Someone wants to buy your house.
They’ll pay cash. They’ll take the home as-is, without any repairs. They’re ready to close almost immediately.
What could go wrong?
A growing number of individual and corporate home investors are ready and willing to purchase houses in just about any condition, offering immediate cash. Some want to fix up the homes and quickly sell them for a profit. Others want to add them to a real estate portfolio. Still others want to buy houses and rent them back to their previous owners, hoping they’ll increase in value over time.
But if you can sell your house quickly and easily, do the buyer’s motives really make any difference? And could there be any hidden landmines to be aware of?
They might…and there are. Let’s explore.
Who Buys Houses?
Most home buyers are “traditional home buyers.” They’re individuals or families who want to own the house they live in, and use real estate agents to assist with the purchase. (In most cases, it would be more accurate to say “who want to own the house in conjunction with their mortgage lender.”)
Traditional buyers hope their home accumulates value over time, of course. But their primary goal isn’t to make a smart investment; it’s to own (or “own”) a comfortable place to live.
Home investors, in most cases, aren’t going to live in the houses they buy. They’re simply searching for smart investments.
- Some of these buyers are “house flippers.” They make money by purchasing distressed properties, making any necessary repairs or renovations, and immediately selling the homes to traditional buyers. Generally speaking, smart flippers may be able to earn 20-30% on their investments.
- Some of these buyers are wholesalers. They don’t even bother fixing up the houses they purchase; they buy at bargain basement rates, and immediately resell the homes to other investors who are willing to pay more than they did. Successful wholesalers already have existing client lists, so it’s easy for them to find willing buyers.
- Some of these buyers are true investors. In some cases, they rent the homes they’ve purchased to tenants (and at times, they may rent them to the people who just sold them). In other cases, they don’t plan on doing anything at all with the houses they purchase – at least, for a while. They’ll let them sit and accumulate value, before cashing in for an eventual windfall down the road.
Most home investors don’t bother with mortgages. They’re well-capitalized businesses, with enough available cash to purchase homes outright.
“What does all of that have to do with me?” we hear potential sellers ask. Truthfully, it might not matter at all. On the other hand, it could have a major impact on the price you can get for your home. And for some people, it might have an impact on how well they sleep at night.
Bottom Line: Most home buyers are people who simply want to own a nice place to live. But many investors have a large pool of money they use to snap up houses at attractive prices, whether they plan on quickly reselling them or holding onto them for a while. Selling to an investor can be an attractive option, but for some home sellers, it can be risky.
Why Sell To a Home Investor?
Four groups of people are most likely to receive offers from investors who want to purchase their homes. They all have one thing in common: they’re motivated sellers.
- There’s a phrase commonly used in the real estate industry: distressed property. It literally means a home that’s about to enter foreclosure. Some people use the term more broadly, to include houses that are in bad shape and likely to reach the point of no return in the near future. In either case, the owners are probably eager to sell and receive whatever money they can get in return.
- Other owners may still be current on their mortgage, but their house is sorely in need of major renovation or repair – and they can’t afford to have the work done. They may want to escape their money trap before they end up in even deeper financial trouble.
- There’s another group of homeowners to consider: the ones who have to move in a hurry for personal reasons. They may need to relocate because of family problems or illness, or because they’ve taken a job out of the region.
- Finally there are people who inherit or end up owning a house they don’t really want. What they do want is to find someone who will take the property off of their hands.
All of these owners are primarily concerned with one thing: getting out. They’re less concerned with maximizing the sale price of their house, as long as they get as much as possible under the circumstances.
A home investor is seemingly the perfect buyer in all of the situations we’ve discussed. They’ll close the deal quickly, they’ll pay cash so there are no contractual hang-ups to worry about – and most are willing to buy homes in poor condition.
Naturally, though, investors won’t pay top dollar for distressed homes, or to people who are desperate to sell. That’s the biggest drawbacks of selling your house to a home investor, but it’s not the only one to be concerned about.
Bottom Line: When homeowners are in serious financial trouble or have to move in a hurry, purchase offers from investors are tempting. The owners can sell their house quickly for a cash payout, even if their home is in very poor shape. However, investors know that the sellers are motivated or desperate to sell, and their offers are usually well below the market value of the property.
Risks of Selling to a Home Investor
The biggest risk is the most obvious one. The others aren’t common, but can be more problematic if you’re unlucky enough to experience them.
The Final Sales Price Will Be Disappointing
We’ve already touched on this: you’ll receive a low payout when you sell your house to a home investor. After all, they’re not buying your house to live in it; they’re buying it to make a profit.
The most they can get for your home (after fixing it up) is the current market price for pristine houses similar to yours. So they’ll want to pay a lot less than that, in order to ensure a good return. Even investors who plan on keeping the property for a while won’t buy it if they can’t get a “good price.”
There’s a bright side, though, if you do a little math.
Take the fair market value of similar homes (in saleable condition) in your neighborhood. Then deduct the cost of the repairs you’d have to make before you’d be able to sell for the same price. Realtor commissions on a traditional home sale would cost you about 6% of the fair market sales price; staging the home and some closing costs associated with a traditional sale might add another 4%. Deduct those amounts as well.
Before you know it, what seems like a “lowball” offer from a home investor is really pretty realistic – when you understand that they also need to make a decent profit on the deal. Even so, you’ll probably be receiving about 20-30% less than you’d get for the house if it was in perfect shape and sold on the open market.
That’s the first big risk of selling to a home investor. You won’t be getting a fair market payout. If you’re a desperate seller or have a distressed property, however, it may be a risk you’re willing to take.
You May Miss Out On an Opportunity
Some investors accumulate properties in a neighborhood with the ultimate goal of tearing them all down to build apartments or condos. Some plan to do the same and use the land for a commercial project. And some plan to sell all of the properties to another developer, for a nice profit.
When investors or developers have a huge project on the drawing board, that increases the value of the land they don’t yet own – because they need it. In other words, your house might be worth a lot more to them than it would be to an individual home buyer.
Here’s the problem. You have no way to know what the investor will be doing with your house, so you have no way to know that they’d probably be willing to pay a lot more than they’re offering. Only a realtor who has experience dealing with investors would be able to sniff out the truth.
If a home investor is interested in buying your home – and it’s located in an area that’s not zoned strictly for single-family detached homes – it might be worth consulting with a real estate agent first who has dealt with investors in the past.
You Might Have Seller’s Remorse
Naturally, you’ll wish that you didn’t have to sell your home for a below-market price, and you’ll probably wish you didn’t have to move at all. But that’s not the remorse we’re talking about.
Investors don’t have to tell you what they’re going to do with your home after they purchase it. They might be fixing it up and selling to a nice family, of course. But as we’ve discussed, they might be planning to rip it down and use the land for commercial development or apartments. They might even be unscrupulous landlords who would be willing to rent the property to, let’s just say, tenants who want to use it for improper or illegal purposes.
How would something like that make you feel? Would you feel that you had let your neighbors and friends down?
If so, you might regret being responsible for creating a problem in your former neighborhood even more than you regret having to accept a low sales price.
You Could Get Scammed
You can consider this possibility a sad commentary on our society, or simply look at it as human nature. But scammers will take advantage of anyone who is in a vulnerable position – and that includes homeowners who are desperate to sell their house quickly.
These scams come in several forms.
- Administrative fees: Some supposed “investors” approach potential sellers with an all-cash offer to buy their home in just days or weeks. Once a seller has agreed, they’re told that they first have to pay a small service or administrative fee so the deal can go though. The “investor” takes the $500, $1000 or $5000 fee, and vanishes.
- Overseas Buyer: This is a similar scam. The person making the offer says they’re working on behalf of a foreign “investor,” and the seller simply has to contribute some upfront money to take care of the foreign “banking fees.” Naturally, there’s no foreign investor, and that money is lost. A variation on this one: after signing over their house, the seller is paid with a cashier’s check drawn on a “foreign bank” which turns out to be worthless.
- Bank Error in Your Favor: The deal is done, the contract is signed, the seller receives a check. Then – the “investor” calls. “The check was for $5000 more than the agreed-upon price; can you please wire the $5000 back to us?” Of course, the scammer stops payment on the big check, keeps the “overpayment,” and disappears.
- The Fine Print: Some “investors” take advantage of people selling their home without the help of an agent or attorney, by hiding language in the written contract that changes the terms that both sides agreed to orally. In a worst-case scenario, the “investor” takes over title to the home before the seller is paid – and then refinances or sells the home to someone else. The homeowner is left holding the bag, since their home has legally been sold and the “investor” is long gone.
- Equity Skimming: The “investor” buys the home and takes over the mortgage payments, but allows the seller to rent the house so they don’t have to move. As you’ve probably guessed, the “investor” doesn’t pay the mortgage, the bank forecloses, the “investor” vanishes with the accumulated rent payments, and the homeowner is on the hook to the bank.
These scams aren’t commonplace, but they do happen. If you’re thinking of selling your house to a home investor, your best protection is to do it with the help of a realtor and/or lawyer who can look out for your best interests. Yes, it might be an extra cost you don’t want to incur, but if you think about how much it might cost you if the deal goes bad – you’ll understand why it’s actually a smart investment.
Bottom Line: You’ll almost always end up with a smaller payout for your house if you sell to a home investor. In most cases, that lower payout is understandable and justified. However, there are additional risks associated with a non-traditional home sale; using a realtor and consulting an attorney can protect your interests.
Selling Your House to a Home Investor FAQ
Q: Should I consider selling my house to a home investor?
A: Do you have to be out of your home almost immediately and don’t have time to go through the traditional home sale process? Is your house in really bad shape, and you can’t afford to make the necessary repairs that would make it “saleable?” Did you just end up with the house (for example, due to death or divorce) and you simply want to get rid of it? In all of those cases, selling to a home investor might be a good option. In fact, in several of those cases it might be your only viable option.
Q: Do home investors try to take advantage of buyers who don’t have much leverage?
A: “Take advantage” is a strong term. Some unscrupulous investors absolutely do. Honest investors, though, are just looking to make a reasonable deal that guarantees them a decent profit on their investment.
Q: To ask the last question another way, am I going to take a bath if I sell to a home investor?
A: Not necessarily, but you’re not likely to receive a huge payout, either. Your home probably doesn’t have the same value as perfectly-maintained, comparable houses in your neighborhood, the investor is going to have to pay for necessary renovations and repairs, and they still need to make a profit (that’s the business they’re in, after all). You’ll probably be receiving 20-30% less than you would through a traditional home sale – but you won’t have to pay realtor commissions out of that check.
Q: Is it really risky to sell a house to a home investor?
A: It’s definitely riskier than selling it through a real estate agent, but if you watch for possible scams by disreputable “investors,” and call on professionals to help you with the sale, you should be just fine.