Over the years, you’ve seen the signs — handwritten in all caps, nailed to the telephone pole just as you exit the freeway — “WILL BUY YOUR HOUSE FOR CASH.” Lately, you’ve started to notice another trend: those algorithm-powered tech companies called iBuyers that make cash offers on homes and close in days.
So, what are these various business models, and what’s your best play as a homeowner looking to sell your house fast?
Some background on cash for houses
Investors buying homes for cash and then selling them for a profit is no small venture — and housing market data shows that these types of purchases are actually on the rise: The National Association of Realtors (NAR) reports that investors accounted for 15% of home sales in July 2020, an increase from 11% the year prior.
You can think about selling your house to an investor like trading in your car to the dealership. If you’re looking to sell your car, you can certainly do it yourself. Do some minor repairs, put it up on Craigslist, organize your own test drives, and handle all the paperwork yourself. However, it’s easier to just take it to the same dealership you’re buying your next car from and let them deal with it.
Who are these cash buyers, anyway?
As a group, cash buyers or house buying companies by definition are individuals or entities that buy your house outright and all at once, without the need for lender financing.
In general, selling your home to a cash buyer allows you to skip the home prep, showings, and staging hassles and arrange a more flexible closing timeline to coordinate with the purchase of your next residence.
But not all cash buyers have the same conditions and policies. In fact, these buyers have evolved into a few larger categories:
1. Buy-and-hold investors
Buy-and-hold investors purchase homes and convert them into rental properties.
Within the buy-and-hold category, you have individual investors who purchase and rent out properties for passive income. On a larger scale, there are institutional investors that purchase at a minimum of 10 rental properties per year, the quintessential example being Invitation Homes, a subsidiary of Blackstone that operates in 16 markets across America.
In Q2 2020, 1.4% of single family home and condo sales were sold to institutional investors, according to ATTOM Data Solutions.
As a seller to buy-and-hold investors, you have more flexible closing dates and you’ll likely get better pricing than if you were to sell to a house flipper.
2. House flippers
Think Chip and Joanna Gaines or your remodeling-enthusiast uncle — they buy homes, typically in a poorer condition and at a lower cost, with the intention of renovating and flipping it for more.
ATTOM Data Solutions reports that in 2019, the number of homes flipped hit an 8-year market share high, accounting for 6.2% of all home sales in the nation. All in all, there were 245,864 single-family homes flipped in 2019.
One of the biggest (and newest) players in the sell house for cash world is the tech-savvy and data-driven iBuyer, short for “instant buyer.” iBuyers use automated valuation models (AVMs) to make competitive offers on residential homes that are typically in better condition.
Since iBuyers typically make less profit per flip, their business is more reliant on turning over a high volume of homes using technology to streamline operations.
As for the seller? There’s no staging, no open houses — you avoid the long drawn-out traditional home sale process and can close in a matter of days once you accept an offer. iBuyers generally offer better pricing, up to 98% of fair market value, while charging sellers a fee around 7%-10% plus the cost of necessary repairs.
According to a study conducted in 200 U.S. cities early this year, iBuyers acquired 1% of all home purchases in those markets in 2019. That may sound like a small portion, but it’s nearly double that of the prior year, indicating that a growing number of sellers are shifting to the speed and convenience of this relatively new model.
Although COVID-19 suppressed iBuyer purchasing as much as 90% — and 2020 iBuyer activity will shrink compared to the year prior because of this — iBuyers are cautiously re-entering the market and will likely be a long-term fixture of the greater real estate landscape.
7 things you should know about selling your house for cash
1. HomeLight will match you with instant home buyers in your area.
This is the desirable route for many sellers because their top priority is to fetch the highest price point possible. Agents wear a lot of hats to make that happen by helping the seller get a house prepped, staged, and ready for the market and guiding them through negotiations and closing.
But in the event that a fast or certain sale takes precedence over price, you might go to the market in search of a cash buyer.
Depending on your home’s condition, price point, and location, your home will be a more desirable purchase to certain cash buyers over others. Most real estate buyers have a specific “buy box” they use with parameters as to which types of properties are most valuable to them. That means what your home is “worth” will vary, even among buyers who can pay instantly.
With Simple Sale, HomeLight has created the largest iBuyer network in the U.S. so you don’t have to spend hours searching for the right investor. Just fill out some information about your home and location and we’ll determine which iBuyer is the best match for you based on their past transaction history, target price range, and the types of property they’re historically willing to purchase.
From there, you can compare what you’d get for your house by selling to an iBuyer against an estimate of what your house would go for on the open market with the help of a top agent.
2. Some direct buyers will purchase your house as-is.
If your home is in need of some significant repairs before you can put it on the market, a cash offer might look pretty appealing because some investors will buy a property “as-is.”
Each investor has their own terms and criteria on the type of home they’d purchase, like the price of the house and its condition.
Flippers specifically aim to purchase rundown properties at a discount that they hope to turn into a profit. iBuyers, on the other hand, purchase homes that are in better condition with minor wear-and-tear issues at a more competitive price.
They’ll send out their own inspectors to your home and most often will deduct the cost of the repairs from your price.
Whether you have an iBuyer arrange for the repairs or you sell “as is,” you’ll avoid the hassles of having to complete the repairs yourself, which can be both time-consuming and costly.
3. You can avoid contingency clauses.
- Offer is only valid if the buyer’s current home sells within three months.
- Offer is only good if the inspection doesn’t turn up a cracked foundation.
- Even if the bank has approved it, the offer is only valid if the mortgage lender comes through.
A contingent real estate deal has anywhere from a 1%-10% of falling out of contract. If you’re selling your home for cash to an investor, this may be an extra obstacle you can avoid depending on the type of buyer you’re working with.
Although many cash buyers will still want to have the home inspected, they’re less likely to nickel and dime you on repairs.
4. Financing is pleasantly different.
The reason home sales take forever is that lenders get involved. If you have to borrow money, you’re on their timeline and they don’t really care about your timeline. According to Ellie Mae, the average purchase loan took 44 days to close as of July 2020. That’s a month and a half just to process the mortgage (plus any time on market it took to attract a buyer).
All-cash purchases close quickly because they don’t have to deal with lenders at all. What’s more, a cash buyer’s offer won’t hinge on the home appraising at a certain amount.
Financing is also where home sales tend to fall apart, so selling your home to someone who is buying for cash means you can skip this hiccup.
5. Selling a house for cash is quicker and less legwork.
Because you have someone interested from the beginning, you don’t have to go through all the primping that goes into listing your home for sale. No need to worry about staging or hiring a pro photographer or figuring out your marketing description.
Direct buyers take care of the inspection and repair responsibilities for you and you completely bypass the lending steps.
You call an investor (or contact one online), they ask you some questions, run some numbers, and they make you offer. You take it or don’t, and you close within a week or two.
This can be an especially attractive option in the event that you have to drop everything and sell the house for a job relocation or other sudden life change.
6. You could also rent out your house or sell it on the open market with an agent’s assistance.
If you’re weighing the decision of selling your house for cash, consider some of your other options, too.
If your home is in decent shape, look at renting it out. You’ll need to hire a property management company or be prepared to do maintenance and repairs yourself, but since rental costs tend to exceed mortgage costs in most cities, a tenant can supplement or completely cover your mortgage payment.
You might even try offering a lease-to-own option to tenants.
You could also partner up with a top real estate agent in your area who has a good track record for selling homes quickly — if you decide to go this route, HomeLight can help pair you with an agent with a low average DOM, or “days on market,” indicating they’ve got experience finding a buyer quickly.
7. Scams happen in the ‘Sell Your House for Cash’ space.
Life events or circumstances such as divorce, foreclosure, bankruptcy or employment transfer all make the option of selling your house to an investor for a quick, no-fuss transaction more attractive. But that doesn’t mean you shouldn’t do your homework.
Investors, unlike real estate agents, do not need to be licensed to operate. Though there are many legitimate and legal cash-for-houses companies, it is an industry fraught with scams.
Beware. Keep an eye on your credit history to make sure no one has taken out a second mortgage on your home. Be hesitant about any company that charges an application fee upfront. Shady businesses can take your equity and walk away, leaving you in a more desperate position than you were when you started looking into a cash option.
If you don’t have the time or energy to exercise vigilance, you’d be better off going through HomeLight’s Simple Sale platform since every iBuyer in our network must go through a stringent vetting process.
To sum up selling your house for cash:
What is this business model?
An opportunity to sell your house directly for cash, skip the hassles of stagings and showings, and close within weeks or even days.
What’s the best play for a homeowner?
If you need to sell your house fast, HomeLight will match you with the right iBuyer for your particular needs, depending on factors like your home’s price range and condition, through our Simple Sale platform.
What’s the catch?
Just like your relationship status on Facebook… it’s complicated — but you’ll likely have better luck if you know your options.
Header Image Source: (Will Porada/ Unsplash)
It’s good to have choices!