What Is a Direct Home Buyer and Are They a Good Option for Sellers?
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- 15 min read
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Jacob Bourne Contributing AuthorClose
Jacob Bourne Contributing AuthorJacob Bourne is a journalist based in California’s Bay Area. He’s covered real estate news for Bisnow, The Registry, and local Bay Area newspapers.
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Kelsey Morrison EditorClose
Kelsey Morrison EditorKelsey Morrison is an editor for HomeLight's Resource Centers. She brings six years of editorial experience covering real estate, home design, cooking, crafting, and pet care. With a background as a commerce editor at World of Good Brands (eHow.com and Cuteness.com) and an associate editor at Livabl, Kelsey holds a bachelor’s degree in Journalism from Concordia University in Montreal, Quebec.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Selling a home may bring good things, like the chance for new beginnings and monetary proceeds. However, depending on the circumstances, the stress and amount of work needed to complete the sale may be an unwanted burden for some homeowners. Either due to personal difficulty or a house in a significant state of disrepair, some homeowners might seek a faster or easier path to closing day.
That’s where direct home buyers can enter the picture. These individuals or companies will buy your home for cash — albeit typically for less than you would fetch on the open market — in exchange for the convenience of a smoother and quicker sale process.
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Although there’s a lot to consider before deciding to sell your home to a direct home buyer, experienced North Carolina real estate agent Alyson Gulassa who serves the Ginger Vereen Peters brokerage team in Raleigh-Durham, says the biggest misconception about selling to a direct home buyer is whether you can still use an agent.
“When you operate with a house-buying company, you can choose to have representation in many cases,” Gulassa says. “I think that is something that potential sellers don’t always realize.”
Having representation or not is no small matter. Even though direct home buyers promise convenience, they ultimately act in the company’s best interest, not your own. Furthermore, although there are many legitimate companies operating in the market, disreputable companies also exist, so it’s good to have someone experienced on your side.
What are direct home buyers?
Direct home buyers are individuals or companies who buy houses directly from homeowners and pay with cash. There can be variations in how they operate, but they seek to turn a profit by buying low and selling (or renting) high. Unlike a traditional home buyer who wants to call the property home, the direct home buyer doesn’t care about the house itself, just its profitability.
So, those ugly window coverings or light fixtures won’t have much of an impact on the home’s appeal for a direct home buyer compared to a family who wants to get settled in ASAP. Not only does this mean that sellers don’t have to bother with making repairs or upgrades, but selling to a direct home buyer means an overall faster, simpler process since they’ll be paying with cash versus the typical mortgage-backed buyer.
The time savings can be helpful for those who need to move on the fly or get money in the bank quickly. While it takes about 44 days on average for a traditional buyer’s mortgage-backed offer to close, with a direct home buyer, closing can happen within a month or even two weeks. Gulassa says she’s seen a sale to a direct home buyer wrap up in as little as seven days.
Another top benefit of direct home buyers is that they’ll purchase homes as-is. The caveat to this is that they may reduce their initial offer after tallying up the repair to-do list.
Direct home buyers generally fall under the following categories:
- A single investor: A local real estate investor who maintains a small share of holdings for rent or sale.
- A group of investors: Smaller-scale industry players who pool their cash resources to expand their property buying power.
- A large direct homebuying company: Companies known as iBuyers have entered into the market in recent years alongside the digital transformation of the real estate industry. Examples include Opendoor and Offerpad.
- There are also other all-cash offer options such as HomeLight’s Simple Sale platform.
Here are some examples of situations where an all-cash, fast sale to a direct home buyer might be appealing:
- You just landed your dream job in another city and need to start soon.
- A divorce necessitates a quicker exit strategy.
- You need cash in the bank sooner rather than later.
- An out-of-state relative passes away and leaves you their home.
- The need to avoid a looming bankruptcy or foreclosure.
- The house requires expensive repairs you can’t afford.
- You are facing foreclosure.
How do direct home buyers operate?
Here’s the rundown on the different types of direct home buyers:
iBuyers: These real estate tech companies offer online tools and rely on algorithms to maximize profits from cash transactions. They generally operate in populous, competitive markets and provide no-obligation cash offers for properties in fairly good condition.
Buy-and-hold investors: These real estate investors can be individuals, small groups, or large companies that buy properties to keep for rental income or to sell when market conditions generate the highest profit.
House flippers: Flippers typically seek out fixer-upper properties that they buy for rock-bottom prices, invest in visible repairs, and then sell high. An example of a branded house-flipping company is We Buy Ugly Houses®.
Trade-in companies: A company that offers trade-in services can help homeowners who are selling and buying at the same time by making an offer to buy the current home with cash on a timeline that helps facilitate a smooth next purchase and move-in. An example of a trade-in company is HomeLight Buy Before You Sell, which allows you to unlock equity from your current home to put toward the down payment of your new home, moving expenses, closing expenses, or property repairs.
Local investors: These are typically individual real estate investors who deal with a few local properties that they buy for cash and either rent, rehab, or sell.
Here are the steps to sell your home for cash
A direct home buyer has a similar business model to car dealers purchasing and then reselling used vehicles. Like direct home buyers, car dealerships are always on the lookout for used vehicles that they can buy for low and sell for high. Instead of having to advertise your car for sale and meet with strangers who take it for a test drive, the dealership quickly and easily takes the car off your hands.
The catch is you generally get quite a bit less than you would if you sold it yourself.
The process is similar with a direct home buyer, except that you’re possibly entering into one of the biggest financial transactions of your life. In a nutshell, here are the steps illustrating how the process works:
- Request an offer that’s typically a no-obligation cash offer.
- Following an initial offer, someone will likely visit your home for an evaluation.
- The offer is amended and finalized for you to accept or reject.
- A sale contract is drafted and reviewed.
- You request the company to issue proof of cash reserves and receive their earnest money deposit.
- Title gets researched and cleared.
- Fast-forward to closing.
- You get paid.
How much do direct home buyers pay?
Now that you’re considering whether to use a direct home buyer to sell your house, a top priority question on your mind is how much cash you’ll get from the sale.
As is the case with selling on the open market, it’s hard to pinpoint an exact number without going through the process, as a number of factors can affect the outcome. The home’s neighborhood, condition, and overall atmosphere of the market play a role in the sale price companies will pay, Gulassa says.
Despite the highly variable nature of how much you’ll get from direct home buyers, it’s safe to expect to yield about 70% of your home’s after-repair market value, says Cliff Auerswald, president of All Reverse Mortgage, Inc. However, keep in mind that the yield could be higher or lower depending on what company you choose, the cost of repairs, and whether you’re selling in a buyer’s or seller’s market.
For example, some house flippers aim to pay only about 50% of a home’s market value. So, if you’d get about $400,000 for your house on the open market, only expect $200,000 from some flipping companies.
On the other hand, iBuyers have been known to pay as much as 85% of market value or higher, which on a $400,000 home would be $340,000. Keep in mind, however, that iBuyers will often charge a convenience fee, which at 5%, for example, would reduce the final sale price to $323,000.
According to Marty Morrison, co-owner of Property Bridge Solutions based in Omaha, Nebraska, his company deducts the cost of repairs from a home’s market value and then another 10% to 20% for the convenience of being able to close with a cash offer, for an as-is property with no Realtor® fees or closing costs. In that scenario, if repairs totaled $10,000 on a home with a $400,000 market value, it would yield around $351,000 after subtracting the repair costs and a 10% convenience fee deduction.
“Your takeaway won’t look as good as your initial offer,” says Gulassa, who cautioned that there is often a gap between what a direct home buyer will initially present to a seller, which may look closer to what they’d get on the open market, and what the offer will drop to after repair estimates and fees.
The take-home message is: prepare for potentially leaving tens of thousands of dollars on the table by selling to a direct home buyer.
What are the benefits of using a direct home buyer?
Here are the top reasons to consider selling to a direct home buyer:
- Quick selling process and speedy closings.
- No-obligation cash offers.
- Simpler process than financed sales.
- Receive a cash payment within weeks.
- Skip repairs and upgrades and sell your home as-is.
- No need to pay agent commissions.
- Avoid the worst-case scenario if facing foreclosure or bankruptcy.
- Less stringent inspections and unlikely to have contingency clauses.
- No need for staging, showings, or public listings.
- Flexible closing and/or move-out dates.
- Greater privacy and no “for sale” signs in your yard.
- Easily sell an inherited or probate property.
- Potential to sell for an acceptable price depending on the company.
What are the potential drawbacks of using a direct home buyer?
The following are reasons to consider not using a direct home buyer:
- Potentially selling for considerably less than on the open market.
- Less competition means no possibility to sell over asking.
- Could pay convenience fees or even hidden fees.
- If you don’t have a Realtor, there’s no one to represent you.
- Some companies might inflate the repair cost estimates.
- Company might not have the cash reserves they initially claimed.
- Company could go out of business while you’re in contract to buy another home.
- Scam risk.
What about all those unsolicited offers asking to buy my home?
Ever wonder what those marketing letters you get in the mail offering to buy your home are all about? They’re likely coming from direct home buying companies that are eyeing your home because of its desirable location or property details. Such companies or individuals may also take bolder moves like sending text messages, cold calling or even showing up on your doorstep and pressuring you to sell.
From the direct home buying companies’ perspective, there are reasons why people sell certain homes and hold onto others. While some of those reasons may be personal, homes in desirable neighborhoods with strong curb appeal and other selling points can turn a hefty profit when it’s time to resell. It’s a tactic especially employed when inventory is scarce. The fact that your home is off-market doesn’t deter them and may even entice them because there’s a chance you may take their offer.
While it doesn’t hurt to find out about the company that’s contacting you, it’s probably unwise to proceed just because they reached out to you. If you do decide you want to sell and want to use a direct home buyer, there are scores of them operating, so do your research and find out which is right for you.
How can I get a cash offer from a reputable direct home buyer?
Now that you’ve decided that you want to explore selling to a direct home buyer, here are some pointers to guide you:
Check out Simple Sale: Start your research by learning more about HomeLight’s Simple Sale platform for an easy and safe way to get a competitive offer on your home. After filling out a brief questionnaire about the property and your selling plans, you’ll get a no-obligation, all-cash offer in as little as 24 hours and be able to close on your home in as few as 10 days, skipping the months it can take to sell the traditional way.
Research online: Any established direct home buyer should have a professional website, and the larger iBuying companies should offer in-depth information and tech tools related to their platform. Although there are too many companies out there to fully vet them all, internet searches are the first and most important step to narrow down your list. Look at company reviews on sites like Trustpilot, Yelp, and Google reviews. See what kind of rating the company has on the Better Business Bureau. Visit the company’s website and the FAQ page for details about things like fees, flexible closing or moving dates, etc.
Another tip is to search to see if a direct home buyer has listed an initial offer on a property tech website. For example, Opendoor advertises preliminary offers for select properties on Realtor.com. This can help you get a sense of your proceeds without inquiring.
Talk to a peer: This step can be a bit more challenging, but if you want more certainty that a company is legitimate, try to connect with someone else who has worked with them. When you’re doing online research, keep a lookout for opportunities to message any reviewers. You can also ask the company itself to put you in touch with someone, but keep in mind that they’ll only choose someone who’s likely to say positive things.
Talk to a company representative: Sometimes getting someone on the phone can be a helpful way to gauge whether a company is legit. Ask questions. If the answers are evasive or the person is pushy, you may want to steer clear.
Consult with a top real estate agent: Remember that you still have the option to get representation from an experienced real estate agent while working with a direct home buyer. Some agents even routinely connect with direct home buyers if their sellers are interested in getting some cash offers in the mix. Going this route will help you be armed with the best information and advice throughout the process.
Conclusion: Weigh your options before contacting a direct home buyer
If you’re in a situation where selling a home quickly and easily is more important than getting the highest sale price, then consider selling to a direct home buyer. These companies can buy your home “as is” for cash and close in a matter of days or weeks, saving you time and the hassle of marketing and making repairs to your home. Selling to a direct home buyer also means maintaining privacy versus selling on the open market.
The important points to remember are to do your research to avoid scams and hidden fees, and consider working with a real estate agent to guide you.
It’s also highly likely that you’ll leave money on the table compared to selling to a traditional buyer, so weigh costs and benefits.
Working with an experienced, top-rated real estate agent can also provide a smooth home sale process and help maximize your return. When you’re ready, HomeLight can connect you to a great agent in your market who is best suited for your selling needs.
Header Image Source: (Shahrukh AQIQ (Oliver / Unsplash)
