For decades, you’ve seen it in the news, on billboards, even in your mailbox: Get an instant offer for your house. Close in as little as one week. We’ll buy your house for cash, as-is.
While most sellers are focused on commanding the highest price for their home, typically by listing on the open market with the assistance of a real estate agent, the direct-buy business model has stood the test of time by serving a portion of the 5.15 million people who sell their home each year who need a quick, no-fuss transaction, even if it means netting less profit.
Need to uproot for a job? Financial hardship has you strapped? Here’s a fast out—all you need to do is sell at a discount for that convenience, speed, and certainty. But who are these buyers making cash offers and are they all one and the same?
More cash buyers to choose from today
What you might not realize is that the direct-buy market—or total pool of buyers out there making cash bids on houses—is increasingly competitive. You have buy-and-hold investors, fix-and-flippers, and high-tech, venture capital backed companies who’ve entered the space in recent years. This latest grouping continues to expand into new markets and includes players like Redfin, Opendoor, and even real estate giant Zillow.
Different buyers have varying offer packages. Some will only purchase tear-downs while others scoop up homes in decent condition. One cash buyer could waive steps like the home inspection to provide a tighter closing and another could get you a better price.
Our Simple Sale platform essentially turns a pre-approved list of direct-buy partners into iBuyers (“instant buyers”), in the important sense that they can make instant offers online.
The bottom line is if you want to sell to a cash buyer, it’s important to shop around. Your market could have several competing buyers who’d throw their hat in the ring for your home. You need to understand the players and weigh your options carefully.
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First off, what is a real estate investor?
Let’s start with the basics: A real estate investor purchases property with the intention of building wealth. Real estate investors can be a corporation or a single person, and typically offer speed, flexibility, and cash for properties.
There are three basic categories of real estate investor:
- iBuyers, the latest grouping of high-tech startups backed by venture capital
- Buy-and-hold investors who purchase properties to rent for passive income
- Fix-and-flippers who renovate properties in poor condition at scale
After you get familiar with these high-level groupings, it’s time to dig into how each of these investors operate. Keep in mind that each individual company has its own business structure and fee breakdown, but we’ll help you get a general idea of how these different groupings of investors tend to work when it comes to:
- Typical service fees
- Typical speed of sale
- General business model
The 3 different types of residential real estate investors
iBuyers put a competitive spin on the fix-and-flip model
The term “iBuyer” seems to have first appeared in a report by investment banking firm Evercore ISI as recently as June 2017, which applied the moniker to up-and-coming real estate startups such as Opendoor.
Now, “iBuyer” refers to the types of new-age investors, including Zillow Instant Offers, Redfin Now, and Knock, that use automated valuation models (AVMs) and other technology to make quick offers on residential homes and close in days.
Buying homes with cash and selling at a profit is a complex business with a lot of overhead, typically forcing investors to buy at a steep discount or risk losing money.
iBuyers theoretically differentiate from other types of investors like home flippers by making more competitive offers on homes in better condition, through the use of technology and streamlined operations to cut costs.
What can you expect if you work with an iBuyer?
The iBuying process starts with a round of general questions about your home regarding its condition and any recent upgrades you’ve made. Then, an algorithm assesses the value of your home through different data points.
iBuyers typically select homes that fall under these qualifications:
- Valued between $200,000 to $500,000 price point
- Built after a certain year
- Relatively good condition
If your house qualifies under the iBuyer’s specifications, you will receive an offer within a few days. If you choose to accept it, you’ll move forward with the iBuyer and close the sale in as little as one week.
When you sell your home to an iBuyer, you opt out of the timely tasks involved in a traditional home sale—staging, listing photos, open houses, showings, etc. though you can generally expect to deduct the costs of needed repairs from your take-home proceeds.
For example, Opendoor notes on its pricing model that repairs needed to sell the home are a “TBD” transaction cost, and that it looks for “items that are broken, in poor condition, or can affect the safety, structure, or functionality of the home,” in line with typical home inspection red flags.
iBuyers are a fast-growing business model expanding rapidly across the country. Their service fees typically range between 6%-12%.
Buy-and-hold investors scoop up thousands of single-family rentals
A buy-and-hold investor, or an institutional investor, is a large, Wall Street-backed organization with considerable cash reserves that invests on behalf of its members. Real estate investment trusts (REITs) purchase thousands of homes and turn them into rental properties.
Blackwood’s Invitation Homes and American Homes for Rent are amongst the largest REITs in the country, each with tens of thousands single-family homes purchased annually. These REITs buy vacant, leased, or occupied single-family homes across the United States.
What can you expect if you work with an institutional investor?
You can expect a REIT to execute the sale with its experienced transaction team of underwriters, acquisition experts, and local real estate professionals.
Institutional investors offer quick and dependable all-cash purchases with flexible closing dates. With advanced pricing models and thousands of successful transactions, REITs often provide better pricing than other options.
Fix and flip investors quickly renovate properties in poor condition at scale
A fix and flip investor purchases a property (often priced low due to poor condition) and renovates it to turn it around for a higher price. A fix-and-flip investor can purchase, renovate, and resell a home in as little as a few weeks to as long as a year, depending on the extent of the repairs and the local real estate market.
What can you expect if you work with an fix and flip investor?
Fix and flip investors offer less than market value for homes to budget for necessary renovations. With relatively flexible standards, fix and flip investors will work with nearly any home regardless of condition.
The biggest fix and flip investors, We Buy Ugly Houses owned by HomeVestors and We Buy Houses, will provide a no-obligation offer on homes regardless of the condition. If you choose to accept the offer, they will move forward quickly and purchase your house in as few as 30 days.
Pros and cons of the different types of real estate investors
The general advantage of selling to an investor is a fast, streamlined transaction without having to jump through the hoops of working with a buyer who has to obtain financing. But the experience and offer packages vary among investor types and even between individual companies, so here we’ve summarized some basic pros and cons among them.
|Fix and Flip Investors||
Real estate investors in today’s market
Just how big is the real estate investor market compared to traditional home sales? NAR’s September 2018 Existing Home Sales statistics shed some light. In September 2018, sales to investors made up 13% of home sales, down from 15% the year prior.
Here’s what you can expect from the pricing, timing, and processes of both the traditional sale and investor sale routes:
When you sell your house to an investor, you stand to cut weeks or even months off the selling timeline by taking out all of the prep work, stagings, showings, marketing, and repair negotiations.
Historically, you could only lock in this convenience and certainty by selling your home at a steep discount. But with more investors than ever making bids, you now have the chance to cherry pick the best deal for your house based on factors like closing speed, offer amount, and logistical ease.
Explore your options before you sell your house to an investor
With today’s fast-paced technology and large pool of real estate investors, selling your house fast doesn’t mean settling for the first and only offer that comes your way. In your market, you may have several of competing iBuyers ready to make an offer on your home.
Compare your options and shop around using HomeLight’s Simple Sale platform before making your decision if you want to walk away from a quick sale with the most possible cash.
Header Image Source: (Brian Babb / Unsplash)