Updated: Jul 5, 2021
Your home is likely your most valuable asset. Selling it is a big deal. If you’re reading this article, then you only own one house, if you own more than one, you don’t make a practice out of buying and selling properties. You’re most probably unfamiliar with Real Estate investors and have only ever worked with Real Estate Agents. Good news, I am both. I am writing this article because there are some important distinctions between working with an agent and an investor. There are also quite a few misconceptions about both.
Before we can discuss working with an investor, we want to make sure you understand what an investor is and how they make money. Over the years, we have found that there are quite a few misconceptions about the profession. Let’s start off with the absolute basics. A real estate investor is no different than anyone with a 401K, a brokerage account, or a mutual fund. S/he is looking to make a return on their investment so they can send their kids to school, retire, and leave something for their children and grandchildren someday. Most real estate investors have other jobs and they invest in other areas such as the stock, bond, or money markets. Their primary objective is to make more money on real estate investments than they do in other areas like the stock market.
Real Estate investors buy, repair and re-sell (or rent) real estate for the sole purpose of making a return on their money. If they invest $1 into an investment, they expect to get more than a $1 in return. When investing in the stock market, a typical investor can expect a 20% return on a moderate portfolio of stocks, bonds, and other securities – especially if managed by a professional broker. So, when a real estate investor looks at the value of a property, s/he is looking at the return that property will generate compared to some other investment such as the stock market. Thus, if an investor can make $.20 for every $1 invested in the stock market, s/he must make more than $20 for every $1 invested in real estate. Without getting too deep into it, that means that after the total cost (purchase price, repairs, permits, licenses, labor, etc…) an investor expects to make more than 20%. A typical return is 30%, which is $.10 above what s/he could make in the stock market.
So, when an investor looks at a property which could sell for $200K in perfect condition, s/he will offer 70% of that price less repairs. Let’s say, for example, after making all necessary repairs and upgrades to the home, it could be sold for $200K; we call this the ARV (After Repair Value). Let’s also assume it will cost $30K to fix it. An investor will offer multiply the ARV ($200K) by 70% and then subtract the repair costs ($30K). The offer will, therefore, be $200K x 70% = $140K Minus $30K (repairs) = $110K.
Here is what a typical real estate investment looks like to an investor:
On the surface that seems like a lot of money. Just consider this. BEFORE taxes, The investor in this example had to spend $153,000 of his/her own money (or borrow it from high-interest investors called hard-money lenders). That means his/her return on investment (ROI) is 28%. That’s only 8% what she would have gotten for doing nothing if her money was invested in the stock market. To put it another way, that’s a whopping $.08 more for every $1 invested in the stock market.
I don’t explain all of this to make anyone feel bad for real estate investors because that would be just plain crazy. Eight percent (8%) above what can be made in the stock market is a very good return and it’s the reason investors put their money in Real Estate. I explain this because it is a common misconception that investors make low ball offers and their objective is to take advantage of sellers who are desperate. That’s not the case at all. Are there predators out there, of course there are. When money’s involved, there’s always someone looking to take advantage of someone else. But, in general, Real Estate investors are just a bunch of people who really like real estate. Some of us like renovating properties, others like helping people (that’s right, there are some pretty creative ways to buy a property that create win-win scenarios). I personally got into real estate investing because I want to help create higher-quality low-income housing. It’s not the only area in which I invest, but it’s my company’s primary mission.
So, to address the elephant in the room, the scenario described above is not considered a low-ball offer. It is simply an offer which makes it worth investing her money in real estate rather the stock market or just keeping it in the bank.
Some good rules to keep in mind when working with real estate investors:
Transparency is King
When working with an investor, you should always ask them to show you how they determined their price. If they won’t show you their numbers or if they can’t explain them, you should be cautious. Professional investors will always use a formula and will know their numbers inside and out. They will be happy to explain how and why they came up with those numbers. More importantly, if you are willing to be flexible with how you sell the property, a good investor will have at least 1 or 2 alternative ways to structure the deal to make it work for different people in different circumstances. For instance, some people just need a little cash but they need it right away. In those situations, an investor may be able to give the seller $10,000, $20,000 or more in a matter of a day or two. Then pay the balance over time or in a future lump-sum payment. The more flexible the seller, the more likely an investor is to be able to come up with a solution that works for everyone.
On the flip side, you should share as much as possible when working with investors. You shouldn’t be afraid to share you reasons for selling. If you’re facing foreclosure or bankruptcy, for instance, it can be embarrassing to share that. We get that, but, if you share it, the investor can tailor an offer for you that helps you avoid those issues. If you don’t, she can’t help you. If you’re worried about someone taking advantage of you, consider what we said above. You should always ask for an explanation of every detail of every offer. If it doesn’t make perfect sense to you, don’t take it or ask them to explain it until it does. A fair and honest investor will spend as much time as you need explaining the offer. If they don’t call another investor; there are lot of us out there.
The first offer is rarely the only offer
When an investor makes an offer, as described above, you can assume he/she has at least one more offer that can be made, though the offer will be structured differently. For instance, if you need cash right now, and you want to get out of the house and loan immediately. Well, that’s going to be one offer; quite likely one structured similarly to the example at the beginning of this article. Alternatively, you might be able to wait for your money but want the highest price you can get. Believe it or not, in that case, an investor might be able to offer you more than fair market value with some monthly payments over time. This can yield tax benefits which might matter to some folks. Whatever the situation, a good investor will find a deal that can work for everyone.
Investors have partners
Most real estate investors don’t have infinitely deep pockets. In fact, many don’t have any cash of their own to work with; this is especially true of new investors. Many real estate investors start out with very little cash of their own. They borrow the money from other investors, people they know with money to invest, and from banks. Some investors work in teams pooling their cash to make offers. Suffice it to say, when an investor makes an offer on your property, s/he has to justify it to more than just you.
When working with an investor, we’ll ask you a lot of questions, while it’s best to answer them all, only share what you’re comfortable with sharing. After an initial conversation, the investor will research your property. Most often, we’ll want to visit the property with you present. Here’s what you can expect:
They’ll ask for a tour of the property.
You’ll find a place to sit and discuss the sale of the property.
They’ll likely ask you questions about why you’re selling your home and what you’re hoping to get from it. They might even give you a standard questionnaire to fill out.
They’re going to ask you about the sales price. How did you come up with the number? How much do you owe? Are there liens or back taxes on the property, etc…
Then they’ll discuss the terms of the sale. Now, investors have a lot of flexibility when it comes to structuring deals because most of them don’t work through traditional bank loans. Because of that you might hear options that you didn’t know were possible or available to you.
The beauty of working with an investor is you have creative options to get to your desired solution. An investor is usually the best (and only) person to present them to you.
If you’re looking for quick and creative solutions to the sale of your property, contact us today.