- Selling to an investor is probably not the best decision for 95% of home sellers
- Investors can close very quickly, with low closing costs and no repairs needed, but are going to only work with a steep discount
- Consult a Realtor about your home’s value before selling to an investor
I am a Realtor. My primary goal is to list and sell your home as quickly as you want to. But there are no guarantees. At a minimum, I would plan on two months between listing and closing. That is a best case – it will likely be several months.
If a traditional sale is not fast enough for you, there are faster options.
Perhaps your home has been listed for sale but isn’t getting any offers. Maybe you inherited a house. Maybe your home is in bad shape and you don’t have the funds to get it in sell-able shape. Or perhaps your home is on the market and you’ve had some investors ask about it?
You may want to explore selling to an investor. This is a quick guide on what the advantages and disadvantages are to selling to an investor.
When You Should Explore Selling to an Investor
If you can’t make the payments. Facing foreclosure? Don’t let foreclosure happen to you, especially when there are alternatives. Investors can sometimes get in before the foreclosure happens and save your credit while making a good deal for themselves, too. Note that an investor can’t help you after the home is foreclosed. If you are struggling to make payments, it is best to contact someone about it as soon as possible.
If you inherited a home. Many find inheriting a home to be a burden at the most inconvenient of times. Sometimes the home is in a town they themselves know little about and have little connection. Listing a home conventionally can often still be a great option, but will be a much longer and more involved process. For those looking to just make this problem go away, investors can be an option to consider.
If you need cash now. This is not a good position to be in, but life happens. Selling your home to an investor is the fastest way to sell a house. Just realize that you will be accepting a steep discount to the price.
Advantages of Selling to an Investor
- Cash deals. Investors pay cash meaning they won’t be asking for seller concessions from your bottom line to cover their closing costs.
- No commissions. Selling directly to an investor will save you 6% or so commission, helping your bottom line. Investors use agents to help them price your home, and most use an agent to sell your home after they’ve repaired it. I would recommend consulting an agent before selling to an investor, but as for the actual sale process, you can just pay a lawyer a fee to make it all go through smoothly.
- Fast cash. A traditional sale in the Killeen area might take five or more months to sell: two weeks to get the home ready, two to three months to find a buyer, and another six weeks to close after that. You can be sold with the cash in your pocket in one or two weeks when selling to an investor.
- Make no repairs. Selling traditionally will involve repairs up front – new carpets and paint to make the home fresh and any other obvious repairs. Then more repairs after the buyer’s inspection, plus any that their lender requires – all out-of-pocket costs in the $1000s or $10,000s, not to include the fact you are still paying a mortgage that whole time. An investor won’t ask you for any repairs. They budget for repairs (and risk that their budget is right) on their side of the deal.
Disadvantage of Selling to an Investor
- Sell at an investor “wholesale” price. There’s really only one disadvantage to selling to an investor, but it’s a pretty big one. They have to make money doing it. A lot of money. Investors have to have high margins on their deals because they can be high risk, capital intensive and a lot of work. More on what to expect a “wholesale” price to be follows.
How Much Can I Get from an Investor?
Here are the steps an investor takes to evaluate what they are willing to pay for your home:
Step 1. Get under contract. The first thing an investor is going to try to do is get under contract with you. They don’t even care about the price or the house yet – they just want to make sure nobody else can buy it until they’ve had time to review the deal themselves. Investors will have an option period where they can walk away for any reason whatsoever, often a few weeks or even months. During this time they will inspect the home, estimate repairs, and VERY likely renegotiate the price completely. It is typical that they will get you under contract for a too-good-to-be-true price and then come down a LOT after their inspection. I recommend that you make the option period as short as possible so that you are not stuck with an investor for too long. Reputable investors and wholesellers can do their due diligence and line up a buyer (if they aren’t buying it themselves) in a week. Try to get an option period of 7 or 10 days.
Step 2. Get an ARV. An investor will work with a Realtor to determine a fair, after-repair-value (ARV) for your home. This price is what your home could be sold for if it were completely fixed up, including remodeled and renovated if necessary. This is the price they will usually try to sell your home for after they’ve repaired and fixed it up. They don’t have to share this price with you. If you want to know what their ARV is, you need to consult your own Realtor, which I highly recommend doing.
Step 3. Estimate costs. They are going to inspect your home and come up with estimated repair costs. Most investors will not hire an actual licensed inspector but have their contractor come through for an estimate, or perhaps event just the investor themselves.
Step 4. Multiply the ARV by 70%. This is called the 70% Rule for house flippers. Investors want 30% of the ARV to cover their holding costs, Realtor commissions, and transaction costs. That is not the whole 30%, though – the rest is profit. The 30% also serves as a cushion in case they under-estimated the repair costs (which always happens), or over-estimated the ARV. Fort Hood area flippers may even look for more than 30% because transaction costs tend to be a big number.
Step 5. Subtract all costs. After multiplying the ARV by 0.7, the investor will subtract the estimated cost of repairs.
Step 6. Make the offer. If you do the math, it is a “low ball” number, but don’t be offended. That is just investor math. Investors are usually up for negotiation, but the good ones simply make an offer and, if your answer is no, move on to the next deal. It is a numbers game and not about forcing a deal.
And unfortunately no, selling your $125,000 home for $115,000 is not a great “investor deal”. If that is the kind of discount you are willing to take to move your home a little faster, then you are still better off listing with an agent instead of selling to an investor.
Your home, completely fixed up, is worth $150,000 (the ARV). $150,000 x 70% = $105,000. They estimate $15,000 in repairs. $90,000 would be an investor’s offer. That is a whole $60,000 off the fixed-up market value of your home. If that number outrages you, then you should consider listing your home with a Realtor, if you can accept that it will not be as quick and painless as a cash investor deal.
This is NOT the right solution for probably 95% of sellers or more. Most sellers should list and sell their home on the market with a Realtor to ensure they get the most value for their home.
Not every investor or investment strategy uses the math above. If you need to get rid of a home quickly, and don’t think you have time to list it conventionally with a Realtor, there may be other options that can save your credit, save your home, and/or save your money. There are countless strategies for countless circumstances. Contact me below and we can review your unique situation and make a recommendation.