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December 21, 2022December 21, 2022

Selling to a real estate investor

Needless to say, real estate investing has become popular again. Selling to a real estate investor was even embraced by tech companies that are called “iBuyers.” To get your attention, real estate investors post road signs, send direct mail, and inundate social media with a promise of getting cash for your home. But real estate investors are not all the same, and their intentions are not always fair: which begs the question “Should you sell your home directly to a real estate investor?”

Selling to a real estate investor

When most people think of a real estate investor, they think of someone who will renovate and resale the home. This is commonly called “flipping.” However, another type of flipping has become popular, where the investor, also known as a “wholesaler,” flips their purchase contract to another buyer (usually at a huge profit for them). Also, there are investors who buy and then keep the property to rent.

What’s the catch?

The typical lure from the real estate investor is a quick sale. Although many can close quickly, others not so much. The reality is that real estate investors offer the quick sale in lieu of a huge reduction in their sale price. After all, they never promised you top dollar. The truth remains that real estate investors pay a fraction of what you can likely sell your home on the MLS (and the irony is that the MLS buyer is likely to be to an investor).

What about the promise of cash? Although investors offer cash for your home, you won’t literally be getting cash at settlement. Rather, just like any real estate transaction, you’ll either get a check from the title company or a wire to your bank.

Many real estate investors tout “no Realtor fees.” Sounds good, right? Not so fast. Many real estate investors charge premiums and/or miscellaneous fees. Some make you pay their closing costs. In truth, your unexpected fees can exceed the average agent commission.

Real estate investors also promise “no contingencies.” However, many investors use a “study period” in lieu of specific contingencies for various reasons, including obtaining the funds to close. Wholesalers use the study period to find a “buyer” (usually another investor) for their contract (you may not have assurance that the assigned buyer has the ability to complete the purchase).

Due diligence

Before you sell directly to the real estate investor, consider your goals with the pros and cons. Due diligence on your part will help you obtain your goals. Don’t be afraid to approach a local real estate agent to understand the value of your home. Compare an investor sale to the MLS sale (which is typically getting your money a few weeks sooner for a fraction of the value). You should consult with an attorney to review the purchase contract to ensure you understand what you’re signing.

By Dan Krell
Copyright © 2022

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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.

November 5, 2022December 13, 2022

Outperforming the housing market

In 2011 I wrote an article exploring the question of outperforming the housing market by attempting to time real estate transactions. The question was then aimed at home buyers and sellers. New research published in the Journal of Real Estate Research reveals more interesting data as it relates to real estate investors.

In my 2011 analysis of research and data, I discussed why attempting to “time the market” as an owner occupant wasn’t very favorable. It appeared as if attempting to time a purchase or sale didn’t yield the desired result. The conclusion was that long term home ownership was probably better than speculating on buying and selling homes on the exact bottom or top of the housing market.

Likewise, home sellers waiting for the housing market to rebound before making a move probably missed an opportunity as well. So, who is outperforming the housing market?

A recent article published by Wong, Deng, and Chau in the Journal of Real Estate Research (Do Short-Term Real Estate Investors Outperform the Market?; 2022, Vol. 44 Issue 2, p287-309) reveals an interesting conclusion.

The study attempted to further look into the incentives of short-term real estate investors, specifically how various market conditions affect short-term real estate investor performance. The study analyzed real estate transaction data from Hong Kong and found that three economic conditions were favorable to the investor’s performance that seem to mimic the current low-inventory market we are experiencing here. The three items that help the investor performance are: 1) having few sale comparables; 2) having sale prices of the comparables dispersed; and 3) market prices go down. The study’s conclusion is that buying and reselling withing three months generates a gross return that is 6 percent above market appreciation. The authors caution that their study is limited such that there are multiple investor strategies that need to be studied as to the effects on short-term real estate investor performance. They describe short-term real estate investors as engaging in arbitrage, which by definition is basically “home flipping.”

By Dan Krell
Copyright © 2022

November 5, 2019October 20, 2020

Real Estate Riches Promises

House flipping has been around as long as people have lived in houses. Flipping houses got a bad rap in the 1990’s, when scammers engaged in widespread fraud using mortgages, appraisals, and straw buyers. In some cases, some “renovated” houses were uninhabitable and sold to unsuspecting home buyers. But house flipping has regained its legitimacy because of its significant contribution in revitalizing the country’s housing stock after the Great Recession. As a result, many investors found their fortunes. Of course, reality TV glamorized house flipping and the prospect of real estate riches. And as more people wanted in, flipping instruction courses multiplied.

Many embarking in house flipping courses believe it’s their road to real estate riches . Unfortunately, what’s not understood by many consumers is that flipping houses is an incredibly risky business. For most, it’s a full-time job that offers a modest living. And, many real estate flippers lose money.

Last week, the Federal Trade Commission (FTC.gov) entered a temporary restraining order against a real estate investment seminar promoter. You may have seen ads for these seminars, as they were promoted with reality TV star endorsements. The FTC alleges that the seminars are misleading and make “deceptive promises of big profits to lure consumers into real estate seminars costing thousands of dollars.” According to the October 4^th FTC press release, the promoter claims to offer consumers coaching and training on how to make large sums of money by flipping houses.

But it’s not so much about real estate riches through flipping houses. The FTC complaint alleged that seminar ads attracted consumers to free event that claimed they would learn how to make large profits “using other people’s money.” It is alleged that the free event was a sales presentation for a three-day workshop that cost $1,997, and was promoted as teaching everything needed to know “to make substantial income from real estate.” The three-day workshop was sometimes described as a “beginner’s course,” and attendees were “upsold” products and services that cost as much as $41,297.

The FTC action just didn’t pop up overnight. It resulted from years of investigation. An eye opening 2013 report highlighted complaints about these seminars (Some Buyers Call Classes By ‘Flip Or Flop’ Stars Misleading; Investors Business Daily; 10/28/2016, p43-43). The reality TV star who was supposed to be at the seminar, instead appeared in a video stating they were busy filming their show. An attendee who paid $1,997 for the three-day course, $1,000 for real estate software, and “thousands more” for additional classes, stated, “They weren’t really teaching at all.”

Real estate investing and flipping courses have been around for decades. However, not all advocate house flipping as the vehicle to make riches. There are many avenues to invest in real estate; some teach buy and hold strategies, others teach auction strategies, etc. Before spending any money on a real estate investment course, do your due diligence. Check with the Better Business Bureau and FTC for complaints.

Andrew Smith, director of the FTC’s Bureau of Consumer Protection stated, “From start to finish, these defendants used the promise of easy money and in-depth information to lure consumers down a path that could cost them thousands of dollars and put them in serious debt. When a company tells consumers they have the secret to get rich with little work, we encourage consumers to take a hard look at what’s really being offered.”

Original article is published at https://dankrell.com/blog/2019/11/05/real-estate-riches-promises/

By Dan Krell
Copyright© 2019

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May 13, 2019December 13, 2022

iBuyers are Just House Flippers

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

If you like this post, do not copy; instead please:
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