As Realtors, we have certain rules of thumb that we are comfortable with when helping a client evaluate an offer. However, if you are working with a distressed seller you should also be familiar with the rules of thumb that investors work with to help your client complete a successful sale to an investor.
Over my 12 plus years as a real estate broker practicing traditional real estate and as a creative real estate investor I’ve seen plenty of conflicts between investors and Realtors that were usually the result of the Realtor being unfamiliar with investor strategies and methods. Not to say that investors are always the good guys but knowing where the other party is coming from will put the Realtor in a much better position to ensure their distressed seller doesn’t go into further distress! This article will shed some light on the differences AND offer advise on how the Realtor can best look after their clients’ interests when you are dealing with an investor offer.
First, when should your client consider accepting an investor offer?
I’ve sat in the investor role with many homeowners looking to sell their house and surprisingly it’s not uncommon for me to suggest that the seller list the property with a Realtor rather than sell it to me at my investor price. That’s because, in most cases, the seller will make more money by listing the property on the open market. Buyers shopping on the MLS are expecting to pay a market price whether they are buying a primary residence or rental property. And, it’s simple economy that making an offering to the largest pool of buyers will result in the best offer.
However, it’s important to learn the difference between a MOTIVATED seller and a DISTRESSED SELLER. If you have a DISTRESSED SELLER, you should consider shopping the property to the investor community.
How do you spot a Distressed seller? Here are some examples:
· Facing foreclosure in the next 90 days or less. The closer to foreclosure, the higher the distress level!
· Upside down… they owe more than they can sell it for and pay all their closing costs.
· Ugly House. Is it a hoard, burn out, mold infested, foundation cracking, full of pet feces, just plain naaaaassty! You’ll know it when you smell, er I mean, see it!
· Must move fast due to health issues, job issues, family issues. What does this look like? I once encountered a family that was desperate to sell the mother’s house before she was released to a nursing home from hospital care because if the sale occurred after she went to the nursing home she would be forced to use all the proceeds for her care before Medicare would start paying her benefits. She worked hard all her life to pay off the house so she would have something to leave her children.
· Any seller who for some reason is unable or unwilling to allow for showings or is a loose cannon who will need a saavy buyer who won’t be unnerved by a difficult personality.
So, you’ve got this distressed seller who really needs your help and you know an investor is likely the best option to help this person out of their problem.
Next, how do you find an investor buyer?
These situations require a creative real estate investor, not your fellow agents buy and hold guy that purchases turn-key rentals with conventional financing. How to find the right investor? You could simply call one of the many “I Buy Houses” signs along the road. Or, ring up one of the investors who sent a postcard or yellow letter to your client. But, be careful, as these are shark filled waters we swim in and there are a host of unexperienced and unscrupulous investors who could easily make matters worse for your seller. Instead, do your research and find a referral to an investor who has been around for years versus someone who is just back from a weekend guru workshop and is ready to practice! Length of time in this business is a good indicator of someone with the experience, connections and integrity that your client will need.
Shameless plug… call a StepStone agent (or the StepStone Broker! J). Not only are we experienced investors we are also Realtors who understand the languages of both worlds! And, because we are licensed, we hold ourselves to a higher standard. Even if that StepStone agent isn’t your buyer they will certainly know who to direct you to!
Here’s where things start to get weird for you. First, the negotiations may go a bit different. Rather than focusing on how much you are asking the investor may be more focused on what your client needs to net or the problem they need to solve. They may also ask about alternative financing such as owner financing or selling the house subject to the existing financing (known as Sub To). However, in most cases, it will be a very basic cash offer but there will be some differences that may seem alarming to the Realtor but are very typical in investor transactions. Here are some of those differences:
Earnest Money: You may be used to seeing EM equal to about 1% of the purchase price. In an investor offer, it will likely be much less. It is not uncommon for an investor to place $10-$100 as earnest money or even ZERO! And yes, the contract is still binding with Zero earnest money. If you don’t believe me call any attorney run title office (I like the Ceshker Group and Patten Law Firm) and ask the attorney. REASONING: As I tell sellers, I’m not a typical buyer who is placing one offer at a time on property. I could contract 10 houses in a week and it wouldn’t be prudent to have $10K sitting in escrow at a title company.
Option Money: Again, the investor will usually ask for a much longer option at a very low option fee such as 30 days for $10.00. As the agent, you will need to make sure the option period is not too long so that your seller will be in dire straight if the investor exercises her option to cancel. Try to negotiate a time range that works for both parties. An investor may also be amenable to a very short option period depending on the situation. REASONING: Most investors will put a contract under property AND THEN FIGURE OUT THEIR STRATEGY. This is not to say they don’t intend to purchase when they put it under contract but there can be various options they will want to consider. They need time to evaluate various exit strategies, collect estimates and bids, identify funding sources and those costs, identifying potential partners or even wholesale buyers. But why is the option money so low? Think of it this way: The seller has a problem house and the investor is going to work by putting their knowledge, skills and connections to work for the seller to rid them of this problem.
Financing Terms: Cash is king and that’s why we love investors. No banks, no appraisals, no last minute underwriting delays. However, when you ask for a proof of funds on that cash offer you may not get a bank statement but instead a Pre-Qual from a hard money lender. This should not concern you as hard money works very much like cash and the offer is not subject to the approval of financing. Instead, hard money loans are provided based on the asset, not the buyer’s ability to repay like traditional financing. They are also able to close super fast like cash transactions.
Title Company: We all have our favorite escrow agent whose office smells like wonderful cookies and she sets you up with awesome business tools and monthly lunches. However, the investor may be very firm about using their preferred title company which will usually be an attorney’s office/title office combined. This is because distressed sales are often wrought with title complications and having an attorney run office who is experienced with investor transactions will be in a better position to help deal with whammies that might pop up. Any investor worth their merit understands this and will be very hesitant to allow the transaction to go to a traditional title company.
And/Or Assigns: If you see this verbiage next to the buyer’s name on the contract should it be a red flag? Maybe, but not necessarily. Often, when you see this it means the investor may be attempting to wholesale the property. (Wholesaling is when a buyer assigns his interest in a contract to another buyer, usually for a fee).
Every contract is assignable even without this verbiage unless it specifically says it is NOT ASSIGNABLE. So, ensuring this language is not on the contract will not guarantee that the buyer will not wholesale the property. The investor may be including that so they have flexibility on what business entity they want to use to purchase the property, or they may want to partner with someone and put it in their name or yes, they may be intending to wholesale the property.
This is why it is imperative to work with an investor who has deep roots in the investor community. That investor will have a list of reliable cash or hard money buyers and will know who is looking to buy what, where and for how much. Not every property is going to work for everyone but by contracting with a well connected investor you can be sure that, if they are going to wholesale, they will find the right person who wants to buy the property. Beware of wholesale brokerages who exist only to put property under contract and sell the contracts.
While some of this may seem slanted to the benefit of the investor you must keep the best interests of your client in mind. If they are truly distressed, an investor can be a life saver by freeing them of a problem house, quickly getting them the cash they need, allowing them to avoid costly and overwhelming showings, repairs, inspection and sales processes. By being familiar with the differences in investor transactions you will be in a better position to maintain a good working relationship with the investor buyer and achieve your seller’s goals.