Every homeowner wants to get the best price for their home when they sell. They may have inherited a house that they want to get most money for as quickly as they can. They may be a tired landlord, who just wants to be done with dealing with tenants. If this is you, you may be wondering what the difference is between selling your house to an investor versus through a Realtor®?
There are many options when selling your home that may provide the seller with a better net amount after the sale. Typically people only consider selling property through a real estate agent. Selling a house privately to an investor is often viewed as suspect or something of an unknown. However, just over 100 years ago, most real estate was sold privately without the use of Realtors®. If someone wanted to buy or sell a property, the two parties entered into the transaction privately.
When selling considering selling a home to an investor versus through a Realtor, there are several things to consider. In many cases, most people only want to know about the bottom line. How much money will I receive for the sale of my house? For others, there will be additional consideration: How long will it take me to sell my house? Will I have to spend money on repairs to sell my house?
The Difference Between how Realtor’s and Investors Determine a Price
How Realtor’s Price Homes to Sell
Real estate agents price homes based on what similar homes in the neighborhood have sold for. They will look at square footage, the number of bedrooms and condition of a house to determine similar comparable sales. These comparables are referred to as “comps” in the real estate industry.
Determining Comparable Sales
Let’s use an example. Suppose you have a 3 bedroom, 2 bath house with 1,200 square feet. A good agent will look for every 3 bedroom 2 bath house of similar age, that has sold in the neighborhood over the course of the previous 6 months. From this data, they will try and determine the resale value of your home.
Let’s say they find 12 homes in the previous 6 months, ranging from $250,000 to $315,000. That’s a big variance. Why such a disparity in home prices? There could be several factors. Condition, location, upgrades all impact the price. Unless the agent has physically been in each of the homes, it will require more homework on their part to determine the reason for each difference in price. A good agent will call the original listing agent to ask them what the condition was like. Why was the price so much lower than the others in the neighborhood?
The importance of choosing the right comparable home sales
Several years ago I sold a house with lots of upgrades, and it set a new price ceiling in the neighborhood. A Realtor® friend who had not been inside the house that I had sold, listed a property around the corner for a similar price to mine. During an open house she had prospective buyers come by, but complain about the price. Her reaction was to say, “But it’s just like the house around the corner than sold for…” and she proceeded to describe the listing I had just sold. The buyer’s reaction said everything that needed to be said. “This house isn’t anything like that house”. My agent friend hadn’t seen inside my house and therefore, could only assume the two houses were similar.
This is the difficulty agents have when determining a sale price.
Why it can be difficult to know what a house really sold for
To add to the difficulty, the sale prices of homes in the neighborhood don’t account for any concessions the sellers may have made to the buyer. Did the buyer receive cash back at closing to help with their closing costs? Did the buyer receive cash back at closing to do repairs? None of these concessions show up in public records and can only be seen by agents who take the time to look for them in the Multiple Listing Service.
What if the most similar comparable sale in our neighborhood was $280,000 but the sellers gave 3% back to the buyer’s to help with their closing costs? That’s an $8,400 discount. What if there was a $2,000 credit to the buyer for repairs? What if the seller’s also paid for a $500 home warranty, and paid for city a county transfer taxes? That’s an extra $1,000 discount.
This means that though Zillow and Redfin may say that the house next door sold for $280,000, but in reality it really sold for $267,300 (290,000-2,000-500-1,000). It’s these hidden pieces of information that take time to research that most agents don’t have time to do. And of course, that amount is prior to any real estate commissions being paid which at 5% would amount to $14,000. After buyer credits, transfer taxes and commissions our seller would net $253,000. That’s just $3,000 difference between the lowest price house in our neighborhood and what our seller received.
And if you spend any time and money trying to get your home ready to sell, you would need to subtract those values from the $3,000 difference. With only 3K difference, you could easily be in the hole depending upon the amount of time and money you spend preparing to sell.
How an investor prices a house to buy
When an investor looks to purchase our home, they approach it completely differently. The key difference is the price an investor starts from.
They look at what the house will sell for after is has been updated and remodeled. They call this number, After Repair Value or ARV. Let’s say that the $315,000 house that was in our list of comparables is a completely updated house. Someone has put in new kitchen, updated bathrooms, new paint and carpet all within the past five years.
When we sell our house to a potential investor, they will subtract out the cost of their remodel and other expenses. Let’s say it costs $35,000 to remodel and update the house. Then they will subtract out the costs of insurance, any commissions they may have to pay and build in a small profit for the risk and work. So for our example, the investor begins with $315,000 minus $35,000 for repairs minus $15,750 for commissions minus a small profit margin.
Net cash offer
But our investor buyer doesn’t ask for any seller concessions such as credits for closing costs, city transfer taxes, escrow or title fees. The investor is paying the fees that normally would be split between the buyer and seller. This is what is often referred to as a net cash offer. The price you see in your offer, is the amount of money you will receive. Selling your house to an investor is much like selling a used car. If someone offers you $12,000 for your car, you expect to get $12,000. You don’t expect to pay your buyer’s DMV fees or taxes. Why would you expect to do that when you sell your house?
The investor’s bottom line after taking in all of the above figures will probably be around $250,000. That’s a $3,000 difference in the net amount our sellers would receive if they sold it through the real estate agent. However, the sellers didn’t have to spend any money on repairs. You didn’t have to leave the house every time a prospective buyer wanted to see your house. And you didn’t have to keep your home spotless while your house was being sold.
Who pays what fees
|Resale Price of Home
|Net to Seller
It doesn’t matter what price you sell for. What matters is how much money you actually get.
If you were to ask the real estate agent what you could sell your house for, they would say $280,000. But we can see that this is not really what you will receive in the end. If you were to ask what an investor would pay you, they would say $250,000. It would appear that selling your house to an investor would be quite lower, when in reality, it’s identical. But in order to see that, you must compare the net amount you will receive from each.
As you can see, the difference is in what the investor can ultimately sell your home for. Since they have the funds and resources to remodel the home, they can sell it for more. That means the number they start with will typically be much higher than if you sold through a Realtor who is selling your home without the upgrades.
Of course, there are many variables. The condition of your home and the amount of repairs needed. Whether or not the buyer will ask for a buyer’s credit for closing costs. Sellers and buyers can negotiate many other items in order to come to a mutual agreement.
Other Considerations for Selling to an Investor
There are additional costs to consider when comparing the difference between using a real estate agent versus selling your house to an investor. First, your house has to be marketed on the Multiple Listing Service. You can of course see these listings on Realtor.com. While the house is being marketed, potential buyers come and go through your house. You have to keep it clean. You need to be ready to leave your home on short notice when buyers want to come by and see your house. And you have to be prepared for multiple inspections and your potential buyers asking for repairs because of their inspections.
During this time, you continue to have to pay utility bills, insurance and maybe a mortgage. On average, it takes an average home 30 to 40 days on the market to find a buyer. If it needs quite a bit of repairs, it probably will take longer. Once you have a buyer, it will probably take 30 to 45 days to close escrow depending upon your buyer.
If the homeowner has to continue to make mortgage payments, pay insurance and utility bills, this can quickly eat up any price difference between what they would receive if sold through a Realtor versus selling to an investor.
The Bottom Line
We don’t want to suggest that selling your house to an investor will always give you the same amount of money as if selling through a real estate agent. There’s far to many variables to consider. But, if time is a factor and you need to sell your house fast because of some circumstance, selling your home to an investor can be the way to go. They often offer short escrow periods and limited inspections. Many can even close in 7 days.
If your home is in great condition and you aren’t in a hurry to sell your home, then selling through a real estate agent will usually be your better choice.