Selling Your Home to a Real Estate Investor the Right Way in 2020
If you are looking for a way to sell your house fast and for cash, real estate investors look like the most attractive option. Any cash home buyer advertises that they will make the transaction so easy for you and you’ll get cash in no time. This may seem too good to be true, and in many cases it is!
What will an investor pay for your house? Will you get the promised cash as fast as you’re told, and how much? Are “we buy houses” companies legit at all? This guide answers these concerns and others, to help you make the best possible decision for your situation.
How to Find a Good Property Investor and Get the Best Deal for Your Home
Who Are Real Estate Investors?
Real estate investors buy homes for cash and off-market from sellers who have problems that require a quick and easy sale of their property. Investors resolve the previous owners’ problems, and rent or resell the properties they bought.
Investors buy houses in any condition. Because of their streamlined business model, real estate transactions can be completed in only a few days—a real benefit to homeowners who:
- need to get rid of a home because of its poor condition. These sellers have a house in disrepair or with legal issues attached and no money or time to put in solving problems, which is normally required to sell the property.
- need to sell their house fast because of a time constraint. These sellers need a quick sale because they want to simplify their emotionally draining divorce process, need to relocate quickly, have a financial crisis, family tragedy, and the like.
Should I Sell My House to an Investor?
“I need to sell my old house quickly. After doing some online research, I got an email from an investor who wants to buy my house. What’s this all about?”
We hear something similar from clients all the time. Read on to learn about all the pros and cons of selling your house for cash to a home buying company or a private investor.
They Buy Houses As Is
An investor may be extremely helpful if you are thinking about selling your house in a poor condition AS IS when nobody wants to buy it and you can’t afford to repair it.
A property investment company will buy your house AS IS, in any condition, even if your property is falling apart. When you sell your house to an investor, they take complete responsibility for all needed repairs.
They Work Fast
When you request a cash offer on your house from an investor, they usually make it faster than in 24 hours from being contacted by you. So you don’t need to put any effort into marketing: staging, photography, advertising, conducting showings and open houses, and waiting for someone to eventually make an offer on your property.
And because investors buy houses for cash and don’t need a mortgage approval, you normally can have your property sold in as little as a week. And you’re out of the home quickly.
They Make It Simple for You
Investors also fix any legal problems associated with the building, such as problems with:
- tax liens
- delinquent mortgage payments
- mechanic lien filings
You don’t need to make countless phone calls or trips to the courthouse. The investor takes care of all the research and all of the paperwork.
And you won’t be surprised by any Realtor fees and hidden costs at closing. The amount of cash you accepted in the investor’s offer is the amount you receive at closing.
Because investors factor repair costs, overhead, and profit into their cash offer, homeowners who sell a property to investors won’t get full market value for the home. And their offer is necessarily lower than what a similar house in good condition would bring through a traditional sale.
That being said, be aware. Because real estate investors have few licensing requirements, the industry has many scammers who want to take advantage of distressed sellers.
How Much Will an Investor Pay for My House?
For investors, buying houses is a business venture. When they buy your home, they put money into it and resell it for a profit.
If they plan on selling it to a landlord who is always looking for a good deal on a rental property, they may not have to put much money into the house. But if they plan to fix it up and sell it to a future homeowner, they could have a considerable expense.
To come up with an offer, the investor:
- Estimates the after repair value, also known as ARV, of the property (the estimate of the property’s value at the time of resale).
- Estimates the amount of money that will be needed for rehab of the house to get it ready for resale.
The after repair value is usually multiplied by 70%. The repair costs are then subtracted from this calculation to determine the maximum cash offer for the property.
Please note: The 70% multiplier is an average and can vary by region and other variables.
Are There Any Costs when Selling to an Investor?
In any real estate transaction there are closing costs to pay before you can walk away with cash. With an investor they are minimal and negotiable, but what do they consist of?
To answer this question in detail, we asked Kristina Morales, a licensed and investor-friendly Realtor, to explain the expenses that selling a house to an investor may incur.
This video is also a part of our Home Closing Costs Video Series that consists of four guides:
- Cost of Selling a House with a Realtor
- Cost to Sell a House by Owner
- Cost to Sell a House to a Real Estate Investor (presented on this page)
- Closing Costs Comparison: Realtor vs. FSBO vs. Investor
Infographic: Closing Costs when Selling a House to an Investor
Hi everyone, my name is Kristina Morales and I’m a licensed real estate agent in the state of California. Today, I’m presenting you the next video in the ‘Closing Cost’ series brought to you by House Cashin.
We are going to be talking about what to expect in closing costs when selling your home to a real estate investor.
Real estate investors purchase a property to either hold it in their portfolio and lease out or they purchase a property to “flip” it: remodel and resell. If an investor is flipping the property, the key consideration for that investor is to make sure that they purchased the property at a big enough discount so they’ll still make a profit when they go to resell it.
Why Choose to Sell to an Investor?
The number one reason is because you typically will have a quick close which means quick cash.
The reality is that even though you’ll typically have that quick close and quick cash in hand, it’s also typically sold below market value.
We’ve always looked at commissions in all of these three methodologies, so when you’re selling directly to an investor, you’re not paying real estate commissions. So a seller’s saving an additional three to six percent depending on what you’re comparing it to.
If you’re comparing it to a FSBO (“for sale by owner”) method you’re saving three percent when selling to an investor. If you’re comparing it to selling with the realtor, the seller’s saving six percent, so it’s significant because you’re not going to have agent commissions.
Other Closing Costs
Typically the seller’s not going to have to pay for any closing costs because an investor will pay all closing costs.
Remember the other examples we talked about—out-of-pocket expenses? Those were the expenses a seller incurred either before their property hits the market or incurred before it even closed.
So, when selling to an investor, you’re not going to have to worry about doing home repairs, you’re not going to have to worry about staging or getting a big list of requests for repairs after they make an offer.
They’re also going to cover any costs for point of sale inspections. They’re going to pay the HOA fees and any transfer fees or documentation fees that the HOA may require. And of course they’re going to cover the termite inspection and any repairs that might be needed after they get the results of that inspection.
The other costs were netted from proceeds. So, again, the seller would luck out here because an investor is going to pay the title service fees, they’re going to pay the escrow fees and they’re probably going to pay the transfer tax.
However, a seller is going to owe their prorated share of property taxes. They’re still going to owe the mortgage balance and any accrued interest that they might owe and they’re still going to owe their prorated share of HOA dues.
Closing Costs Example
Now, let’s look at the example. We’re going to use the exact same assumptions: we’re assuming it’s a $250,000 purchase price, but look at this: zero commission, zero escrow fees, zero transfer tax.
So, now let’s look at the closing cost example calculations. Here you’ll see that there’s no agent fee commissions, the seller doesn’t have to pay title fees, the seller doesn’t have to pay escrow fees and they don’t have to pay the transfer tax.
They are responsible for their prorations as we discussed—property taxes, HOA fees, interest if there is a mortgage, but they’re not responsible for a buyer’s warranty, because typically an investor is not going to request one from the seller.
Now, here is the total closing cost at closing. The seller is only responsible for their share of their property taxes and HOA fees and these prorations end up being $2,594. So, this is 1.3% of the purchase price. The lowest cost at closing for a seller is when you’re selling to an investor.
The Closing Costs Video Series
So, let’s review the videos that were in this series. In video 1 we talked about what to expect when selling your home with the real estate agent. Two is what to expect when you sell as a FSBO. Three is this one—it’s what to expect when selling to an investor.
The next video is going to be summarizing it all up. We’re going to compare the closing costs that you can expect to pay and you can expect to have in each of these methodologies.
However, video 4 is going to go a step further: we’re going to look at other considerations. We’re going to look at what is the purchase price you can expect to receive in each of these scenarios, what are some other pros and cons that need to be contemplated that are as important, if not, more important than what you’re going to pay in closing costs.
So it’s a really interesting video: it’s a nice quick synopsis of what we’ve been talking about, and I hope that you find it helpful.
I will see you at the next video, thank you so much for watching.
How to Find the Right Real Estate Investor to Buy Your Home for Cash
To create a list of potential investors, type one of the following key phrases in your preferred search engine:
- “sell my house fast in [your city]”
- “we buy ugly houses in [your city]”
- “[your city] cash house buyers ”
Put together a list of those with good reviews. Study their websites and eliminate any newcomers from your list. Make appointments to meet with the investors who appear to be the most transparent and reputable.
Choose the investor with not only the best cash offer but also with the most straightforward communication.
Use House Cashin
House Cashin is America’s largest platform for off-market properties that connects home sellers wanting to sell their property fast & for cash and real estate investors looking for a lucrative investment opportunities.
Since 2013, our network of private investors has helped thousands of homeowners who needed to sell property fast with various legal and technical problems attached to their homes and rental properties or who had a financial emergency.
At House Cashin platform, we individually screen and vet every investor and make sure you deal with only the most reputable, experienced and ethical real estate investing firms. Therefore, you don’t need to waste your valuable time on scavenging the internet with hopes to find a reliable investor.
When you contact us through our online Cash Offer form or via a phone call, we connect you with one or more reputable investors in your area. After they review your home’s details and potentially visit your home, you will have one or more cash offers to choose from within 24 hours.
How “We Buy Ugly Houses for Cash” Companies Work
When considering how to sell your house to a real estate investor, realize that investors can be grouped into three general categories:
While their purpose is the same, dealing with each is a different story.
Rehabbers are usually (but not always) local real estate investors. They can be divided into two types “fix-and-flip” and “fix-and-rent”. Rehabbers look for homes with various problems, either condition-related or legal. They buy a property, fix the issues and resell or rent it at the market price.
Whether the investor fixes and flips the house to a retail customer, or fixes and rents out the home to a tenant, the selling process is the same: getting an offer, signing a purchase agreement and getting cash in a few days.
Especially if the investor is located in your area, they likely have connections with title companies, contractors, and other service providers in your city.
This type of investors has a few advantages over wholesalers and iBuyers:
- They can start a title search with a simple phone call to their preferred title company—reducing the time it takes to get your property sold.
- Because of their connections with local contractors, they can usually get better pricing on repairs than an outside investor can—which could mean a better offer for you.
- The renovation standard for a rental house is typically lower than for a house meant for a retail sale. If your home is purchased as a future rental investment property, those repair cost savings can translate into a higher offer.
Wholesalers or real estate wholesale investors don't actually buy your property. They 'flip' the contract to another investor for what’s called an ‘assignment fee’. The typical wholesale investor looks for homeowners willing to sell their distressed properties at a bargain price.
After signing a contract with the seller, the wholesaler shops it to other investors (usually rehabbers). The wholesaler 'sells' (assigns) the contract to the bidder offering the highest fee to the wholesaler.
To be successful, the wholesaler must assign the contract to another investor before the closing date. If a wholesaler is able to successfully assign the contract to a buyer, they pocket the fee.
Wholesaler’s fee comes in the form of a spread between the agreed amount with the seller (the amount that the seller agreed to sell the house to a wholesaler) and agreed amount with the buyer (the amount that the rehab investor agreed to buy the house from a wholesaler).
But if the wholesaler can't beat the closing date, they must have the money available to honor the contract. Otherwise, they risk violating the terms of the contract, wasting your time and ruining their reputation.
They also should be upfront and honest with you about not having an intention to actually buy your house.
iBuyers buy houses in any condition, just like any other investor. But they also purchase houses ‘sight unseen.’ How does their business model work (in general)?
- When you contact an iBuyer, you answer questions about the details of your house, such as feature and condition (usually done online).
- The iBuyer enters your submitted information, data from comparable sales in you area, and other information about your local market into their software.
- The iBuyer sends you an offer and a contract.
- When you accept their offer, an inspector will usually inspect your home to confirm the condition and details you specified.
- If the inspector finds the home in worse condition than you specified, you will be asked to accept a repair credit (deducted from your profits at closing).
- At the closing, you receive your cash—minus the iBuyer’s fee (usually 6-7%) and any repair credit.
“We Buy Ugly Houses for Cash” Ripoffs
Some investor scams that a home seller can face are specific to the type of investor. Other scams are common to any unscrupulous cash home buyer. You can more easily confirm the integrity and experience of a local rehabber than a wholesaler or an iBuyer.
The local investor has a local trail of customer experience, which you can trace. But even when choosing an investor from a list of highly-recommended prospects, be aware of the types of scams perpetrated against sellers.
Changing the Contract
Watch out for the investor who tries to talk you into signing a contract with vague terms. Typically, they will come back several times for your signature on seemingly insignificant changes to the agreement. But when the contract is finally completed, it won’t be nearly as favorable to you as was the original.
If you're behind on payments and are looking for a way to stop foreclosure at the last minute, any investor will buy your house (and they will negotiate a settlement with the lender as a part of the deal.) But some investors work a scam in this scenario.
They offer to sell the house back to you at a reasonable price after you get back on your feet financially. And before that you have to pay rent to the investor to stay in the house.
But their contract is full of nitpicky clauses. And they expect you to violate the terms sooner or later. At this point, they take possession of the house and pocket whatever 'rent' payments you've made.
Equity skimming is another common scam perpetrated on unsuspecting homeowners facing foreclosure. The investor offers to settle with the lender. In exchange, you convey the title to the investor (but not the mortgage).
The investor, in turn, promises that you can ‘rent’ your house from them until they can settle all the issues with the home, and after that they will sign the deed back over to you.
But the scammer typically refinances all of your equity out of the property and then skips town—leaving you with your name still on the mortgage for the house you don’t own anymore and that will soon be seized by the bank.
‘Sight Unseen’ Offers from Foreign Buyers
Beware of anyone who gives you an offer over the phone that seems too good to be true. Especially foreign buyers. These scammers could pose as a rehabber, a wholesaler, or an iBuyer. And the contract they offer is only meant to steal your personal information.
For people wanting to get started as real estate investors, the wholesaling of property is appealing. A real estate wholesaler with no money can ‘buy’ any house, transfer the contract to another investor, and collect the assignment fee (if everything goes well).
But if the wholesaler can’t find another investor to take over the contract before the closing, the seller could end up with no deal, no money, and a lot of wasted time.
The iBuyer is a newcomer to the real estate market. They work well for people with houses in good condition who need to sell quickly. But it’s easy to get scammed when trying to sell a home in poor condition to an iBuyer. Their initial offer might appear to be excellent. But the price reduction they will likely demand for a house in disrepair can be outrageous.
To avoid being scammed, remember the difference between a traditional buyer and a cash home buyer. For the traditional buyer, the house is not only about money, but also an emotional choice. Emotional factors influence the amount of money the buyer is willing to spend.
But the house is only about the money to a real estate investor. They don’t care if there’s a 150-year-old elm tree in the front yard. They don’t care if the home once belonged to a distant relative. So think like a business owner when dealing with an investor. If you wonder how they can afford to offer you such a good deal, they probably intend to scam you.
How to Choose the Right Investor
You would not choose to trust your financial future to the first available financial planner. Don’t trust what might be your largest asset to the first investor that comes along.
The ideal real estate investor:
- has a long history of satisfied clients.
- has the cash on hand or has a private or hard money lender to provide the cash.
- is upfront and honest in every conversation.
- responds quickly when you need answers or help.
- can close as soon as you need.
- will buy the house As Is.
- understands your local real estate market.
- can come out to your home or give you an offer on the spot over the phone.
- has a local title company connection so the sale can be completed within a few days.
- has local contractor connections to help keep repair costs down, which should reflect in a higher cash offer for your house.
Take Your Time to Read the Purchase Agreement
The contracts that real estate agents and title companies ask you to sign as a seller are highly regulated. Most sellers have enough confidence in the fairness of the contracts to only check over the terms that are unique to their real estate transactions.
But the purchase agreement you sign with real estate investors is not written under such legal scrutiny. Read every single word of the contract until you are satisfied with its content. If in doubt, take it to your attorney for review.