Understanding A Property Investor’s “Cash Offer”
We’ve all seen the salesy signs and ads out there stating “We pay cash for houses” or something to that effect. A lot of people don’t fully understand what that means so this short article will go deeper into it and also provide insight into some benefits and drawbacks of selling a house or other real estate to a property investor.
First off, when selling to an investor, you need to understand that the investor is purchasing a property as an investment and ultimately wants to profit off of it. Whether they are flipping the property or plan on renting it out, it needs to make financial sense to them. It’s just like any business out there. For example, if you go and buy something from the grocery store, there is a profit the store is making off of selling that product. Like any profession, there are investors that are good at what they do and others that aren’t. The good ones make a transaction a win-win for the seller, provide value, solve problems, and care about helping the seller in any way they can. The bad ones are strictly in it to make money. Our belief is that you need to provide value and solve problems for people seeking out your services.
Like anything else, there is a time and place for selling a property to an investor. For multi-family, commercial, and a few other categories, the buyer will almost always be an investor or business owner regardless. When it comes to single-family houses, you have to weigh the pros and cons. Here are a few of the generally a few of the positives of selling to a reputable investor:
A cash or hard-money offer. This means closing much more quickly and there is a lot less chance the transaction will fall through.
Closing when you want. Because the investor can close quickly and is most likely not looking to personally live in the property, there is a lot of flexibility on when you can close to best suit your needs. Also, you don’t have to worry about a house sitting on the market for months.
A lot of the time an investor will buy as-is meaning you don’t have to pay for costly repairs or worry about finding contractors.
They might have experience in handling pre-foreclosure, probate, houses in bad condition or any other specific situation.
Some investors buy in bad neighborhoods where it would be hard to sell otherwise.
They will normally cover closing costs and eliminate the need for a realtor.
Normally a pretty straightforward and easy transaction.
Experienced investors may be familiar with owner financing or other creative buying strategies that can be of much more value to the seller and end up giving the seller more money in the end.
They can provide peace of mind because quality investors do what they say they will do meaning less stress and worry on the seller’s side.
They are eliminating your selling costs (realtor, closing costs, marketing costs, etc.) and your holding costs (utilities, interest, taxes, insurance, maintenance, etc.)
Here are pretty basic formulas on how they come up with their cash offer:
For an income-producing property (rental):
[Gross Income (rents)] - [Expenses] = [Cash flow*]
*Each investor has a different amount of cash flow they require depending on how much money they have invested in the property and the outlook of the investment. In better terms, they base the purchase price off of the cash flow and the return it gives them compared to their total cash investment.
For a property they will buy, improve, and resell (flip):
[Market Value] - [Selling, Holding, and Remodeling Costs] - [Profit Margin*] = [Cash Offer]
*As with cash flow, every investor has a criteria for the profit margin they’ll accept but most are pretty close. It also depends on the money they invest meaning one would expect more profit on a $500,000 house vs. a $50,000 house. Therefore their profit margin is normally a percent of market value.
Hopefully this shed some light on how real estate investors come up with their cash offer. Like any profession, there is a time and place for their services. People that aren’t in real estate generally don’t think positively of investors but the truth is that the quality ones provide a great service, invest money into and improve local communities, can help people out of tough situations, and provide quality properties for people to buy or rent. There isn’t any difference between what they do and what other types of businesses do. If you have any questions about this topic, any other articles we have, or about our business, don’t hesitate to reach out.