Have you ever wanted to know how these “We Buy Houses” companies make money?
Does your mailbox fill up with their postcards or letters?
Do you see those ugly yellow signs on the side of the road and wonder what the big deal is?
Lately, in this hot market we’ve been experiencing over the past couple years, it seems everyone and their mother has been jumping into the real estate business. Ironically similar to what we saw back in 2006 and 2007.
Let’s take a moment to deep dive into how these “real estate investors” make their money, and what drives all the marketing you are seeing.
Meet the 4 types of pro home buyers in Atlanta
When it come to investing, there are many roads to take. So many that when getting started, many don’t make it to the finish line, because they get lost in the maze of options. Here we are going to talk about the 4 most common:
- The professional rehabber. “Fix ‘n Flipper.”
- The professional rental investor. “Buy ‘n Holder.”
- The professional wholesaler. “Quick Flipper.”
- The professional hedge fund style investor. “Robo-Buyer”.
I’m going to cover the pro’s and con’s of working with the above professionals, how they make their money, and who might be the best fit for you when selling. However, keep reading, because there is also a 5th buyer in the mix, who you want to do you very best to stay away from. This 5th category is on the rise lately as well.
Professional Rehabber (AKA the Fix ‘n Flipper)
The Fix ‘n Flipper is a very popular person in the Atlanta market. These investors are usually looking for older homes that are distressed or very outdated. The goal with these homes are to fix the pending issues the homes poses (deferred maintenance), and also update them to today’s standards, cosmetically. Depending on the area, this can mean granite counter-tops, new cabinets, updated paint colors, custom tile showers and flooring, new major systems like the roof and HVAC, and many other cosmetic touches. They need to make the house stand out from the competition so it won’t sit on the market long. The Fix ‘n Flipper is about speed. He wants to finish the project, get it sold, and move on to the next one. For this reason, they will be looking for homes in areas with low days on market. Meaning homes that sold in 15 days or less, from when they hit the market.
I wrote a book about an insanely traumatic Fix ‘n Flip that we completed a couple years ago that you can check out here. You can see some before and after shots of it below!
Before and After of the Kitchen Remodel
Before and After of the Bathroom Remodel
How do these Fix ‘n Flippers make money you ask?
Here is a simple step by step example to help explain:
- Buy outdated house for $105,000.
- Hire contractors to begin work which will total $40,000
- Have house cleaned and staged with furniture to prepare for listing.
- Hire real estate agent to list property for $210,000.
- Close on property and get paid.
Now it may seem that if $145,000 was the total investment, and $210,000 was the sales price, then the Fix ‘n Flipper would make $70,000. Unfortunately (for the flipper) this is not the case.
The buying formula is usually: After Repair Value (in this case $210,000) x 70% (to account for the investors profit, closing costs on both transactions, realtor expenses, property taxes, insurance, borrowed money expense, utilities, cleaning, etc) – minus the cost of the renovation. So $210,000 x 70% is $147,000. Subtract the rehab of $40,000 and you get $107,000. This is roughly the amount the investor could have paid for the property, so at $105,000 he met that criteria, and most likely made around a 20% return on his money.
A pro of working with these types of buyers is that they will buy homes in “as-is” condition, meaning you won’t have to do anything to fix up the home. These buyers are very experienced with fixing many different types of issues, so there should be no worry. A con to this type of buyer is that they most likely will not by “pretty homes.” Meaning if there is no work or updating to be done to increase the value of the property, then there is no play for them and they will not want to work with you.
The professional Rental Investor (AKA the Buy ‘n Holder)
Business Insider recently said that Atlanta was the #1 city in the nation to buy rental property. There are lots of investors looking to increase their wealth by adding more rental property to their portfolio. The goal of this type of investor is to get in a house cheap enough to rent it out at their desired rate of return. A very simple way to determine a common method of return is called the 1% rule. If a home could rent for $1,000/mo, then you could say that a “Buy ‘n Holder” would likely pay around $100,000 (this number includes repairs) for your home. The 1% rule normally only applies in nice areas such as A class, or sometimes B class areas. My wife and I do buy in these areas, however we prefer to buy rentals in B & C class areas where the returns can be higher. Here was a rental property in Marietta we purchased from Benjy and his Partner.
How do these types of investors make their money you ask?
Well, instead of collecting larger sums of money all at once, these “Buy ‘n Holders” make their money in much smaller amounts over a longer period of time. Lets run through a brief example:
- Buy ‘n Holder buys a vacant house for $60,000
- Some light renovations are done for $20,000
- The property is listed with a leasing agent to find a tenant for $950/mo
- Tenant moves in and starts paying the owner $950 each month.
So the investor is all in at around $80,000, and the property rents for $950/mo. This would be slightly better than the 1% rule. It’s important to know that all $950 will not go to the investor. There are property taxes to be paid, insurance, property managers, maintenance expenses, and sometimes vacancy between tenants. We usually account for 40%. So if a property rents for $1,000/mo then we are only collecting $600/mo. Also that is if the property was paid for in all cash! If there is any debt on the property, then that monthly check to the bank would be deducted as well.
A pro of working with this type of investor is that they will buy houses that are not highly distressed. If your property doesn’t need much work, or maybe it’s in great condition, it’s just outdated, then its a prime candidate for a Buy ‘n Holder. They might even be able to pay you more than a Fix ‘n Flipper, depending on their criteria regarding rate of return. A common con of selling to these types of buyers is that they are usually very picky about where they buy. Such as a buyer might only buy single family houses, and turn away all townhomes, condos, or anything attached to another structure. Another example would be some Buy ‘n Holders I know will only buy in Cobb county (marietta, smyrna, kennesaw, etc) and won’t dare to venture outside of Cobb, or inside the perimeter (ITP), which would be Hwy 285 surrounding the metro Atlanta area.
The Professional Wholesaler (AKA the Quick Flipper)
This type of “buyer” has really grown in popularity over the past 10 years. In all honesty, I would say the number of Wholesalers in the nation has over 10X’d. These “quick flippers” are connected with a large network of other buyers in all price ranges, looking for many different types of property. Ranging from small residential, to multifamily and commercial property. When you go under contract with a professional wholesaler, they will immediately start to market your property privately, within their network of buyers. They will add a small fee to their purchase price and get paid at closing.
For example, if you speak with a wholesaler that is interested in your property, and you agree on a price of $100,000, the wholesaler will create a nice package of content and market your property to his or her buyers at slightly increased price, of let’s say $110,000. When a buyer is found, agreeing to $110,000 as a purchase price, closing will be scheduled. At closing the buyer will wire in $110,000 + closing costs, to the closing attorney. $100,000 of the funds will go to the seller, as promised, and the remaining $10,000 will be made payable to the wholesaler. This $10,000 goes back to refund all the marketing expense it took the wholesaler to find you in the first place, and the rest is profit for them.
Some advantages of working with this type of investor, are that they will usually have relationships with many types of buyers. So no matter the type, area, or condition of your property, it has a good chance of getting sold. Also, because of the demand a good wholesaler creates when marketing your property, they can require things like faster closings, which allows you to move on with your life sooner. I would say a third advantage, is that if your property has a certain defect, in which might scare some investors away, a professional wholesaler will have many different investors looking at your property. So the chances of finding one of them that is comfortable dealing with that type of defect is higher!
Some disadvantages would be that your not 100% guaranteed that your wholesaler will find someone to close on their contract with you. If their buyers network is small and still growing, they might not have the network required to close on that particular deal, or maybe not at the price that they originally told you. Also, because wholesalers are not actually buying and renovating your house, 100% wholesalers are not always experienced in what it actually costs to complete a renovation, so they might underestimate the amount of repairs needed, and get your hopes up by offering you a higher than accurate price. Then after marketing it to their buyers network, find out they offered you too much and will have to negotiate on price. PRO TIP: When working with a wholesaler, make sure they have rehabbed property on their own, and can show proof of it, so you have a better chance of getting an accurate offer on you home the FIRST time. Besides, your on this page because you want to sell FAST. So do your best to cut out the games.
The Professional Hedge Fund Buyer (AKA the Robo-Buyer)
This is a new type of buyer that has been rapidly emerging as our market continues to heat up. They are backed by significant amounts of money and have large scale buying power. These companies usually operate in the largest metro areas such as Atlanta, Houston, Phoenix, Tampa, Orlando, etc. They tend to have a specific criteria that they stick to, such as only rentals, or only flips. Or both but only in certain areas and price points. Since they buy so much, they have to stick to their guns.
These companies make their money very similarly to how I explained above, but they are working off volume, versus margin. If the market continues to do well, these companies will continue scooping up as much property as they can get their hands on. However if interest rates continue to rise, the margins they are buying on are so thin, I see them crumbling. Or at minimum, a major restructuring of how they buy property.
The main pro of these Robo-Buyers is that other than a retail buyer, they will most likely be your highest bidder. Since they are doing so much volume, they can afford to make mistakes here and there. AKA lose money on certain deals.
Some cons would be that you may not get the same amount as they originally told you. Since these companies buy so much property, they usually will not waste time coming to meet you or even see your house until you have signed a contract with them virtually at X price. They use services like docusign, that makes it very easy for you to sign their contract at X price. Once you have committed, they will come see the house, and usually require you to drop your price based on things they discovered in the showing, in order for them to proceed. Another con would be the fees that these companies charge. Since their buy margins are so small, they try to pad their profit by adding in fee’s for their “selling service.” Overall, if your looking for someone to gently guide you through the process of buying your home, don’t work with a Robo-Buyer. You will feel like a number more than you will a name.
The 5th type of Investor (AKA the Amateur)
I want to emphasize the importance of working with an experienced professional when it comes to selling your home.
If you’re at the point where you need to sell your home quickly and for cash, then most likely you’re already “over it.” Meaning you just want to be done with the house and move on with your life. Working with someone who can’t smoothly execute that process for you might really piss you off. I’d like to provide a few tips that might help you in making the right decision.
- Look for reviews. Not just a couple, but 10 or more. See if they have a testimonial page on their site, and if so, how big is it?
- Ask to speak with one of their testimonials to make sure they are not fake.
- Question them about your specific situation and see if they have closed on property very similar to yours.
- Did you receive a proof of funds when they made their offer? This is a small document showing how much money is in their bank account to purchase your property. This will usually separate “green” wholesalers from the experienced ones, or actual cash buyers.
- Is your buyer putting up any earnest money? If not require that he/she does so they have some skin in the game!
- The best investors I know LISTEN to their sellers situations to see if there is anything else they can offer, other than buying their house. They are not “all numbers.” Work with people who care about your situation and genuinely want to help. We have offered moving services, delayed move outs, virtual closings, and more to help make the selling transition as easy as possible on our sellers.
I hope this helped close in on your decision, regarding what type of buyer you want to work with, when it comes to selling your house quickly, for cash. Let me mention, the ABSOLUTE BEST buyer to work with is someone who is going to look at your home in all 3 ways combined! They could buy it to rehab, and resell on the retail market. They could buy it as a rental property. Or in a worst case scenario, they could wholesale your contract to another investor they know, in order to still get you paid! If you want an easy way to find one of these multifaceted experienced buyers, just give us a call, as we’ll do all 3. I hope to hear from you so I can get you a no obligation, cash offer on your home today.