iBuyers are Just House Flippers

ibuyers
How much is your home worth? (infographic from nar.realtor)

Disruption in the marketplace seems to be the standard these days. So, it should not come as a surprise that the iBuyer phenomenon has taken hold of the real estate industry and is expanding.  What started out as an experiment in limited markets has grown into the internet version of “I Buy Houses.” (You’ve probably seen the “I Buy Houses” bandit signs around town.)  Nonetheless, iBuyers have become the trendy and acceptable version of house flippers.

According to Zillow, an iBuyer is “…a real estate investor that uses an automated valuation model (known as an AVM) and other technology to make cash offers on homes quickly.”  And although Zillow’s explanation of the iBuyer model describes that the home gets sold to the investor sight unseen, many will actually visit your home before finalizing the deal.

Automated valuations are helpful but not always accurate. Additionally, investors typically apply their AVM derived value into a formula to produce their offer price. Because they are akin to the Pawn Shop of the real estate industry, where they have to build in a profit for them, house flippers usually offer 70-75% of retail value (after repairs).

House flipping by any other name is still house flipping.  But the iBuyer trend has put a shiny veneer to the business.  The model allows for anonymity, at least initially, by giving you an offer to buy your home just by completing a form.  However, just like traditional real estate investors, iBuyer representatives will visit the home to confirm the accuracy of the reported home’s condition and other vital facts. 

If you’re looking to get top dollar on your home, you’re probably going to be disappointed with the iBuyer offer (or any real estate investor offer for that matter).  However, you might be willing to accept a lower offer on your home for a quick closing and selling “as-is.”  The desire of convenience of selling to real estate investors is confirmed by ATTOM Data Solutions 2018 Year-End Home Flipping report that indicated “207,957 U.S. single family homes and condos were flipped in 2018” (attomdata.com).  Although house flipping is down four percent from 2017, the numbers indicate a continued willingness by home owners to deal with house flippers. 

Don’t think you’re escaping the 6 percent commission when selling to iBuyers.

Patricia Mertz Esswein wrote recently that the iBuyer convenience comes at a cost (Kiplinger’s Personal Finance. April 2019, Vol. 73 Issue 4, p12).  She explained that iBuyer service fees range from 6 to 13 percent, which exceed Realtor commissions that typically range in today’s market from 3.5 to 5 percent!

Currently, most iBuyers are exclusive to specific markets that make the model financially sound.  However, new iBuyer companies are throwing their hats into the ring and expanding the model in new markets nationwide.  An article from the California Association of Realtors’ magazine (The Era of iBUYERS?; California Real Estate. September 2018, Vol. 98 Issue 6, p22-25) discusses the pros and cons of iBuyers and explains that the phenomenon is still in its “infancy.”  Meaning that iBuyer companies are still cautiously expanding in hot markets.  Furthermore, you should be wary of real estate brokers who engage in making iBuyer (or similar) offers as part of their listing service because it could be in conflict of their fiduciary duties to you.  

If you’re wanting to get top dollar on your home, you probably will go the traditional route and list on the MLS.  But, if you’re looking for a quick sale, explore all of your options.  Solicit and compare iBuyer offers to local real estate investor offers.  Also, consult with several real estate agents to not only get a picture of your home’s value, but they may have buyers for your home too. 

Original published at https://dankrell.com/blog/2019/05/13/ibuyers-are-just-house-flippers

By Dan Krell
Copyright © 2019

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Quick sale investor promise?

Is a quick sale to a real estate investor worth it?

House flipping is a misunderstood industry.  Sure, these investors promise a quick sale, but legitimate home flipping is valuable to the real estate industry and the community.  Home flippers revitalize run-down homes, and market appealing homes to home buyers.  In a low inventory housing market, home flips have become a significant percentage of home sales in a low inventory market.

House flipping data

quick sale
House flipping is a significant portion of home sales (Home Stats infographic from nar.realtor)

ATTOM Data Solutions (attomdata.com), the data solutions behind Realtytrac, recently released its Home Flipping Report for Q1 2018.  The report indicated that there were 48,457 U.S. homes that were flipped, which represented 6.9 percent of all home sales.  Although the number of homes flipped decreased 3 percent from last year, the percentage of flipped homes in the home sale inventory increased!  The number of flipped homes decreased to a two-year low, but the home flipping rate is the highest since 2012.  The average gross profit of $69,500 is at the highest point since ATTOM started collecting the data in 2000.

Given the stats and profits, it was just a matter of time for the mom and pop home flipping business to become corporatized.  Using the power of the internet and corporate financing, companies such as Opendoor, Offerpad, and recently Zillow have become players in house flipping business.  Whether corporate flippers are profitable or have a sustainable business model is for another column.  But, there is no doubt that home sellers are seduced by one-click instant offers and promises of a quick closing.

How real estate  investors operate

House flippers are known to buy foreclosures and other financially distressed properties.  However, these real estate investors also go after other properties too, as long as it’s financially feasible (it’s a business after all).  Other types of targeted homes include estate sales, divorce sales, long-time rentals, and outdated or obsolete homes.  So, if you haven’t already received a letter offering you a quick offer and fast closing, it’s just a matter of time.

For some home sellers, a quick sale to an investor is fitting.  The seller is disposing of a home that would otherwise continue to be a financial burden and deteriorate further.  However, many realize they can sell for more on the open market (MLS).

Is a quick sale to an investor all it’s cracked up to be?

If you’re thinking of selling your home (or even currently selling), you might be fascinated by the idea of a quick sale.  But for most, the dream of selling for a large sum and closing quickly is just a fantasy.  You should realize that home flipping is risky business, and the investors build their costs into their offer.  So, be prepared for a really low offer.  A typical investor offer is about 70 percent of the home’s value minus rehab, carrying, and marketing costs.

Before you sell to an investor, do your due diligence.  Compare multiple investor offers.  Verify that the investor is legitimate.  Be wary of investors who include extended contingencies.  Be aware that “wholesalers” will tie up your home while looking to sell their purchase contract to other investors.  Although most investors promise “cash” deals, the reality is that most investors actually borrow money.  It is not uncommon for investors to back out or default on a deal because their financing doesn’t come through.  Most important, have your attorney review any contract before you sign.

Also, talk to a Realtor.  You could possibly sell your home for more than the investor’s “instant” offer.  Marketing your home on the MLS at a price appropriate for its condition could net you more.

Original is located at https://dankrell.com/blog/2018/10/11/quick-sale-promises/

By Dan Krell.          Copyright © 2018.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Don’t skip the home inspection – old, new, or renovated

homesLike the 49ers seeking gold in California, real estate investors have flocked to D.C. in recent years to seek their fortunes. As home values rebounded, many distressed homes were snapped up by investors with the intention of renovating/rehabbing, and then selling them. For many home buyers, these “flipped” houses have become home; however, for a few, the dream has become a nightmare.

Martin Austermuhle reported on WAMU (A Dream Home Becomes a Nightmare; wamu.org) about D.C.’S house flipping environment and highlighted one family’s dream turned nightmare. Characterized as a “cautionary tale of home-buying in a hot real estate market,” the story was basically about how rotted wood in the porch has led to a multimillion dollar law suit between the purchasers and the rehabber.

If you haven’t received the memo, “house flipping” is once again a bad thing – or is it? Unfortunately, “flipping” has become synonymous with fraud and scams because of the attention that it received in the mid 1990’s (as the result of widespread fraud and scams that involved flipped homes). At that time, several cities (Baltimore being one) were known for flipping scams because of the investors’ ability to purchase a home for very little money and turn it around for a big profit.

Although, there should be nothing wrong with buying a distressed property, rehabbing and selling it (aka home flipping); flipping has generally become the term used when there is an accusation of fraud or con involved with a rehabbed home. During the 1990’s, flipped homes were the center of many mortgage fraud cases that took advantage of lenders by providing false income statements, fraudulent credit reports, and/or fraudulent appraisals. In these cases, the investor was not the only scammer; as accomplices often included: loan officers, appraisers, title agents, real estate agents, and even “straw” buyers.

Many home buyers were also scammed into buying homes in disrepair that were represented as being rehabbed. And believe it or not, some of these homes were nothing but shells (e.g., gutted).

In the aftermath of the flipping crisis of the 1990’s: lenders wrote off hundreds of millions of dollars, lawsuits were filed, and a movement grew to educate home buyers about the need to conduct home inspections. Mortgage underwriting changed to safeguard against future scams with the introduction of title seasoning (length of ownership).

Legitimate rehabbing of distressed properties has always been a viable industry; and can transform an eyesore into a livable home. However, just because renovations have been made to an old home doesn’t mean that it is now brand new!

When buying a home, you must do your due diligence regardless of the age of the home. A thorough home inspection should be conducted, even on new homes. Although home inspectors don’t have x-ray vision, the technology they employ can sometimes make it seem as if they do. Besides the routine identification of deferred maintenance, home inspectors can typically identify issues with renovations and can usually identify code violations. Furthermore, you should check permits when considering a home that has been renovated or expanded. Many jurisdictions offer online services to search permits; locally, the Montgomery County Department of Permitting Services has such a search portal (permittingservices.montgomerycountymd.gov).

If you’re buying a home, you might also consider working with an experienced Realtor®. A seasoned professional is not only knowledgeable about neighborhood price trends and disclosures; many are skilled to work in tandem with the home inspector to negotiate repairs.

Original published at https://dankrell.com/blog/2015/05/22/dont-skip-the-home-inspection-old-new-or-renovated/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Post crisis real estate investing

by Dan Krell ©2012
DanKrell.com

horseWatching an interview of Chef Bobby Flay this week, talk about the possibly of buying a horse at the Fasig Tipton Yearling Auction in Saratoga Springs, NY, I heard him say, “I’m actually looking at this like buying a building, literally…it’s like buying a really expensive piece of real estate…”

Well, why not buy that expensive piece of real estate? Some experts are still saying that real estate is still one of the core investment assets. For example: Brad Case, of the National Association of Real Estate Investment Trusts®, in his June 2011 article in Financial Planning (“School is in”; 41, 3), discussed the importance of real estate as an investment class. Case stated that, real estate is a “basic” investment class. He continued by quoting some of the most influential financial experts on real estate investing: “…Burton Malkiel, the Princeton professor and former member of the Council of Economic Advisors who wrote the famous investing manual, A Random Walk Down Wall Street, said, ‘There are only four types of investment categories that you need to consider: cash, bonds, common stocks and real estate.’ Mark Anson, who led the largest pension funds in both the U.S. (CalPERS) and the U.K. (British Telecom), completely agreed: ‘Equity, fixed income, cash and real estate are the basic asset classes that must be held within a diversified portfolio’…”

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Ann Marsh, in her may 2012 article “Real estate’s rehabilitation” (Financial Planning, 42, 56), also agreed. She stated that not only are financial planners urging their clients to buy into real estate investment trusts (REITs), some planners are urging the “outright” purchase of individual buildings.

Of course, when thinking of real estate investing, most people think about residential real estate – in particular flipping homes or owning rental properties. Investors looking for rental properties tend to look at long term value (appreciation) as well as having a positive cash flow; while home flippers are interested in renovating a home and selling for a quick profit.

commercial real estateResidential real estate is not the only opportunity for investors. Some real estate investors look for deals in commercial buildings; the market downturn has added to the possibilities too. Investors in commercial properties tend to look for development opportunities as well as long term retention.

Another way to invest in real estate is through a real estate investment trust (REIT). The REIT investment structure has been around for many years, and may provide the real estate investor access to investments they might not otherwise purchase on their own. There are many types of REITS, some invest broadly in many types of real estate; while some are focused on specific types of properties (e.g., shopping centers, storage centers, apartments, etc).

Clearly, there are many risks involved in real estate investing. Of course there are financial risks, but there also a time investment required. Additionally: cash flow can become an issue when tenants stop paying rent, or unexpected maintenance issues need attention; rehab or development costs can skyrocket when unexpected obstacles are encountered; and when selling, you may not realize the sale price you initially estimated due to market fluctuations, bad appraisals, etc.

Although some real estate investors are successful; many real estate investors lose money. Before you decide to invest in real estate, you should consult investment, financial, real estate, and other professionals to assist you with the research and due diligence.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 6 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.