Ready to Sell Your House for Cash?
We’ve all seen the signs — usually they are handwritten in all caps, nailed to a telephone pole just as you exit the freeway – “WE BUY HOUSES FOR CASH”. More recently, you’ve probably noticed another emerging trend: those algorithm-powered tech companies called “iBuyers”. These are the hedge fund-affiliated companies that make cash offers on homes and close in days. Some of these companies have fancy sounding names like ‘OpenDoor’ and ‘Knock’. So, what are these various business models, and what’s the best option for homeowner looking to sell your house fast?
So, what are these various business models, and what’s the best option for homeowner looking to sell your house fast?
Some Background on Cash for Houses
Investors buying homes for cash and then selling them for a profit is no small venture. The National Association of Realtors estimates that since March 2019, about 21% of residential sales are all-cash transactions, of which 13% were investor transactions.
Selling your house to an investor for cash is a lot like trading in your car to the dealership. If you’re looking to sell your car, you can certainly do it yourself. Do some minor repairs, put it up on Craigslist and organize your own test drives. However, it’s easier to just take it to the same dealership you’re buying your next car from and let them deal with it.
Who Are These Cash Buyers, Anyway?
As a group, cash buyers by definition are individuals or entities that buy your house outright and all at once, without lender financing.
In general, selling your home to a cash buyer allows you to skip the home prep, showings, and staging hassles and arrange a more flexible closing timeline to coordinate with the purchase of your next residence.
But not all cash buyers have the same conditions and policies. In fact, these buyers have evolved into a few larger categories:
Buy-and-hold investors purchase homes and convert them into rental properties.
Within the buy-and-hold category, you have individual investors who purchase and rent out properties for passive income. On a larger scale, there are institutional investors that purchase at a minimum 10 rental properties per year, the quintessential example being Invitation Homes, a subsidiary of Blackstone that operates in 17 markets across America.
In Q1 2019, 1.9% of single family home and condo sales were sold to institutional investors, according to ATTOM Data Solutions.
As a seller to buy-and-hold investors, you have more flexible closing dates and you’ll likely get better pricing than if you were to sell to a house flipper.
Think HGTV’s ‘Flip This House’ or your remodeling-enthusiast uncle — they buy homes, typically in a poorer condition and at a lower cost, with the intention of renovating and flipping it for more. Because these homes typically require a significant amount of rehabilitation work, the house flipper is able to purchase these homes for a significantly reduced price.
ATTOM Data Solutions reports that there were 207,957 homes flipped in 2018, representing 5.6% of all single-family home and condo sales.
One of the newest and fastest-growing players in the sell your house for cash world is the tech-savvy and data-driven iBuyer. iBuyer is short for “instant buyer”. These companies are typically owned by or affiliated with Wall Street hedge funds and use automated valuation models (AVMs) to make competitive offers on residential homes that are typically in better condition.
Since iBuyers typically make less profit per flip, their business is more reliant on turning over a high volume of homes using technology to streamline operations.
As for the seller? There’s no staging, no open houses and the seller can avoid the long drawn-out traditional home sale process. iBuyers can close in a matter of days once you accept an offer. iBuyers generally charge sellers a fee ranging from 7% – 18% of the home’s sales price plus the cost of necessary repairs. These fees and repair costs can easily add up to tens of thousands of dollars so home seller need to be very aware of what it is they are signing up for if they choose to work with an iBuyer.
In 2018, iBuyers made up about 6% of the market share in Phoenix, Arizona, an increase of 26% year-over-year. In fact, close to 30% of sellers in Phoenix are asking their real estate agents for an iBuyer estimate before they list their home.