The real estate market is made up of sellers and buyers each looking for the best deal. Most buyers are who you’d think of in a typical HGTV episode: young professionals looking for their starter home, a family trading up for more space, a retired couple who’d like to downsize. But some buyers in the mix are actually not individual people at all. They’re companies. Companies that, as their business model, purchase homes for some kind of profit.
As a seller, it’s always a good idea to consider all your options, based on your priorities and needs. That option-weighing process includes who to sell your home to and what they can offer as far as price, terms, and peace of mind.
Perhaps you’re doing the math and not loving what you see as far as a traditional sale. On average, a home in the U.S. takes around 24 days to go under contract and another 46 days to close. And beyond the typical back-and-forth negotiations and buyers’ fickleness, there are countless hurdles that can drag out a deal — or even derail it altogether.
You’re intrigued by the idea that a house buying company could literally buy your house tomorrow — but, naturally, a little skeptical of what their intentions are and if you’d be happy with the outcome. This guide to house buying companies is meant to give you the clarity you need to make an informed decision about selling your home, while offering a little background on these companies that buy houses.
What is a house-buying company?
As the name implies, these companies buy homes directly from homeowners. The main benefit for sellers is that home buying companies, by way of paying for a house from their cash reserves, can offer a much faster, simpler process than a traditional Realtor or FSBO sale.
Owen Dashner, owner of Red Ladder Property Solutions in Omaha, Nebraska, knows quite a bit about the homebuying process — it’s what he does every day as a property investor. Below, Dashner breaks down the various types of house buying models:
1. House flippers
These types of buyers purchase properties with the intention of remodeling or renovating to add value, then re-sell those properties quickly for a profit. House flippers look for where specific improvements — such as cosmetic updates, mechanical repairs, an addition, or a change to the layout — would immediately boost the equity.
“Typically, the house would need to be purchased by the flipper at a price that allows for a 15%-20% profit margin, depending on the size of the project,” says Dashner.
All major cities and most mid-sized metro areas have several house-flipping businesses, and you’ll also find some lower-volume companies in smaller cities and towns.
The best-known U.S. house-flipping company is HomeVestors (otherwise known as the “We Buy Ugly Houses” company), which has franchises all across the country.
2. Buy-and-hold companies
Buy-and-hold companies purchase houses with the intention of renting them to tenants for a profit. “Similar to flippers, they will look to acquire properties that offer enough potential equity or cash flow that they are able to make an acceptable return on investment for their owners or stakeholders,” Dashner explains.
Some buy-and-hold investors are smaller, mom-and-pop operations that do their own property management and repairs to save money, while the two major U.S. companies, Invitation Homes and American Homes 4 Rent, may have in-house teams to handle various aspects of the business and may have sizable overhead.
Most of these types of investors use the “BRRRR” model, which stands for “Buy, Rehab, Rebab, Refinance, Repeat.” Because they tend to focus on multi-family buildings and other types of rental properties, buy-and-hold investors can be found in almost any city.
An iBuyer is a business that uses real estate market data and technology to make immediate offers on houses, sight-unseen, after being contacted by an owner. Some of the best-known examples of iBuyers today are Redfin, Zillow, and Opendoor.
“While house flippers normally look for homes that need work, iBuyers are generally more focused on properties that are in fairly good shape compared to other properties selling in the market,” says Dashner.
iBuyers are typically fee-based, meaning that they make offers closer to the actual market value of the house, but will then charge a fee (around 6%-7%, depending on the location) to handle the purchase, marketing and sale of the property. Once an offer is accepted, the iBuyer will send out a representative to inspect the home’s condition.
If any repairs are needed to bring the house to market condition, they will likely request a credit at closing for the needed repairs. At the current time, iBuyers operate primarily in larger metropolitan areas, so they may not be an option in smaller cities or rural areas.
4. Trade-in companies
There are different variations of what’s known as the home trade-in business model. Some trade-in companies will offer to buy a new home on behalf of a homeowner, using the owner’s current home as collateral. Sometimes these companies will let the homeowner rent the new home until the old one sells.
A few examples of today’s top house trade-in companies include Knock, Ribbon and HomeLight.
HomeLight’s Trade-In program is unique in that we’ll work with your real estate agent to make an offer on your current home — and guarantee it. We buy your home at that guaranteed price so you get the cash to close on your dream home and control when you move. We then work with your agent to list your past home.
If your home sells for more than the price HomeLight paid for it, we give you the additional cash minus selling costs and program fees.
(FYI, HomeLight Trade-In is currently available in California and Texas. We will be launching in other states in 2020. Enter your information here to be notified when HomeLight Trade-In launches in your area).
5. HomeLight’s Simple Sale
With so many different types of buyers and investors clamoring for properties, it can be difficult to determine the best one for your home. Our Simple Sale platform acts as a network for hundreds of real estate buyers across the U.S., so we can make the connection for you and hand-match your home to the right buyer.
Agent as deal-maker
At first glance, it might seem that a seller would choose a home-buying company as a means of avoiding real estate agents’ commission fees. But as these types of companies grow in popularity, many Realtors are choosing to work with them as a means of getting quicker sales for their clients.
Cheesette Cowan, a top real estate agent in Tampa, Florida, has worked with many property investment companies in her local market. In the past year alone, she has sold around 10 homes to direct buyers. Overall, her experiences have been positive ones.
“For me, the only challenging part of working with the smaller home-buying companies is that there are sometimes title hang-ups,” she says. “Since they choose their own title companies, the process can be a little tedious, but it’s still faster than a traditional sale.”
In general, Cheesette estimates that her sellers get about 4%-5% less than they would have on the open market, but in the long run the benefits — like quick closings and extended move-out dates — make it a worthwhile trade-off.
Andrew Monaghan, a top agent near Phoenix, Arizona, says property investment companies can be a good choice for sellers who don’t have knowledge or experience in gauging the value of their homes — but he says it’s still a good idea to work with a real estate agent who can evaluate the offers and alert the seller to any red flags.
“Generally speaking, if a homebuyer is unwilling to put something in writing, pushes for a signature, makes a limited-time offer, or uses any other tactics that put pressure on the seller, those are signs that it may not be a legitimate company,” says Monaghan.
How the process works
If the direct home-buying model has piqued your interest, you’re probably wondering how to get started and what the steps will look like. Although every company might be a bit different in their approach and requirements, you can expect a process similar to the following:
- The seller (or the listing agent) contacts the house buying company to discuss the potential for purchasing the home. The company gathers some basic information about the property.
- The company schedules a walk-through inspection of the home to gauge its condition and to check for necessary repairs.
- The house buyer determines the market value of the home after accounting for repair costs, known as the after-repair value (ARV). “While iBuyers will use an AVM, most house buying companies will do a comparative market analysis similar to a Realtor to determine what your home can be resold for after repair,” says Robert Taylor, an experienced rehabber in Sacramento. “They’ll then deduct for commissions, resale costs, and repairs, plus a small profit margin.”
- An offer is presented to the seller, including a price for the property as well as a proposed closing date and any other terms of the sale.
- After any negotiations are made and the seller and seller’s agent accept the offer, the closing date is set for completion of the transaction.
“Using a reputable house-buying company should result in a quick, low-stress home sale to let the seller focus on other things,” says Dashner.
Pros of using a direct homebuyer
Still not sure if you’re a good candidate for working with a home-buying company? Read on for some of the most notable benefits of this arrangement:
A fast, quick sale:
Most property investors buy houses with cash, which means there is no bank financing and no lender to require an appraisal. The overall closing time frame is considerably faster than a traditional sale — usually within 21-24 days, but possibly as quickly as seven days, notes Nick Taveras, owner and president of DNT Home Buyers. Plus, closing costs are typically covered by the home-buying firm.
A traditional buyer is more likely to want a home to be “move-in ready,” and may ask for concessions for the carpet that needs to be replaced or the mismatched appliances. But a direct homebuyer likely won’t be deterred by old, outdated aspects of a home, as there’s a good chance they don’t plan to live in the home and will make the improvements in preparation to rent or re-sell.
Little to no inspection contingencies:
The home inspection usually ranks right up there with the appraisal as one of the most stressful aspects of selling. But when selling to an investor, the inspection process isn’t nearly as exhaustive as with a regular buyer who plans to live in the home.
No staging or prep:
When selling on the open market, there’s a seemingly interminable cycle of cleaning, staging and showing, over and over for an indefinite amount of time. When selling to an investor, there’s no need to keep the house pristine and show-ready, and there’s no parade of strangers coming in and out of your home.
Most of the day-to-day inconveniences of having a house on the market — like hiding pets, putting away family photos, and disrupting your schedule to make yourself scarce — are no longer factors.
Flexible move-out dates:
Traditional buyers are often looking to move into their new home as quickly as possible, but a home-buying company will in most cases allow some flexibility in the seller’s move-out date. They may even agree to rent the property back to you (in what’s called a sale-leaseback transaction) for a period of time until you find your next home.
Potential cons of selling to a property investor
The key is to weigh the advantages against the potential drawbacks of selling to a property investor:
Home-buying companies are usually looking to get a price that’s below market value in exchange for paying in cash, closing quickly, and offering more flexibility than in a traditional sale. Although you may sacrifice a bit of equity up-front, it may end up being comparable in the end after factoring in the time savings, little to no repair costs, and lack of an appraisal-driven bank loan.
When selling to an investor, there’s always the potential for them to “wholesale” the house to another buyer, which increases the risk of the unknown buyer not following through on the deal.
Although most home-buying companies are legitimate, some are not. Property investors are not required to have a license in order to buy houses, which means there’s always the chance of getting caught up in a scam with an underhanded person or company posing as an investor.
“Make sure to do some due diligence on the reputation of the house-buying companies you are considering,” suggests Dashner. “Google is your friend, as is the Better Business Bureau. And don’t be afraid to ask for verifiable references to validate your research.”
Is a home-buying company the right choice for you?
The answer depends on your individual situation and goals. Different home-buying companies serve different types of homeowners. iBuyers are a good option for those selling properties in good condition at a certain price point, rental investors are well-suited to those with rentable properties in high-yield areas, and house flippers are typically seeking distressed properties.
A good way to stick your toe into the direct-buyer waters is to request an offer from an online selling tool like HomeLight’s Simple Sale, or by reaching out to a real estate agent in your area to help you evaluate your options.
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