Sell A House Quickly By Understanding The 2 Types Of Investors
When you sell a house quickly to an investor as is, or as a “fixer-upper,” it is important to understand the different types of buyers or investors who you might be interacting with. For the sake of this article, the term buyer and investor will be used interchangeably.
Understanding your investors will determine how you evaluate offers and choose to move forward with each respective buyer. Not all buyers are created equally!
The 2 Buyers To Know When You Sell Your House To An Investor
Now, I could write a novel longer than “War and Peace” if I really wanted to dive into every group and sub-group of investor-type. For the sake of keeping this very useful, we will focus on the 2 most common types of buyers whom you will encounter when you look to sell a house quickly, as is.
Fix And Flip Investor
The first is the fix and flip investor. Turn on HGTV any given day and you will see who I’m referring to. These investors are simply looking to purchase a property, repair or update it, and then sell it on the retail market, for a profit.
Fix And Flip Investors Look For Properties In Poor Shape
A fix and flip investor is looking for a property that requires a decent amount of work in poor condition; homes that will not sell at retail value without being fully renovated. These properties are appealing to fix and flip investors because a house in average, or even slightly below-average shape will usually not sell for a profitable enough margin post-renovation.
However, a property that is in poor condition will have the chances of a larger spread for profit because of all the work needing to be done to it. Being that a fix and flip investor has to purchase and sell the property, all while incurring a hefty amount of fees by doing two settlements (agent commissions, settlement fees, taxes, lender fees, etc.), they need to buy properties that are heavily reduced in price.
It is important for a fix and flip investor, to find ways to reduce their costs so they may pass those savings onto the sellers when they are purchasing their properties.
How They Finance Properties
One common way this is achieved is by reducing, or eliminating, any finance costs. With a private lender, commonly referred to as a hard money lender, up front “points” are due when the loan is made, in addition to a higher interest rate.
Example Fix And Flip Financing
For example, if a fix and flip investor is purchasing a $200,000 house using a hard money loan, they might be paying 2 points up front (2% of the loan amount or $4,000) and 10% interest over the life of the loan.
In this example, if they buy the property and it takes them 5 months to ultimately sell it, they will pay $8,333 in interest during that time. So, the total loan costs come to $12,333 ($4,000 up front and $8,333 during the holding period).
This might sound egregious, but properties in disrepair are typically unable to be financed traditionally by a big bank or lender. A normal, “institutional” lender would not even consider making a loan on a property such as this. For this reason, the fix and flip investor is forced to use hard money to purchase the property.
You Can Sell A House Quickly To A Fix And Flip Investor
There is also a convenience factor when using hard money that directly benefits the seller. Private lenders making hard money loans do not have the rigorous rules and criteria that a traditional bank has. Therefore, they are able to make a loan much quicker.
A 7-day settlement is not uncommon when a hard money loan is used, but this is not even remotely within the realm of possibility with a traditional bank or lender, needing 30-45 days to settle. Since most fix and flip investors opt to use either cash or hard money, it allows you to sell a house quickly to them.
They Will Commonly Buy Houses With Cash
We have all heard the expression, “cash is king,” and it definitely applies here too! A fix and flip investor using cash to purchase a home can be more competitive than the a fix and flip investor using hard money. When using cash, there are no financing costs.
If an investor is buying a property with cash, and the investor using the hard money loan we discussed in the prior example were competing to purchase the same property, the cash buyer would have $12,333 of leeway if needed. They can then put that money towards a higher offer, as they are not paying the interest or points associated with hard money.
Fix And Flip Investor Summary
Here is a summary of the fix and flip investor:
~ Will usually use either cash or hard money (private loans) which allows you to sell a house quickly to them.
~ Prefer properties that are in poor condition and require a lot of rehab
~ Seek to purchase properties at a deeply reduced prices due to the risks involved, multiple costs, and the need to make a profit.
~ Do not shy away from property defects as they have experience dealing with these types of properties regularly.
Buy And Hold Investor
The second type of investor we will discuss is the buy and hold investor. The name describes exactly what they look to do with a property. This kind of investor focuses on buying properties and then holding them as rentals where they receive rental income over time.
Buy And Hold Investors Are Typically More Competitive
A buy and hold investor has a long-term outlook when compared to the fix and flip investor, offering associated advantages and disadvantages. The biggest advantage for this investor is the ability to make competitive offers and thereby pay more for a house than a fix and flip investor could.
This is an option as buy and hold investors do not have to account for selling the property, hard money financing fees, or making a profit within a short turn around period. A buy and hold investor is focused on the rental’s potential and the value of the property over a long-term period.
But, They Usually Don’t Move As Fast
Now let’s go over the disadvantages. The biggest disadvantage is that a buy and hold investor is using a long term, low-interest loan. These are not approved as fast as the hard money loans that a fix and flip investor would use, thereby requiring a longer closing period. This can make it tougher to sell a house quickly to a buy and hold investor.
Additionally, buy and hold investors are not looking to purchase a property in complete disrepair like a fix and flip investor would. Generally, a buy and hold investor is looking to buy a property, change simple things such as paint or carpet, and then rent it out. They are not looking for a property in need of a full-blown rehab.
The Hybrid Buy And Hold Investor
However, this is not always true, as some buy and hold investors will use cash or a short-term loan such as hard money to purchase a property quickly. Then, once the property is renovated, they will refinance into a long term, low-interest loan.
This type of investor is very competitive and is considered a hybrid; they can close as fast as a fix and flip investor AND they can pay more for the property because they will be looking to rent it long-term like a buy and hold investor.
Buy And Hold Investor Summary
Here is a summary of the buy and hold investor:
~ Able to make higher offers than a fix and flip investor due to fewer costs.
~ Prefer properties that are in average or slightly below-average conditions, needing few cosmetic tweaks.
~ Hold a property over the long-term.
~ Typically use a more traditional form of financing, needing longer settlements which won’t allow you to sell a house quickly to them.
The 2 Types Of Buyers When You Sell Your House To An Investor: Summary
Fix and flip investors are generally looking for properties in need of a substantial amount of repairs and updates, while buy and hold investors are looking for properties that might need some updates, but not a ton. Knowing the type of property you are trying to sell will help you understand who you will likely be dealing with.
This should give you a little more insight into the types of buyers you will encounter when you look to sell a house quickly to an investor, as is. Don’t hesitate to reach out to us with any questions you have, and remember to always be on the lookout for wholesalers so you can avoid a bad outcome!