Ever driven around town and see a sign saying that they buy houses cash? These signs are often bright yellow or "hand written" in sharpie. These signs are often legitimate however you should proceed with caution.
Wholesalers or Inventors
These signs are put up by wholesalers or investors. A wholesaler is someone who "purchases" your home and than assigns the contract to a list of investors. They do this by purchasing your home at an insanely low price and than sell it to investors at a higher price that is still a deal. Some investors skip the wholesalers and put their own signs up to avoid paying the wholesalers fees. These signs will give you cash for a home however the price is generally significantly lower than what you can get on the market. Many wholesalers will offer 50-70% of the actual value on the home. On a $400,000 home that means the home seller is leaving $120,000 to $200,000 behind! That is a significant decrease on home sale price. Talking with a qualified real estate agent can also sell your home on the open market for a lower cut and can still find a quick cash buyer if needed.
The individuals who call these signs are often overwhelmed and can be considered motivated sellers. These sellers generally include those who have a hoarder house and ashamed to have others tour the home, divorced couples who are trying to split everything, those who inherited a house and aren't sure of how to approach the selling process or even landlords who have trouble tenants they can't get rid of. All of these home sellers have a motivating factor that may cause them to not to recognize the amount of money they are leaving on the negotiating table.
Wholesalers and investors will often use the same formula to calculate their offer.
After Repair Value (ARV) – Renovation Costs – Holding Costs – Transaction Fees – Desired Profit = Cash Offer
After repair value is the price that the home can sell for after it is fixed up. Usually the investor will run a comparative market analysis (CMA) of similar homes nearby in a fixed up condition and see what they sell for.
Renovation costs are the total costs for materials and labor of the projects. Investors usually know estimates offhand such as $10,000 for a bathroom remodel and another $5000 for vinyl plank floors. These are totaled up to estimate the renovation costs.
Holding costs are things such as the mortgage or likely a hard money loan. Many flips can take 3-12 months to complete depending on the scope of the project. Insurance on the property will also have to be paid. During that time interest will have to be paid on the borrowed funds.
Transaction fees are things such as paying for the closing and real estate agent fees. These can include title insurance, recording fees and more that take place each time a real estate transaction takes place.
Desired profit is the amount of money that the investor would be happy receiving for taking on this project. It is a lot of work to complete a flip and it has to be worth the investors time. Many flips are expecting a $40,000-$60,000 profit depending on the scope of the work. This also gives them some buffer encase if something goes wrong.