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Throughout 2021, the U.S. housing market saw record-setting growth. The increased demand helped fuel a seller’s market that still shows no sign of reversing any time soon.
In markets like these, sellers don’t always have to wait for a nice young family to come along and offer 10% over the asking price. Professional investors might be a faster option for selling your house — while still securing a profit.
To be sure, investors want to make money on your home, so it’s unlikely they will blow you away with the monetary value of their offer, but that doesn’t mean you can’t get a good deal. How much will an investor pay for your house? How do you find investors to buy your house? Here, we’ll answer those questions and more as we help you determine if selling to an investor is the right choice for you and your property.
Who are these home investors?
Hot markets have a way of attracting opportunists and many people are jumping in on the property investment craze. In 2020, home investors made 11.3% of all home purchases across the U.S.
So, who are these “investors” buying up homes in the open market? There are two primary types of home investors: House flippers and rental property owners.
House flippers buy distressed homes, fix them up with their own money, and then resell them at a profit. Rental property owners intend to hold the home for a long time, earning money by renting the property out to tenants. While these are the primary types of investors, there’s no hard-and-fast rule to what they’ll offer for your house. An offer depends on their vision for your property’s financial potential and the size of their operation.
Individual or family investors may only own one or two properties, and likely have less disposable income to make another offer. Companies tend to buy homes in bulk, so their budget to buy 20 houses in the neighborhood may restrict them from blowing your mind with a high cash offer. When considering purchases, investors usually employ one of four key strategies that will impact the kind of offer they make on your home.
A buy-and-hold investment strategy means an investor intends to grow a real estate portfolio over time. Rental investors often employ this strategy to slowly accumulate properties in their portfolio while mitigating monthly mortgage and maintenance costs with rental income. Individuals will almost always rent these properties until the market grows enough to justify a profitable sale. Corporate investors might buy homes without renting them just to grow their portfolio and wait until the market is favorable enough for resale.
Wholesale investing is when investors buy properties and resell them quickly without making any improvements. Basically, they’re leveraging the abundance of investors in the market. Wholesalers aim to buy houses well below market value, then sell to another investor for a slightly higher price. As such, they tend to buy in bulk to maximize profit. If your home is in good condition, you probably don’t want to sell to a wholesaler.
House flippers put their own time and money into improving a home to then sell it at a higher price. Every home needs different amounts of work, so the calculations for home flippers can get complicated fast. They need to understand the cost of materials and labor, and consider the potential of the local market, before finalizing an offer price.
This hybrid investment is the middle-ground between home flippers and rental owners. In this case, individuals or a company buy a home, renovate it, and then rent it out to secure long-term income. Since there’s more income potential in the long-run, these hybrid investors may make you a better offer at the outset.
How do investors calculate an offer for a home?
Now you have a general understanding of the strategies and goals of different types of investors — but how do they actually calculate an offer? And how can you ensure you’re getting the best price?
Every good investor will consider the following factors:
- The home’s age.
- The home’s location.
- The home’s overall condition.
- Comparable sales of homes in the area.
- An estimate of the time and money needed to get the home ready to sell.
Those things are entirely out of your control, aren’t they? But there are things you can do to entice a better offer from an investor. First and foremost, you can understand the 70% rule.
Many investors use the 70% rule to identify whether a home is a worthwhile investment. The rule states that an investor must pay no more than 70% of what they can sell the home for once they fix it up. This estimated final sale price is the After Repair Value (ARV).
How much an investor will pay for a home: An example
Let’s work through this. Say an investor uses all of the information available to them and determines that your home has an ARV of $600,000, and 70% of $600,000 is $420,000. That means the investor must spend no more than $420,000 to buy the house from you and pay for all of the repairs the house needs. Naturally, the offer you receive is very contingent on the amount of work the house needs.
But that’s the secret — you know what the house needs. If the investor plans to rip out all of the 15-year-old appliances and replace them with top-of-the-line brand new ones, that’s not really your problem. If you’re aware of essential repairs and can get your own idea of how much it will cost to make the house move-in ready, you can estimate the best price an investor can offer.
Take that previous example. The investor has $420,000 to spend, and you estimate the home needs about $50,000 worth of work. If you’re a tough negotiator, stand fast at a $370,000 minimum sales price.
Knowing how to think like an investor, using data and understanding the 70% rule will help you land on a sales price that’s worth it to you and reachable for the investor.
Pros of selling to a home investor
Most of the time, you’ll get the best price for your home from someone who plans to actually live in it. But there are instances when it makes more sense to sell to an investor, and benefits to doing so.
Solve a problem
Sometimes, a house doesn’t really feel like an asset. If you inherited a home you don’t plan to live in, selling fast to an investor is a good way to avoid the property taxes on a home you don’t plan to live in and enjoy a quick windfall. If you’re facing foreclosure on a home or the home has fallen into disrepair, it’s a depreciating asset. You won’t find anyone to pay fair market value, but an investor will probably give you the best available deal.
Fast, flexible timeline
If you’re relocating for work, finalizing a divorce, or need to move on from a home quickly for myriad other reasons, investors offer a fast solution. In most traditional sales, a buyer will need a 45-day escrow period for inspections, appraisals, and mortgage approval contingencies. Most investors can close in less than a month.
Additionally, when you sell to a traditional buyer, you have to agree upon a closing date. Once set, you must vacate the house. Investors have more flexibility. You can change the closing date, negotiate to stay in the house for a few days after the closing date, or even leave some things behind that you don’t want.
No prep work
Putting your house on the market is a job. From cleaning and decluttering the house to taking listing photos, making repairs, showing the house, negotiating, and more, there’s just a lot of work involved.
Most investors don’t care how your home looks right now. They can see the potential even with all your clutter there. There’s no sentimentality or trying to envision which bedroom little Billy will call his. It’s all about the cold, hard cash.
Still, bear in mind that with a traditional investor, you will probably still have to show the house, negotiate, and go through an inspection like you would with a traditional buyer. It’s still a lot less work than preparing for a regular sale.
Selling to an iBuyer could also save you some time by handling the entire process online.
Most investment companies and iBuyers buy in cash. Some independent investors may, too. Investors prefer cash offers because they close faster and they avoid an appraisal coming in below the offer price and killing the deal.
With a cash offer, you’ll have the down payment for a new house almost immediately.
Cons of selling to a home investor
Like with anything in real estate, however, there aren’t just pros to selling to investors. The biggest con, of course, is the obvious one.
As we’ve mentioned throughout this piece, investors offer flexibility in exchange for a lower sales price. Any offer from an investor reflects needed repairs and aims to close the deal as quickly as possible. It won’t be a terrible offer, but it will be one that prioritizes an investor’s profit potential.
It’s safe to assume that most offers from investors will not be for market value, or that you will otherwise be leaving money on the table.
Less obvious: Investors — or people posing as investors — may scam you. Investors don’t need any credentials to buy a property, so if you’re working without a real estate agent to get a deal done quickly, you may be susceptible to con artists. You don’t really know a buyer’s motivation all the time. Usually, they plan to buy your house and sell it for more — after putting their own money into improvements. But do they know something you don’t about the market or your home? Are they intentionally making an unfair offer?
A trustworthy real estate agent can help you sniff out suspicious offers, but if you’re not working with one, take these steps:
- Call the investor’s office and ask for a list of recent purchases.
- Check their website or ask for materials to support their business claims.
- Read reviews online.
- Check your local Better Business Bureau for warnings against the investor.
Selling a home takes work, especially since you often have to buy another home as well. In many markets around the country, houses are going for well above asking price these days. Being a little patient and selling your home the traditional route will likely net you a better offer than one you’d get from an investor. But if you’re in a bit of a time crunch or simply don’t want the financial and time burden of maintaining a house, selling to an investor can give you a quick out. And now you know how to ensure you’re getting a good deal.