During the process of choosing the right investor for your property, it is imperative to understand what type of investor he or she is. Is the investor a “fix and flip” kind? A “buy and hold”? Are they planning on being the end buyer at all thus garnering them the label of “wholesaler”? You may think this doesn’t matter but as we will see, it is extremely important to understand what type of investor you are entering a contract with and what it means for you and your property.
The “Fix and Flip”
He or she purchases a property that has equity at about a maximum of 70% market value, remodels it, or fixes it up in a relatively short amount of time (usually around 4-8 weeks), and then sells it on the open market. For the investor there’s a lot of time and money tied up in a deal like this but also an opportunity to turn a nice sized profit this way. This type of investor may require an “option period” during the contract to bring out an inspector and get repair bids but a seasoned investor should have an excellent idea of what things cost and be able to quickly calculate fix-up costs with a thorough walk-through. They may or may not submit a cash offer. Many investors work with a line-of-credit through a local bank that works just as well as cash. This conserves their capital which, in many cases, the investor may use for fix-up costs. It could normally take anywhere from 14-30 days to close with this type of bank line-of-credit. Whereas a cash buyer may be able to close somewhat faster, however it is important to realize that just because someone is offering a cash purchase does not mean you can close tomorrow. The title company still will need time to review the deed, check for outstanding liens, and draw up necessary documentation.
The “Buy and Hold”
This individual will want to purchase a property with the plan to hold onto it for a long period of time as a rental property. In this case, the subject property does not necessarily need to have much equity for them to purchase, just good rental potential with cash flow. Although be aware that a home with little to no equity means that you, as the seller, will not walk away with much in your pocket. Additionally, this type of investor is going to want to purchase a property that will not require a huge monetary investment in order to get it “rent ready”.
This type of investor is the one that could pose the most risk to you, the seller. In this case, the investor you are meeting with initially will not be the end buyer of your house. Wholesalers typically will get a property under contract with a seller for one price and then try and find an end buyer to “flip” the property (really the contract) to before the agreed close date. This is completely legal and has the potential to be a win-win if it’s done correctly and with full disclosure. However, please be aware that if you, the homeowner, are under any sort of time constraints, this can be disastrous for you. The investor will have protected himself with some sort of way out of the contract, usually an ‘option’ or ‘due diligence’ period. If they cannot find an end buyer, they can walk away, leaving you 14-30 days down the road in the same situation you were in. If you are facing foreclosure, this can be catastrophic.
Selling to an investor should be a positive and relatively simple process. After all selling your house to an investor at a discount should be full of benefits to you and your situation. Do your home work! Find out what type of investor you are dealing with. Ask questions and don’t accept vague answers. There are many honest, professional investors out there. Don’t settle until you find the one that’s right for your unique real estate situation.