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Selling To A Private Investor
So, what is all the hype? Why are all these people trying to buy homes all of a sudden? Is it just a scam, or are they legitimate investors? All these questions, how do you know what to do when it comes to selling to a private investor? Hopefully this article will help answer some of your questions.
Private investors’ buying a single-family home is nothing new. Although you would think it was, with the surge of bill-boards and road-side signs offering to buy your home. The truth is, this has been going on for years. What is new is the number of people doing it.
Why the sudden surge? The sluggish economy, people disillusioned with the stock market, lack luster retirement programs and so on. Reasons vary from investor to investor. But the goal is the same, more people want their money in real estate right now.
So who can you trust? That is a tougher question. Pretty much you have to take your chances. Most investors will meet with you face to face. You should check out there company and do your homework. The nice thing is, you are talking about real property and not a pile of cash. So it’s a bit harder for someone to rip you off.
How Does It Work?
That is the hardest question of them all. From what we can tell, every deal is different. But, here are some general guidelines that can show you what to expect.
- First know this. Investors are looking to make money. Most are trying to help you out of a problem by using their time and resources. But, most are not willing to make your problem into their problem.
- You can expect to see your perceived value on the home go down. Investors deal with three numbers: 1) Fair market value; 2) Wholesale value and 3) Mortgage balance. These numbers tell the investor how much risk they have by buying your home.
- You may not get cash up front. Many investors do not like to give cash up front. Instead, they will give you a "note" for the profit you are trying to take out of the house. This reduces their risk by not having a large upfront payment.
- If you have heard the term “Cash to Close” from an agent (which is probably why you are selling FSBO), you can expect to be made what is called an offer "Subject-To" the existing loan. This is not an assumption. You are actually selling the home, but retaining the loan in your name. It is usually a safe way to sell your home, but there are some risks you should talk over with the investor.
- If your home is in need of repairs, you can expect to be made a wholesale offer. Investors usually work with contractors to fix up the homes and are expecting to outlay a serious amount of cash to get your home sold. Paying retail for a home in need of repairs never makes much sense.
All in all, most of the money the investor plans to make is in bypassing the commissions sought after by real estate agents. They work with title companies and mortgage agencies to get around all the fees they can. That becomes their profit. For example, if your home is worth (fair market value) $150,000, you can expect to pay 10% in fees and holding costs. This would be $15,000. Most likely, an investor would offer you $135,000 for your home. They turn around and sell the home privately for the retail value to make the profit. They may hold the home for up to three years to increase the profit margin, but generally, they try to sell fairly quickly.
Before you think this is a bad deal, you just sold your home. Sometimes in as little as 7 days. You would have had all those costs anyway, but now, your done. You can move on with your life.
Repairs
If there are repairs needed, these usually come straight off the price of the home. But expect the cost to be a retail price of repair, not what you could do it for yourself. Most investors will hire top-notch contractors to perform these repairs to ensure they are done correctly.
Cash Purchase
Yes – investors will purchase your home for cash. But, you must have a price to value of at least 80%. Often times it must be lower, say 70%. This means that the investor can buy the home for 70% of the fair market value of the home.
Our advice
Call an investor, talk over your options. Trust me, they wont have their feelings hurt by you telling them no. They are generally pretty honest and upbeat people that are looking for good investments. They want you to be comfortable with the deal as much as you do.
Talk to more than one. Get a sense of what they are doing and how deals are structured.
Selling to an investor can be a great way out if you need out quick.
Terms that may help you when talking to investors
Fair market value – This is not the appraised value of the home. Investors will use an appraisal, but not as the gospel. Investors work almost exclusively from “Comps”. These are the actual prices homes are selling for in your neighborhood.
Holding costs – the monthly payments, utilities and maintenance you continue to pay while trying to sell your home.
Subject-To – The property is deeded to another party subject to the terms and conditions of the original mortgage. In other words, you keep the loan in your name, but the buyer assumes legal liability for the loan. If they default on the loan, you take them to court – and win!
Wholesale value – This is a tricky number and we have never seen an actual formula for it. It should be the price that home sell for at auction, but with the surge of novice investors buying at auctions for ridiculous prices, this is not the case. Wholesale would most likely be calculated as Fair market value minus 10% minus full retail of any and all repair costs.
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