The 70% Rule is a general guideline used by cash home buyers to calculate the maximum offer on a potential property.
(ARV) x (70%) – (estimated cost of repairs) = maximum purchase offer.
Note: To calculate rehab cost use the general $20 per square foot method.
The remaining 30% includes the potential profit and loss for the investor. The 30% gives the investor cushion against issues that will come up during rehab, taxes, and other expenditures.
Accepted offer: After the offer is accepted by the homeowner, the closing process begins. Closing should happen at a title company, lender’s office, or escrow company, depending on the state.
Do we buy houses companies pay cash? and Who is really purchasing the property? Below we will answer both questions.
Are we buy houses companies paying with cash? yes and no it depends on how you look at it.
There are two general ways to purchase a house.
- The company has enough cash reserves to pay for your house with its own money no loans required. (this option is great because loans carry allot of fees) The fewer fees an investor has to pay, the more they can offer for your home. This is great because the homeowner walks away with more money in their pockets.
- The other option is hard money or money from an investor. Both of which are loans that carry fees and interest rates on the borrowed cash. Within the industry, both options are considered cash because it is not a conventional loan.
Note: Most we buy house companies use a combination of the two.
Who is really purchasing the property? In the case of national, we buy houses companies like Zillow and Offerpad they are purchasing the property with a vested interest.
Typically, a light rehab is done on the property to increase the value then it is sold on the MLS through a realtor.
Keep in mind that these transactions come with heavy fees for the homeowner.
When it comes to smaller to medium-sized we buy houses for cash companies like Sell Your Homes Houston. The house is bought for the owners of the company or contracted to a 3rd party investor.
Here is where the cost of acquisition will vary between the company owners’ vested interests and a 3rd party investor.
The company owner who is keeping the house in its portfolio as a rental or flip will use the 70% rule as a guide to purchasing the property. Example:
(ARV $100,000) x (70%) – (estimated cost of repairs $20,000) = maximum offer $50,000
If the house is contracted to a 3rd party investor or wholesaled, the 70% rule still applies but a finder’s fee or wholesaling fee is attached. Example:
(ARV $100,000) x (70%) – (estimated cost of repairs $20,000) – (wholesaling fee $5,000) = maximum offer $45,000.
The wholesalers/ finders fee varies depending on the wholesaler and the price of the house.
Note: For wholesalers finding and acquiring a house is not an easy task. It can cost thousands of dollars in marketing and hours of work to acquire one property.
Who Are We Buy Houses Companies
We buy houses companies also referred to as iBuyers range from large national companies to smaller ran companies often consisting of a few people.
Below is a short list of national companies and a brief overview.
Offerpad: According to their website, it’s a leading technology and real estate company with a mission to provide the best way to buy and sell a home.
Leading with firsthand real estate experience and utilizing powerful technology developed in-house.
They provide direct home offers to provide modern, consumer-centric home buying and selling solutions to help more people move freely.
On average, the company receives new offer requests from homeowners every 30 seconds and acquires a home every 20 minutes throughout regular business hours.
It is a privately held company headquartered in Chandler, Arizona, operating across the country in 700 cities and growing.
Zillow Offers: According to their website, it’s a new buying program that creates an easier way to sell your home with less hassle on a timeline that works for you.
If your home is in a participating market, you can effortlessly request a cash offer from them in a few simple steps.
If you move forward with the offer an advisor will work with you throughout the process. However, if you chose to list your home for sale, they will connect you with a trusted local agent who advertises on Zillow.
HomeVestors: Also known as “We Buy Ugly Houses” was formed in 1996 to give people a fast and easy way to sell a house or unwanted property for cash. The company has purchased over 100,000 homes and operates all across the nation.
Opendoor: According to their website, in 2014 Opendoor, headquartered in San Francisco set out to reinvent the most important transaction with new, radically simple ways to buy and sell your home. They currently operate in twenty-one cities across the nation.
Whether it’s getting married, starting a family, or taking a new job, they help in getting people to their next step in life with simple and seamless transactions.
Besides the larger aforementioned companies, the industry is made up of thousands of smaller to medium size companies that purchase homes directly for cash including Sell Your Homes Houston. If you would like to know more about Sell Your Home Houston, you can visit our about page here.
Pros of We Buy Houses Companies
- Stop feeding the money pit
Selling your home directly to we buy houses company will stop the bleeding. You do not have to continue dumping cash into that old house that is causing you headaches.
Many homeowners have this issue with older houses. The good news is, by selling your house fast for cash, you won’t have to worry about it anymore.
This is especially true for homeowners with a second home that isn’t occupied. You won’t have to stress about paying a second mortgage, utilities, taxes, and other expenses that are burning through your money.
- Easy streamlined process.
If you are a distressed homeowner and you need to sell your home quickly, selling to an investor is your best option. Cash offers are processed faster than conventional financing and it is less risky for the seller.
A traditionally financed home can take 30-60 days to close and there is always a chance that a change in the buyer’s finance causes their loan to be denied.
Many investors purchase houses sight on seen. In many instants, all the investor needs are pictures and a working knowledge of the market and they are able to offer you a competitive price for your house. The process is usually three steps.
- Information is gathered about the house via appointment.
- The property is evaluated for the best no-obligation offer.
- After the offer is accepted, the transaction can close in as little as 7 to 30 days.
3. No repairs needed
Houses are purchased in as-is condition. The homeowner does not have to spend thousands of dollars on expensive repairs to sell their house.
A substantial part of how an investor makes a profit is through forced appreciation. That means the house is purchased with the opportunity to increase its value through renovation.
4. Maximizing your profits
Selling directly to an investor can save you tons of money from fees and commissions
- Double closing cost for you and the buyer (buyers usually ask for you to pay closing costs) Typically 2-5 percent and you will have to pay this twice since you are paying for the buyer as well.
- Other related fees such as carrying costs, taxes, etc.
- Double realtor commissions for your agent and the buyer’s (typically around 6%)
Selling directly to an investor like Sell Your Homes Houston will streamline the process reduce the headaches and allow you to keep more money in your pocket.
5. Peace of mind “priceless”
Selling directly to an investor alleviates a lot of pressure on you to sell your house. If your house is distressed in need of repairs, you are behind on your taxes or you are facing financial difficulties. A good option is to sell your house to an investor.
No matter the condition of your home or the circumstance that you are in. I am sure there is an investor willing to buy it.
The transaction can go very quickly depending on your timeline, and you do not have to wonder if your loan is going to fall through at the last minute.
6. No realtor needed.
Ok let’s talk about the elephant in the room “a real estate agent” and do you really need one.
With technology today and companies like Zillow and Trulia to name a few you are more than capable of selling your home yourself however, its allot of work.
You do not need a realtor to sell your home, but its great to have experienced representation with you.
Note: If your goal is to not pay realtor fees, keep in mind as the seller you are responsible for paying the buyer’s agent commissions in Texas.
As for an investor you should have a few real estate agents on your team.
To serve the homeowner best, you need options and a realtor gives you added benefits.
Not all houses need to be a fix and flip or a rental, that is one dimensional. As an investor, you should always seek to serve the homeowner the best you can. That does not always mean you purchase their home.
They are reaching out to you to solve a problem; your job is to help them.
Next time a homeowner brings a property to you that needs light repairs, or their situation isn’t that dire, help them out.
Let’s say the property needs $10,000 in repairs and they can get full price on the open market.
Introduce the homeowner to your trusted contractor, painter, plumber, etc. I am sure some homeowners can find a creative way to get the money they need to do a light rehab.
As an investor, you are not doing the work for them but providing a little help to the homeowner that goes beyond just buying their house fast for cash.
After the work is done you can recommend the homeowner use your realtor to list the house on the MLS.
The scenario does not generate income for the investor. However, you created value and income for the homeowner, realtor, and contractor.
- Don’t waste time with for sale by owner
Selling your home can be stressful enough as it is, with packing, moving, cleaning, and relocating.
Often times the money you save by not paying a realtor is replaced with headaches, anxiety, and stress.
For sale by owner isn’t easy, here are some of the task you will be responsible for:
- Market research
- Conducting showings
- Answering the phone from potential buyers
- Working knowledge of real estate laws and guidelines
- Qualifying buyers
- Giving tours of the property
- Prepare documents (contracts, deeds, closing statements, etc.)
- Advertise the property
If you are up for the challenge no problem some homeowners are. But if you are looking for and easier stress-free process, you should sell directly to an investor.
Cons of We Buy Houses Companies
- It’s not for everyone
If you have a house that is in great condition and you can list it on the MLS for market value, selling to an investor isn’t what you want to do.
You want to work with a realtor or try selling it your self as for sale by owner.
I am not saying investors won’t by houses of the MLS at market value some will, and it can be a great option.
However, most investors are seeking a higher return on their invested capital, and other methods are more favorable.
- Selling Price
As I explained selling your house to we buy houses company isn’t for everyone and all situations.
If you have contacted or will contact an investor in the near future. It’s imperative that you understand that investors seek to purchase homes at a discount. Usually at least 30% of the after-repair value (ARV) minus costs of repairs.
So, don’t be shocked or discouraged if the offer price isn’t what you thought it would be.
Houses purchased by investors are usually deeply discounted allowing the investor to earn a profit. Many things can and will go wrong during rehab, so enough cushion needs to be present to protect the business.
Even so, many investors find themselves losing money on properties from unforeseen circumstances.
Homeowners must understand that getting a high selling price isn’t the advantage of working with we buy houses companies.
The condition of your house will determine the cash offer you receive. If you follow the simple 70% rule you can get a general idea of what an offer would be.
As a homeowner, you shouldn’t feel defensive or angry at an offer. At the end of the day, it all comes down to numbers.
The offer is no obligation, so if you don’t like it find another investor it’s that simple.
- Your Losing A Home
The factor of the matter is when you sell to a we buy houses company you could be losing a house that is dear to you and has been in your family for years.
If you recall from earlier in this article, I talked about distressed houses and homeowners.
Often times investors purchase homes from families that are facing tough circumstances. Whether it’s going through foreclosure, divorce, behind on taxes or inherited property, etc.
It’s not an easy situation for homeowners to handle and chances are you are selling a home that you wanted to keep.
Although selling your house will in many cases help you financially and relieve a lot of stress and anxiety. It doesn’t change the fact that you are selling your house.
To put it into perspective. My wife inherited a house from her great grandmother when she passed. She lived there for several years after she graduated from college and started her career.
After moving to a new house, she wasn’t able to sustain paying the taxes on her inherited house. Consequently, she fell behind on her taxes and ran the risk of the city taking her home.
An investor contacted her about selling her house for cash and she agreed to the offer.
Although she was able to unburden herself from the house it was at a cost that wasn’t financial.
It has been 7 years since she sold her house, but lingering regrets still remain.
My wife was and still is attached to that home, she has a lot of fond memories of her great grandmother there. Our goal is to buy the home back one day.
We buy houses companies offer a great service, but at the end of the transaction, you are losing a home.
- You Don’t Always Know Who is Buying Your Home
Often times when homeowners work with a we buy houses company they only see one or two people representing the company during the transaction.
You might get a false sense that they are the actual people buying your home.
In many circumstances yes, they are buying your home outright with cash reserves.
However, many wholesalers are selling their interests in the property to other investors that you aren’t aware of.
Does this affect the validity of the transaction? No, but its information worth knowing.
Most consumers aren’t concerned with where and how their new iPhone is made. They just want a great product that functions and works as advertised.
- No Licenses Required
Unlike real estate agents, cash home buyers aren’t required to have a license in most states.
Although having a license isn’t needed there are many we buy houses company owners and employees that do have a real estate license.
There are cash buyers that use their licenses to close transactions with homeowners only charging a 1% fee instead of the traditional 3% fee by real estate agents.
- Potential Scammers
In any business or industry, you are going to find people who operate unethically to get ahead.
There is always someone looking to take advantage of you regardless of what your situation is or who you are. Unfortunately, this is apart of life and business.
Here are some ways to see if you are dealing with a scammer.
- Do your research: Because a company is new it doesn’t mean that it’s a scam all companies have to start somewhere. Also, if a company has been around 10 years doesn’t mean that they have good business practices either. Do your research check the Better Business Bureau (BBB), Google, and any other resources you have available.
- Know what you are Paying for: Check for hidden fees. It’s common in many industries to hide fees within contracts. You are quoted one price in the beginning and end up paying a higher one.
- No in-person visits: Technology has come along way but when working with a cash home buyer a representative of the company needs to be there to evaluate the property. This isn’t the type of business where you can totally take away in-person interaction.
- You get a bad feeling: This isn’t technical and there is no science behind it. But if you are working with a cash home buyer and you are uneasy, trust your gut instincts.
- Ernest money: Make sure the cash home buyer provides proof of funds and an agreed-upon earnest money amount.
- Offer too good to be true: There are times when investors pay too much for a home. But if you know your home is worth $70,000 and you get an offer for 3 times that, something isn’t right. Your best bet is to walk away and not get excited about a big payday.
- Never pay an upfront fee: A legitimate sell your home for cash business will not require upfront fees.
- Too eager to send the buyer money: If a cash home buyer is willing to cut you a check for a property they haven’t seen or evaluated. This is a red flag and you should stay clear. Don’t get caught off guard with the promise of a big payday.
There are plenty of myths about we buy houses companies and this article is here to clarify some of the questions you have.
Having larger companies like Zillow and Opendoor offering direct home buying services will help to put homeowners at ease when working with a cash home buyer.
Traditional ways to sell your home are tried and true and it’s a great option.
BUT WHAT WILL YOU DO IF THE TRADITIONAL WAY DOESN’T WORK FOR YOU?