If you’re a home seller who wants to close fast and have the added certainty of a cash offer on your home, selling to an investor may be a good idea. But if you want to make top dollar on your home sale, listing on the open market is the better option. For home sellers somewhere in the middle, they may consider working with a real estate-tech company that can give them the benefit of a guaranteed offer while listing on the market. This can also help homeowners who need to sell their home and buy a new one.
Investors who buy homes: Who are they?
If you’ve received an unsolicited offer to buy your house, then you’re familiar with real estate investors. These opportunists have proliferated in the hot real estate market, and in 2022, bought 22% of single-family homes in the U.S. according to a study by CoreLogic.
There are two primary types of real estate investors that buy homes on the open market:
- House flippers: These investors buy distressed homes, fix them up with their own money, and then resell them at a profit.
- Rental-property owners: Conversely, these investors intend to hold the home for a long time, earning money by renting the property out to tenants.
How much will an investor pay for my home?
Real estate investors will typically pay 50% to 70% of the market value of your home. Their offer will depend on their vision and investment strategy for your property. It will also depend on the size and capabilities of their investment operation.
Individual or family investors may only own one or two properties, and likely have less disposable income to make an offer. Investor companies — like We Buy Ugly Houses — tend to buy homes in bulk, so their budget to buy 20 houses in the neighborhood may restrict them from giving you a high cash offer.
There are four main categories of investors. The category of investor will impact the kind of offer they make on your home:
Buy-and-hold investors
A buy-and-hold investment strategy is used by investors who intend to grow a real estate portfolio over time. Rental investors often employ this strategy to slowly accumulate properties while mitigating monthly mortgage and maintenance costs with rental income. Individuals will almost always rent these properties until the market grows enough to justify a profitable sale. Corporate investors might buy homes without renting them just to grow their portfolio and wait until the market is favorable enough for resale.
Wholesale real estate investors
Wholesale investing is when investors buy properties and resell them quickly without making any improvements. Wholesalers aim to buy houses well below market value, then sell to another investor for a slightly higher price. As such, they tend to buy in bulk to maximize profit. If your home is in good condition, you probably don’t want to sell to a wholesaler.
House-flip investors
House flippers put their own time and money into improving a home to then sell it at a higher price. Every home needs different amounts of work, so the calculations for home flippers can get complicated fast. They need to understand the cost of materials and labor, and consider the potential of the local market, before finalizing an offer price.
Buy/flip/hold investors
This hybrid investment is the middle-ground between home flippers and rental owners. In this case, individuals or a company buy a home, renovate it, and then rent it out to secure long-term income. Since there’s more income potential in the long-run, these hybrid investors may make you a better offer at the outset.
How do investors calculate an offer for a home?
Real estate investors want their offer to win, but they also want to be able to turn a profit. In order to do both, they use a combination of factors to calculate their offer on your home:
- House factors: Just like when you sell on the open market, the condition of your house will impact how much investors are willing to pay for it along with things like your home’s age, location, overall condition, comparable home sales, and the time and money needed to get the home ready to sell.
- Automated value models: Investors use real estate AVMs — a software based tool that combines statistical modeling and publicly available data — to estimate a home’s value. This number helps set a baseline for how much they are willing to pay for the house.
- The 70% rule: Many investors use this rule of thumb to identify whether a home is a worthwhile investment. The rule dictates that an investor must pay no more than 70% of what they can sell a home for once they fix it up — also known as the After Repair Value (ARV).
What happens when investors buy your house
Let’s work through this. Say an investor uses all of the information available to them and determines that your home has an ARV of $600,000. Using the 70% rule, they calculate that they must spend no more than $420,000 to buy the house from you and pay for all of the repairs the house needs. Naturally, the offer you receive is very contingent on the amount of work the house needs.
But that’s the secret — you know what your house needs. If the investor plans to rip out all of the 15-year-old appliances and replace them with top-of-the-line brand new ones, that’s not really your problem. If you’re aware of essential repairs and can get your own idea of how much it will cost to make the house move-in ready, you can estimate the best price an investor can offer.
Take that previous example. The investor has $420,000 to spend, and you estimate the home needs about $50,000 worth of work. If you’re a tough negotiator, stand fast at a $370,000 minimum sales price.
See how the 70% rule can impact your proceeds, start by figuring out how much your house is worth.
Pros of selling your house to an investor
Most of the time, you’ll get the best price for your home from listing on the open market. This creates the opportunity to get the market value or more if there’s a bidding war for your home. But there are some instances when it makes more sense to sell to an investor:
Get rid of a money pit
Sometimes, a house doesn’t really feel like an asset. If you inherited a home you don’t plan to live in, selling fast to an investor is a good way to avoid the property taxes and enjoy a quick windfall. If you’re facing foreclosure on a home or the home has fallen into disrepair, it’s a depreciating asset. You won’t find anyone to pay fair market value, but an investor will probably give you the best available deal.
Close faster on a more flexible timeline
If you’re relocating for work, finalizing a divorce, or need to move on from a home quickly for myriad other reasons, investors offer a fast solution. In most traditional sales, a buyer will need a 45-day escrow period for inspections, appraisals, and mortgage approval contingencies. Most investors can close in less than a month.
Additionally, when you sell to a traditional buyer, you have to agree upon a closing date. Once set, you must vacate the house. But investors have more flexibility. You can change the closing date, negotiate to stay in the house for a few days after the closing date, or even leave some things behind that you don’t want.
Skip all the prep work
Preparing your house for sale is a job. From cleaning and decluttering the house to taking listing photos, making repairs, showing the house, negotiating, and more, there’s just a lot of work involved.
Most investors don’t care how your home looks. They can see the potential even with all your clutter there. There’s no sentimentality or trying to envision themselves in your home. It’s all about the cold, hard cash.
Still, keep in mind that with a traditional investor, you will probably still have to show the house, negotiate, and go through an inspection like you would with a traditional buyer. It’s still a lot less work than preparing for a regular sale.
Selling to an iBuyer could also save you some time by handling the entire process online.
Get a cash offer
Most investment companies and iBuyers buy in cash. Some independent investors may, too. Investors prefer cash offers because they close faster and they avoid an appraisal coming in below the offer price and killing the deal. With a cash offer, you’ll have the down payment for a new house almost immediately.
Cons of selling your house to an investor
Like with anything in real estate, however, there aren’t just pros to selling to investors. The biggest con, of course, is the obvious one: only getting 50% to 70% of your home’s value.
You’ll get a lower offer
As we’ve mentioned throughout this article, investors offer flexibility in exchange for a lower sales price. Any offer from an investor reflects needed repairs and aims to close the deal as quickly as possible. It won’t be a terrible offer, but it will be one that prioritizes an investor’s profit potential.
It’s safe to assume that most offers from investors will not be for market value, or that you will otherwise be leaving money on the table.
→ Learn whether you should take the first offer on your house
You might get scammed
A less obvious con: Investors — or people posing as investors — may scam you. Investors don’t need any credentials to buy a property, so if you’re not working with a real estate agent, you may be susceptible to con artists. You don’t always know the buyer’s motivation. Usually, they plan to buy your house and sell it for more — after putting their own money into improvements. But do they know something you don’t about the market or your home? Are they intentionally making an unfair offer?
A trustworthy real estate agent can help you sniff out suspicious offers, but if you’re not working with one, take these steps:
- Call the investor’s office and ask for a list of recent purchases.
- Check their website or ask for materials to support their business claims.
- Read reviews online.
- Check your local Better Business Bureau for warnings against the investor.
Alternatives to selling to an investor
Many homesellers find themselves in a middle ground: Their house needs some work to sell for top dollar but they also need the cash now to put towards the down payment on their new home or to pay for another big expense. If you’re in this situation, Orchard can help.
We’ll give you a guaranteed offer on your home sale, but list your house on the open market first. This gives you the opportunity to sell for the maximum amount, while also giving you the certainty of a back-up offer. You can even opt to use our Concierge service, where we’ll make value-boosting improvements to your home at no upfront cost to you — we even handle the contractors. We can even help you buy your new house before selling your old one. That way, you can skip the showings and concentrate on settling into your new dream home.
Interested in learning more? Get started with a free home valuation — our estimates are 30% more accurate.
