How Much Will An Investor Pay For My House In 2021?
If you are considering selling your house directly to an investor for cash, you might wonder how and why they come up with the offer price they do. Or maybe you have received an offer from an investor and are wondering how they came to that amount. This article will explain precisely how investors analyze properties and determine what they will offer.
Either way, this article will provide guidance as to how much an investor will pay for your house.
How Much Will An Investor Pay For My House?
There are two main types of investors that buy residential properties; buy-and-hold investors and fix-and-flip investors. Buy-and-hold investors look to purchase a property and then rent it out to receive income over time. Fix-and-flip investors look to buy a property, renovate and update it, and then sell it on the market for a profit.
Understanding the similarities and differences between these two investors is essential because each one will look at property differently.
The Buy And Hold Investor
Buy-and-hold investors have more of a long-term outlook when evaluating a property, so they are usually less concerned with what they can sell the property for in the short term and more interested in the potential of rental income.
Generally, they have a specific type of return they are looking for when they purchase a property, and if it fits that criteria, they will move forward. For instance, if they like the Woodbridge, VA area and want to continue buying property in this area, anything they can buy that will deliver a 7% return per year they will consider.
Buy And Hold Investor Valuation Example
So, if they find a property that will return $1,166 per month after paying expenses (property taxes, insurance, etc.), if they can buy it for $200,000, it will deliver a 7% return. Generally, the estimated repairs are factored in as well.
In this exact scenario, if it will take $15,000 in renovations to get the property to where it will rent and deliver the target return on investment, they will deduct this amount from the purchase price. $185,000 would be the amount they would offer to provide the returns they are looking for.
Buy And Hold Investor Additional Info
There is no “one size fits all” formula for how these types of investors look at properties. Some look at the expected increase in property value over time and factor that in, while others look at a return or monthly cash flow target to determine their offer price.
Generally, they are less willing to get involved with properties in complete disrepair as well. If a property needs new paint, carpet, and minor updates here and there, this is something they would likely do. However, most buy-and-hold investors don’t buy properties that need a significant renovation because they are not set up to do this.
The Fix And Flip Investor
This brings us to the fix-and-flip investor. They usually look for the properties in the worst shape that need a complete renovation. It is a much simpler equation for fix-and-flip investors and is pretty universal when determining an offer price. ARV stands for after repaired value, and this is what the house is likely worth on the open market once it is fixed up and brought to modern standards.
Fix And Flip Investor Valuation Example
Fix-and-flip investors look at the ARV and subtract the renovation budget, closing costs, and desired profit to determine a price to offer. An example scenario where a property’s ARV is $300,000 would look like this:
$300,000 – ARV
($35,000) – Renovation budget
($15,000) – Closing costs
($30,000) – Desired profit
$220,000 – Offer price
These investors are taking on a substantial amount of risk by purchasing properties in terrible shape. While it may seem like a low offer price in some situations, it can usually be justified once the underlying numbers are looked at.
Why Fix And Flip Investors Look For Properties In Bad Shape
The reason why fix-and-flip investors gravitate towards properties in terrible condition is that this is what fits their business model the best. Usually, this is the best use for the property. As I mentioned earlier, buy-and-hold investors tend to acquire properties to rent over years and even decades. They are usually prepared to handle routine maintenance and minor renovations but tend to stay away from the disaster properties.
If these two types of investors were competing to purchase a property that needed minor renovations and updates, the buy-and-hold investor would almost always be able to offer a higher price. The reason why is because they do not need to factor in the costs associated with reselling the property since they plan to hold it long-term.
Buy And Hold vs. Fix And Flip Investor Valuation Example
Here is an example of what it might look like if they were competing to buy the same property:
$300,000 – ARV
($20,000) – Renovation budget
($7,500) – Closing costs (purchase closing costs only)
$272,500 – Offer price
$300,000 – ARV
($20,000) – Renovation budget
($15,000) – Closing costs (purchase and sale closing costs)
($25,000) – Desired profit
$240,000 – Offer price
As you can see, the fix-and-flip investor simply cannot compete on this type of property. Having to account for selling the property and making a profit makes it impossible to beat the buy-and-hold investor.
Summary About How Investors Value Properties
A rule of thumb is that buy-and-hold investors will usually be able to pay 80-90% of the property’s ARV, and fix-and-flip investors will usually pay around 65-75%. To summarize everything and look at the differences between these two investors:
● Will pay around 80-90% of ARV (after repaired value) in most cases.
● Look for properties with light maintenance and renovation needs.
● Tend to avoid properties with substantial renovation needs.
● The time they can close on a property usually takes longer because they will use bank/lender financing. This is not always the case, however.
● Will pay around 65-75% of ARV in most cases.
● Look for properties in need of significant repair or updates.
● Usually can close very fast because cash or non-traditional financing is used.
If you receive an offer in the future and wonder how its value was determined, now you know! Also, make sure that you avoid this type of “investor” at all times because nothing good will come from working with them.
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Best of luck!