Ok, so this post is not related to my previous post about the pros & cons of cash offers (see https://hillcountryflatfeerealty.com/the-pros-cons-of-a-cash-offer/). This post will focus on the trend the real estate industry is seeing in all cash offers from various investor groups. If you have paid attention to radio ads, billboards or social media, you have probably heard about companies such as Perch, Open Door, HomeVestors (We buy Ugly Houses) and several others that make all cash offers to home owners within a matter of 24 hours or less.
Here in the greater San Antonio market, I can’t go an hour listening to the radio without hearing an ad from one of these all cash buyer groups advertising about how they will make you an all cash offer, no matter the condition of your home. These groups target all sorts of owners in need of selling. Divorce, relocation, loss of employment, death/estate sales, deferred maintenance homes, etc. are some of the many sellers they target.
Many of the commercials I hear try to make selling your home on the open market so painful and inconvenient and these investor companies make it sound so easy on the home owner. The ads mention not having to worry about showings or open houses or random people walking through your house, worrying about the deal falling apart at the last minute, the buyer not securing financing, etc. I get it, these things can be a bit annoying at times and there may be situations that make sense for an owner to consider selling to such an investor, however the vast majority of time, an owner who sells to such a buyer is leaving serious money on the table!
Such investor groups will not like this post and I understand. Let’s be honest, they are in business to make money, which of course is a great thing! I don’t blame them for their business model and frankly I have personally made money on real estate investments as well (although my model was different-I was buying pre-foreclosures from banks, not from owners directly). There may be times where selling for cash quickly is the best option for an owner and in those cases, these sorts of investor buyers may be a great option.
However, if you are not desperate to sell, I highly encourage you to steer clear from this sort of selling option for one reason: You will lose serious money in doing so!
Let me break down an all cash investor’s model for you. Their goal is to make money on the deal. No problem with that at all, but the only way to make money on a real estate deal is to sell the asset for more money than they paid for it. These groups are not into holding onto real estate assets for long periods. They want to buy for as low as possible and sell for as much as possible, with the difference being their profit margin. Sure, often times they will need to make improvements to the house in order to reap a higher selling price, which makes sense, but often times the “improvements” can be very light (a good cleaning, new carpet, paint, appliances, etc.).
Also, many of these groups use what I would consider borderline questionable tactics in their “offer.” Let me give you a real life example for perspective. So within the last year, I submitted one of my families’ houses for an offer on one of the larger cash buyer investor groups (heard on the local San Antonio radio quite often) websites for a “free, no obligation, fair offer.” I will try not to laugh out loud quite yet. Being in real estate, I know local values pretty well (that’s what we do for a living). The resale value on the open market of the home I submitted online was roughly $275,000. I could pretty much guarantee it would see for a few thousand dollars more or less than $275,000.
After submitting the details of the home online (I have to admit the process was easy and user friendly), I got an “offer” via email about 18 hours later. Knowing it was going to be less than the fair market value of $275,000 (after all, they need to make money when buying a home), I was prepared to see a lower offer than $275,000. The “offer” came in at $241,000. Ok, I thought to myself, “It’s low, but I guess it’s not ridiculously low.” However, $241,000 was really not the offer. After continuing to read their online offer, it became clear there were “other fees” associated with the offer.
The online offer then displayed a side by side comparison to a “traditional offer” that included a 6% seller-paid commission. The issue/red flag with this side by side comparison of course was that the “comparison” showed a comparison between their $241,000 offer and a $241,000 traditional offer. Major red flag! Stop right there! Their “comparison” lost all credibility with me in a nano-second. I laughed when I saw this side by side comparison. I had to admit it was pretty sly/savvy of them to display such a side by side visual “comparison” to the average reader, but the “comparison” was skewed big time because it assumed the traditional offer was also $241,000, when in fact the fair market value of the home was about $275,000.
So to the reader, it appears their offer was slightly better than a traditional offer (again their comparison was a head to head $241,000 sales price when the traditional offer column should have had a $275,000 fair market value price) after taking all of their fees and closing costs into consideration. Their offer had transaction fees of sorts, some closing cost fees/junk fees, etc. and when the reader goes to the bottom line of each side by side, their “offer” ended up being somewhere around $222,000 where the net sales price to the traditional seller was in the $221,500 range. However, the “net” gain for the traditional seller at $275,00o after all costs of course is close to $30,000 more than their “offer.”
I had to admit this visual side by side “comparison” was pretty ingenious of them, but I also immediately recognized it was not a real comparison due to their offer not taking into consideration the real fair market value of the home.
In addition, there was some fine print in their “offer” that stated the offer was subject to an in-person inspection and that based on the inspection results, their “offer” could “change/be modified.” Again, another red flag. Basically what this means is: Once you agree to our online offer, we are going to come back and tell you we need to lower our offer based on our “inspection findings.”
Here is the bottom line: if you are in a pinch and need to sell your house fast, investors may not be a bad way to go, as you can pretty much count on a quick closing. However, if you entertain an offer from an “all cash” investor, just know you will be leaving serious money on the table. These groups are in business to make money, which of course is completely fine. Their model is pretty simple: buy homes for as little as possible and sell them for as much as possible. I do not blame investor buyers, as often times they do buy beat up, dilapidated homes that need repairs and will often beautify a home and resale it for a profit. No issues with that at all.
When you hear advertisements to sell your home to a cash buyer and that the process is so simple (chose your closing date, no need to worry about showings, etc.), just be warned that when you entertain such an offer, most likely you are not maximizing the equity you would receive if you sold it for fair market value on the open market.
Thanks for reading and I hope you found this article interesting and informative.
Mark Phillips of Hill Country Flat Fee Realty serves the communities of Boerne, Fair Oaks Ranch, Fredericksburg, Kerrville, Comfort, New Braunfels, Bulverde/Spring Branch and parts of San Antonio. We charge a flat listing fee and are a full service real estate firm. This saves our sellers thousands of dollars every transaction.