Who would want to buy a home in as-is condition?
The top two candidates would most likely be:
– HOME BUYER – Looking to buy a property in the neighborhood at a cheaper price than what a 2019 market-ready home would require so they can live in it themselves. This buyer most likely would be using a CONVENTIONAL or GOVERNMENT sponsored form of financing that associates many lending requirements that may not be favorable to a seller selling their property as-is
– REAL ESTATE INVESTOR – Pays with CASH or non-conventional form of financing centered around the purchase of as-is homes
Who would be the best candidate to sell to?
That all depends on the specific situation and needs of the seller and condition of the property.
If the property is damaged in terms of plumbing, foundation, roof, HVAC, framework, etc. then the mortgage lender may not want to lend money as much money to the potential homeowner to be able to purchase the home, or not even lend on the property at all due to the potential risk the lender would have to take. But this would typically only happen in the case of the home buyer using conventional financing to purchase the home.
As for the Real Estate Investor, their primary form of financing is CASH or financing from a private lender or hard money lender that structures their loans based on the future potential value of the home, which is contrary to how a conventional lender appraises the property, which is at its current value. Since these investors are requiring financing to buy a property that has more risk than purchasing a market value home conventionally, they typically pay a much higher mortgage rate than conventional loans, which eats away at the potential spread the investor will eventually receive. These rates typically range from 7-15% of the total loan value.
The point is that the Real Estate Investor can purchase the as-is property with much less hassle and fewer unknowns that come with selling to a conventionally financed home buyer.
A conventional home buyer may pay a bit more than the investor, but the lender will be must stricter with the appraisal and if the appraisal value of the as-is property comes back less than the original loan amount, the loan amount may be lowered. This means that the buyer may require the seller to lower the price even further to account for this discrepancy. Conventional home buyers are allowed to do this due to the financing contingency stipulated in the TREC contract. The seller may reject their new lower offer, but now the seller is stuck in a situation where 30-45 days have been spent and their property still hasn’t sold. That could be a huge problem for the seller. It all depends on the needs and goals of the seller.
Granted, if the home in question is in great shape structurally and cosmetically and may only need light touch-ups to achieve 2019 market standards for similar properties in the area, then selling the property traditionally to a conventional home buyer who can pay closer to the full potential value of the property may be a better bet.
But, for those properties that need more than just TLC and would not meet conventional financing standards, would best be sold to the Real Estate Investor who typically offers terms in their contracts, such as:
– Quick or flexible closing (Close in 7-10 days)
– No Realtor Fees
– No Closing Costs
– Help to move
– Little or no option period
Why doesn’t the conventional buyer offer the same terms?
That all circles back to how the home would be purchased. In the case of conventional financing, they may require 30-45 days minimum before they can approve the loan, option periods can range up to 30 days or more, giving the potential buyer more room to be able to find problems with the property that would require that overall sales price to possibly be reduced.
So, if you’re in a position where you need to sell your home quickly and with confidence that the property will be closed. Take the route of working with a local real estate investor.
Seldom will you ever find buyers who will pay all cash with little to no contractual contingencies that are not real estate investors.
So, my property needs repairs, how does the investor value the worth of my property?
To simply put it, a typical home in Dallas that would fit the purchasing criteria of local investors can be described by the Dallas edition of the ‘Golden Rule’ or the MAO (Maximum Allowable Offer):
Golden Rule or MAO = .8*(ARV) – Repair Cost (EQ. 1)
Let’s breakdown these terms.
MAO (Maximum Allowable Offer) – This is the maximum offer that the investor can make to be able to make a profit on the property. If the investor offers too much, then the investor wouldn’t be able to make enough money at the end of the rehabbing and reselling process to make any sort of profit that would make sense for them to purchase the property in the first place.
ARV- After Repair Value
The ARV of the home is determined by the current and most recent sale prices of similar homes with similar features. These are often referred to as ‘Comps’ because they are directly comparing the potential value of the subject property that is to be purchased compared to other ‘comparable’ properties that have already been updated to the standards of 2019 market standards would demand. The value or potential value must be compared apples-to-apples.
Even though each home is unique in terms of its overall framework and flow, factors such as square footage, year built, lot size, number of beds/baths, etc. can be used to roughly determine the going rate for your property after it is repaired. These features can be found on the Tax Records. Sometimes the MLS will state adverse information that the Tax record reflects. That is why it is important to accurately verify these details during a property walkthrough.
Repair Costs are simply the expected costs needed to repair the home enough to meet 2019 market standards for the home to be resold at a higher price.
What does the 80% multiply by ARV mean? THIS IS CONFUSING
This is the spread. Not the 80%. But the inverse, 20%. As an investor, you are going to want some kind of return on investment, else why would they even invest in the first place. When looking at EQ.1, we see that the Max Allowable Offer factors in the ARV, which is the potential value of the home all fixed up. This ARV number is essentially deflated by 20% to account for the investor’s potential spread or Gross Profit from the transaction.
Does the investor profit 20k for every 100k that my property is worth when it is repaired? That seems like a lot.
Let’s say the investor purchases a home for 50k and the repair costs were 30k and the after repair value is 100k. So, after the investor pays the seller 50k for the property and also pays 30k to fix up the property, they are left with an asset that they would hope is worth at least 100k. Since this property is now fixed up to meet 2019 standards, it now needs to be sold for the profit to be realized. There are costs associated with the purchase and eventual resale of the home.
What costs are associated with the investor when they sell this 100k home on the traditional market?
These costs would be called Closing Costs. These closing costs are typically paid for by the investor when they initially purchase the home from the seller and also paid again when the property is resold. Since the property has been brought up to market standards, it needs to be sold to the eventual End Buyer. The End Buyer is the one who buys and lives in the repaired home.
The investor is going to have to assume the cost of paying the 3% of the ARV to the Buyer’s agent commission to the agent who brought the buyer to the property. Similarly, the investor also has to pay another 3% agent commission to the listing agent who will market the property to be sold to the End Buyer. Also, lets factor in an assumed 1% of ARV cost to account for title fees, document prep fees, etc.
So, if the investor has to assume a 7% of ARV closing cost when selling the home at the ARV price and they only expect a 20% gross profit, then the total net profit is roughly 13% after all is said and done. They are expecting to profit 13k for every 100k that the ARV can potentially be.
Considering that the property may not sell for the full expected ARV or that the repairs may cost more than expected would negatively affect the potential profit of the Real Estate Investor. That is the risk that the investor is willing to take to purchase the property at an agreed-upon discount wholesale price. Not to mention the holding costs or lending costs associated with receiving a considerable loan to help finance the purchase of the property also eats away at the expected net profit associated with the transaction. The longer the property is owned by the investor, the more interest is paid on the loan, which adds significant cost and risk. So really the investor would be lucky to have a net profit of 10k for every 100k the property is potentially worth after all debts and fees are paid.
But, what does this mean to the homeowner?
Essentially the seller needs to realize what their ultimate goals are for selling their home, come to terms with what their property is worth as-is, and what the highest and best use would be for the buyer who would be purchasing the property. Setting aside all the calculations and numbers, the sale price and terms of the contract should reflect a fair exchange of value for all parties involved in the real estate transaction. Fair and transparent transactions have the highest probability of actually closing without any issues for the buyer or the seller.