I’m sure you’ve seen these advertisements on bandit signs by the highway, or in the real estate section of the newspaper. Perhaps you’ve wondered if they are realistic – or are they just a scam?
Well, the truth is that the better ones are genuine. They are placed by private investors who have immediate access to funds and can afford to close on your property quickly. They will often cover the closing costs, and will certainly arrange all of the paperwork. Sounds too good to be true? Well, it isn’t, but there is a snag – I bet you guessed that!
If someone is prepared to buy your house, for all cash, and close in 7 days, they are not going to pay retail market value. That’s a fact – they can’t afford to. These people are not philanthropists – they do this to make a profit (although the reputable ones also like to think they are helping people in distress). So, somewhere below the retail market value is what you can expect to see on their offer. How much below market value? It depends on the condition of the property, its location, and a number of other factors, but it could be around 70% of the retail price.
Before you think this is just a plain rip-off – think about it. If you sold the property through an agent, you would pay them at least 6%. Add on closing costs, inspections that you might pay for, and a small discount on the sales price, and it can easily get up to 10%. Then you can factor in your holding costs. If it takes you 6 months to sell the house (and that’s not bad in today’s market), you have your monthly costs – loan payments, tax, insurance, utilities, etc – to taken into account as well. On a house valued at $250,000, the monthly outgoings could easily be $2,500 a month. Over 6 months, that amounts to another 6%.
Add on the costs of preparing the house for retail sale – maybe another $5,000 and the situation could look like this:
Asking price $250,000
Discount for sale (2%) 5,000
Agent’s commission (6%) 14,700
Closing costs (2%) 4,900
Net sales value 225,400
Holding costs 15,000
Sale preparation 5,000
Total costs $20,000
Cash available $185,400 (74%)
So, if the house sells in 6 months, and you only have to discount by 2%, you might walk away with about 75% of the asking price. If the market continues to decline, or you have to cut your price for a sale, that could soon be below 70%. I think that makes an offer of 70%, cash, immediately, look attractive.
Of course, you can try to sell the property yourself, saving the cost of an agent, but market statistics show that over 80% of FSBOs (For Sale By Owner) end up using an agent anyway, and those that do sell the house themselves, achieve a lower price than the agent would have done. This is partly because the buyers know that the seller is saving agency commissions and discount that from the offer price.
When a private investor talks about buying your house in 7 days, this is just one of the ways in which they can do it. But as you can see, although at first glance the offer may not seem to be very generous, once you take into account the variables we have discussed, it can start to look like a good deal.