Homeowners often think that selling their home to an investor, rather than an end-user, will net them more profit. Although, this notion can be accurate, it is not always true. Therefore, if you want to learn how to sell your home to an investor, you need to know what they are looking for. Simple mistakes can cost you big time down the line.
A real estate investor is someone who is looking to make a profit. They derive value from properties in which they can make more money than they put in. If they believe there is money to be made, they will make an offer that makes sense to them. If not, they move on. The best way to successfully negotiate with an investor is to figure out what their end game is.
Just as a homeowner needs to carefully stage their home when trying to attract offers from end-users, they need to prepare it for an investor, as well. While staging and professional photography are important to homebuyers, investors care about other things, such as cash flow, zoning, historic characteristics and like end-users, location. In this article, I will help you learn how to sell your home to an investor.
Why Should Someone Sell Their Home to a Home Investor?
So, what is the profile of a real estate investor? In reality, few characteristics define them. Most are analytical in nature. Some have PhDs, others never completed high school. Many have a background in construction, engineering or finance.
A real estate investor’s offer to purchase may contain some important benefits over that of an end-user. A few weeks back, I wrote up an offer for a real estate developer looking to teardown an old house and put up a new one. Here is what they offered:
- All cash sale / no mortgage contingency – No reliance on financing.
- No inspection contingencies – No building, pest and/or radon inspection.
- Quick close – They would pay quickly, whenever the seller was ready to close.
- Leave what you want – The sellers could leave whatever they wanted in the house, and return by a later date (agreed to in writing) to collect what they left.
- Leave open permits, open – The seller would not have to close out (think pay) any old permits with the city that were still open.
Why would a real estate investor offer all of these perks to a seller? The idea comes back to the concept of adding value in a real estate transaction.
Adding Value in A Real Estate Transaction
Adding value is a fancy way of saying bringing something to the table. In other words, a real estate investor is competing against many other developers. They need to figure out a way to both beat out the competition and make money on the project. Accordingly, they must add something, or value, to a project.
Some investors add value by completing parts of the project themselves, such as architectural or engineering work. Others have big companies and try to make the process efficient, thereby saving money. Of course, a few “investors” add value by buying cheap properties and flipping them to other developers.
There are countless methods to add value to a project and many investors are thinking up new ways to do so every day. After all, some of the ways to add value to a real estate project have a low barrier to entry. Once a strategy becomes widespread, an investor has to think of new ways to bring something to the table.
“How Do I Find an Investor to Buy My House?”
Before you approach investors, you need to understand what type of developer your property will appeal to. For example, let’s say you own a 10,000 square foot lot in the center of town. In the past you have received offers from developers looking to build a three-story, six-unit building on the site. A trusted real estate attorney friend tells you that a developer can clear about $500,000 on the buildout. To do so, he tells you the best offer you a developer will offer you will be $1,000,000.
A while later, a developer approaches you and offers $1,100,000. The offer looks great on paper, but is it? Perhaps the developer intends to build a parking garage on the land, and he knows he will clear millions once he is able to build it. The bottom line is that if you assume your property will only appeal to one type of investor, you are looking at your own property with tunnel vision. That is shame, because you may be leaving money on the table.
Understand Where Real Estate Developers Come From
A homeowner looking to sell to an investor needs to think outside of the box. Years ago, a few shrewd investors came up with the idea of buying apartment buildings and converting each unit into a condominium. Many competent owners of multi-family residences were suddenly given what-they-considered high offers for their buildings. They quickly sold, only to find out a few years later that the investor was able to turn each unit into a condo, sell them, and made a tidy profit. By the time everyone figured out this new way of adding value, everyone was onto it. Today, most homeowners know to bake the potential profit of a condominium conversion into their asking price.
Developers are always coming up with ways to add value in the real estate process. If you want to approach a developer yourself, the more information about their plans for your property you can find out, the better. Do not rely on what they tell you they intend to do, or your gut feeling. Along those lines, always make sure to double, or even triple, check your sources. There are generally only a few players in each city or town. Many of them have strong relationships with local attorneys and civil employees at your municipality’s planning department: After all, such developers are talking to them often.
How Does Someone Market Their Home to an Investor?
Here is a common “mistake” many real estate agents make when they land a multi-family listing that has been rented out. Like most listings, they list the home on their local MLS. That is what they are supposed to do. However, when they publish the property online, they only list the gross income of the home, but not the net income. Or vice versa.
Why would they do this? Most of the time, I assume they do not know the difference between the terms net and gross income. In other circumstances, various capital expenses, like a new HVAC system or boiler, have drastically cut down on the net profits for the last few years of the homeowner’s tenure. This is common when a homeowner, getting ready to sell their home, starts completing necessary repairs that have added up from years of deferred maintenance. Regardless of the agent’s motive, it comes across as amateurish.
Playing coy with investors is a strategy that many homeowner’s often employ. The hope, I assume, is that a developer will let their guard down and make them a fair offer. That never happens. In fact, serious investors are generally to-the-point type of people. They are getting multiple pitches from homeowners, agents and businesses every day. The easiest way to lose their trust is to waste their time.
Consequently, when pitching an investor, you need to have a competent understanding of the value of your home. A simple website with a floor plan, aerial photos, interior photos and a list of upgrades over the owner’s tenure with the property, are musts. A simple property brochure is important too. A real estate agent should help you accomplish these goals.
How Not to Deal With a Real Estate Investor
Earlier this year I had a developer very interested in a 30,000 square foot lot. The owner wanted $2,000,000. Without city approval, a developer could only build two units on the site. As is, the land was worth a bit over a million.
So, my client and I came up with an idea. He would offer the owner $1,200,000 upfront, and if he could get city permitting, $100,000 for every unit approved in addition to the original two. The developer liked this idea because if he did not get permitting, he would only be paying market value for the lot, an offer he felt would give him enough wiggle room to still turn a modest profit. Of course, he expected to get approval for many units.
Of course, the owner did not retain the services of a competent real estate agent, and had no experience in the field himself. In other words, he did not know how to properly sell his home to an investor. So, I pitched the owner directly. He liked the offer, and told me he wanted to take the weekend to think about. I told him that was a bad request, and investors do not like owners shopping their offers around, which I felt he was going to do.
In other words, an investor does not want a homeowner using their offer to drum up other offers from the competition. A common tactic of a sleazy real estate investor is to hang around on the sidelines, only writing up their offer after a competitor has. Or more sinisterly, waiting until a seller reaches a point of capitulation and wants, or needs, to dump their property on the cheap. What a way to add value!
Regardless the owner persisted, and my client permitted the offer extension. Later that weekend, I received an alert that the owner had listed the property himself (FSBO) on Zillow.
The owner probably did not think I, an agent, check Zillow. However, many of us agents do. In fact, I have alerts set up anytime a new FSBO hits the market in my city. So, I called the owner. He tried to play nice at first, and then told me that he was still, “Very interested in my client’s offer.” I said I would check. By the time I called my client, another agent had already shared the owner’s property, now publicly visible on Zillow, with my investor. My client told me to tell the home owner to take a hike.
A few weeks later, the owner came back to me and asked if my client was still interested. What do you think I told him?
How Does Someone Sell Their Home to an Investor?
All reliable evidence dictates that putting your property on the market with a real estate agent is the right thing to do (See: How to Find a Real Estate Agent – The Ultimate Guide). The trick is to find one who has experience in marketing properties to investors. In fact, it would be smart to request a comparative market analysis (CMA) from a few agents to compare. Some homeowners opt to get an appraisal, as well. A CMA is usually free and an appraisal costs money, but an owner should do what they think feels right. Remember, a CMA or appraisal may show that your home will better appeal to end-user rather than an investor or developer. An end-user may offer more than an investor.
A competent real estate agent should be able to predict the plans a real estate investor for your land (within reason). In other words, they should know where a potential investor will try to add value. For example, if your home will appeal to people looking to rent it out (or renovate it to improve cash flow), your agent should know what the average cap rate in your area is. Or, if your lot is buildable, your agent should be knowledgeable in your home’s city, town, or county’s zoning ordinance.
If your property has a significant amount of value, it may be worth obtaining your real estate salesperson’s license yourself. After all, real estate commissions can easily approach, and exceed, six-figures.
Conclusion – How to Sell Your Home to an Investor
Approaching a real estate developer on your own is like challenging a professional poker player to a game of five-card draw. You can study your opponent’s past moves, play the contest on your own terms and in your own location; but the odds are against you. Of course, luck could bail you out. Survivorship bias shows us that a few successful landowners have done well and a lot more have thought they have done well, when in reality they have really left money on the table. Then there are the countless that have sold their homes for far too little, and now realize it.
By reading this article, you should have gained basic insight into a developer’s mindset. You should better understand how to sell your home to an Investor, too. So, go out there and beat them at their own game!