Drive down just about any major road in this country and you’ll probably see the signs: “We Buy Homes Fast!!”
They’re often loud and obnoxious. They offer quick cash settlements. Sometimes they mention ugly homes. Have you ever considered calling the number on one of those signs? Ever wonder what they’re all about?
These signs are put up by real estate investors. There are a million flavors of real estate investor but these signs most likely belong to a real estate flipper or a wholesaler and they’re looking for the really incredible deals. If you’re looking to get top dollar for your home, then don’t waste your time calling these guys. If you have a home that needs major work and you don’t have the time or desire to deal with tire kicking home shoppers, home inspectors and contingencies of all sorts, then these guys might be worth considering.
Call the number on a sign that offers a quick, cash closing and you’ll probably get someone who will offer you about 50 to 60 percent of what your home is worth in top condition. It’s very unlikely that you’ll be offered any more than that.
Let me tell you why. When I’m considering a home, I budget in about 15 percent in costs just associated with the process of buying and selling the home. There are transfer fees, taxes, and attorney fees when I buy it, plus real estate agents and seller concessions (what the seller agrees to pay toward the buyer’s closing costs) when I sell.
Those costs are pretty much the same for every investor and they consistently eat up 12 to 15 percent of the project. On top of those expenses, there are also holding costs (interest, insurance, taxes, utilities). Many people think that investors have all cash. Actually most investors use private lenders to make quick, cash like purchases and the fees on these loans are usually around 12 to 16 percent annual interest and 4 to 6 up front points. This can easily put an investor’s holding costs at around 10 to 12 percent on just a six month deal.
Most real estate investors are already down 25 percent before they even start to think about renovation costs and some sort of profit. This may seem high but it just means the average gross margin for a real estate investor is about 40 to 50 percent and that is in line with other industries. The apparel retail industry has very similar margins.
It is expensive to buy and sell homes. Real estate investors struggle to keep their overhead costs low. That’s why they use these signs. You may find these signs annoying but if you consider yourself to be on the side of the little guy then you may want to rethink your position. Look, there are few people who are more skeptical of real estate investors than me. Let’s face it. There’s a low threshold for entry in the business and to be completely honest there are a lot of people in the industry who are less than reputable. No one would love to see these shady players cleared out more than I would. But this business also provides opportunity to hard working ambitious people who have little chance of breaking into other industries.
Now if you’re still considering calling on one of these signs then there’s still a couple things you should know. First, find out if you’re dealing with a flipper/rehabber or if you’re dealing with a wholesaler. A real estate flipper or rehabber is normally a direct buyer. They are going to buy your home themselves. A real estate wholesaler is going to buy your home and then sell it to a direct buyer or get your home under contract and sell the rights to your contract to a direct buyer.
There’s nothing wrong with a wholesaler. Rehabber or wholesaler, you need to verify that they can deliver on their promises. If a wholesaler can’t find a buyer for your home then they just may walk away and you just wasted a lot of time. The best way to ensure you’re dealing with someone who can deliver is to get a substantial earnest money deposit.
You should demand an earnest money deposit of no less than 1 percent of the sales price. And ensure the funds are deposited with an escrow agent. Your title company can normally accommodate that.
Also verify that they have the resources and track record. Ask for proof of funds or proof of financing. Don’t be afraid to ask for proof of past performance. Have them show you the homes that they’ve purchased. Real estate sales are all public record and easy to verify.
Justin Pierce is a real estate investor in Northern Virginia. In his occasional column, he will write about investing in real estate.