Selling a house is one of the biggest financial decisions that most people will make. Deciding to sell to an investor instead of listing your property with a real estate professional is a big decision. You will usually be able to sell your property for more money by using a traditional listing with a real estate professional or by listing your property for sale by owner, so selling to an investor should usually be a Plan B for situations in which traditional listings are not a good fit. Not all types of investors are the same, so to find the right fit for your situation, you might want to know the type of investor with whom you are working.
Fix and Flip Investor
A fix and flip investor may be a good fit if you have more equity in your house. A fix and flip investor will often evaluate your property using a widely accepted "70% Rule." The goal is to pay no more than 70% of the After Repair Value of the property, less the cost of any needed repairs or updates. For example, if a house should sell for $200,000 after repairs but needs $25,000 in repairs and updates, an investor would typically be willing to pay up to around $115,000 ((0.7 x 200,000) - 25,000). It's only a rule of thumb but will give you a ballpark idea of what to expect.
Buy and Hold Investor
A buy and hold investor may be a good fit if your house could command a high monthly rent, even if you don't have much equity in your house. A buy and hold investor will often evaluate your property using a 1% Rule if the property is in a more desirable area or a 2% Rule if the property is in a less desirable area. The goal of the 1% Rule is to rent the property for at least 1% of the sum of the purchase price and repair costs. For example,using the 1% Rule, to justify paying $100,000 for a house in need of $20,000 in repairs, the house would need to rent for at least $1,200 per month (0.01 x (100,000 + 20,000)). Using the 2% Rule, to justify paying $35,000 for a house in need of $10,000 in repairs, the house would need to rent for at least $900 per month (0.02 x (35,000 + 10,000)). The appropriate % is a sliding scale based upon things like the safety and desirability of the area and whether the investor expects the property to increase in value at a reasonable rate.
Low or No Money Down Investor
Selling to a low or no money down investor involves more risk. A low or no money down investor typically seeks to take over payments on a mortgage and perhaps pay a little extra if there is sufficient equity in the property. This type of investor will often leave the mortgage in the name of the seller. Many reputable people and companies use this approach, and it can work if there is a high degree of trust and disclosure, but there can be clear downsides to leaving the mortgage in your name. For example, it will likely have a negative impact on your ability to finance other purchases, such as buying another home. Also, the buyer's contract may allow the buyer to easily walk away from the property if their circumstances change, perhaps leaving you worse off than before with an extra, unexpected mortgage payment on short notice.
Selling to a wholesaler can also involve a bit more risk. A wholesaler typically gets a house under contract and then tries to find someone else who will buy the house from them at the time of closing for a higher price. Unless they are licensed real estate professionals, they technically market the contract instead of marketing the house to avoid breaking the law against engaging in unlicensed real estate activity (Ark. Code Ann. 17-42-105, a felony). The wholesaler will often have some contingency built into the contract that allows them to escape if they are unable to find a buyer before the scheduled closing date. This risk might be unacceptable if you are facing tight time constraints. It can be extremely frustrating for a deal to fall apart while it is in escrow.
What is the deal with those "We Buy Houses" signs?
You have probably seen the generic "We Buy Houses" signs stapled to poles and objects along busy streets and at busy intersections. Real estate investors often refer to these as "bandit" signs, because most cities have sign ordinances that prohibit their use. To avoid being identified and possibly fined by Code Enforcement, the people who post bandit signs typically do not identify themselves or their companies and often use disposable phone numbers that are difficult to trace. Licensed real estate agents must disclose their identities in their signs, so the lack of identifying information suggests that the person may not be licensed so may need to jump through hoops to avoid the felony of engaging in unlicensed real estate activity. Only you can decide whether you are comfortable working with the type of person who may be hiding behind disposable phone numbers, intentionally violating ordinances, and skirting the law.
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River Trail Properties, LLC
815 Technology Dr., # 241508
Little Rock, AR 72223