WE BUY HOUSES, CASH!
It happens regularly to homeowners: the unsurprising surprise of receiving a mailing stating that someone is ready to buy their home, cash, as-is, no hassles, no costs, and regardless of conditions. If one thinks that such offer is too good to be true… than probably it is.
As it happens, REALTORS® are not excluded from the pool. In fact last week it was my turn to receive my share of opportunities.
One card was inviting me to call immediately to discuss my options in case I were interested to sell for “top” money, with the promise of a quick close and a “hassle free” transaction. Another letter was proposing me to sell for “cash” and “no hassles” with the commitment to close in less than one month, and no costs; however warning of a markdown on purchase price. “I Buy Houses” signs appear time to time near intersections, and websites where to find real estate investment companies abound. Fill in a form, share some information on your property, and someone will contact you with a cash offer.
Anyone would feel enticed. After all it is every homeowner’s dream to sell effortlessly, quickly, as-is, in cash, with no costs, fees, or commissions, while having someone else handling all the paperwork. So, why hasn’t the market already rushed completely to these investment companies? And how much top dollar or discount is involved? As of now, the vast majority of sellers still hires REALTORS®, and for a good reason.
These companies promise transactions completely free to seller. Analyzing the costs attached to a property sale could help bring some clarity. Let’s consider an average house valued and appraised at $300,000 as-is, billed a yearly total of $3,600 in property taxes. What would its owner save by selling at “no cost”?
Property Taxes. A quick cash transaction closing at the end of August would save a seller four months of taxes at $300 per month, equaling $1,200 total.
Brokers’ commissions. Commissions vary, depending on multiple factors. In this example, we could assume a total of 5% to 7% of sale price, to be divided between listing and selling broker. At an average of 6%, saved fees to seller would amount to $18,000.
Seller is typically responsible for the Michigan Transfer Tax, which has a State and a County component. The former is calculated at $3.75 per each $500, and the latter at $0.55 per each $500 of sale price. Hence, seller would save $2,250 plus $300 for a total of $2,550.
Seller is also responsible for Title Insurance, which is a set amount based on purchase price. This corresponds to $1,570.73 in further savings.
There is also a series of smaller items to consider, such as broker’s fees, closing fees, sometimes a water bill final reading, and similar. We can approximate the total of these figures to $700.
Seller is not responsible for appraisal or inspection charges, and unless agreed, is also not responsible for any land survey costs.
One of the websites I visited was claiming to spare sellers those “hidden fees.” In real estate nothing is hidden. Everything is disclosed and accounted for, including all fees down to the cent. Before a listing, agents provide their clients with a net-to-seller sheet. Before a closing, seller and buyer receive a statement with each and every credit and debit involved in the transaction, and how these figures have been computed.
If we add all these fees and costs that these companies are willing to take off sellers’ hands, we obtain $24,020.73, or about 8% of the purchase price. This is a typical percentage for most sales.
Now the buyer’s costs. Per their messages, these companies do not seem interested in having REALTORS® involved. One went as far as stating that licensed real estate agents add “costs” and “confusion” 😂 to the field! One only wonders why the State of Michigan is still willing to license a horde of professionals to bring chaos to a specific sector of its economy.
Hence, by handling everything in-house, these companies would probably incur in lawyer’s fees, some closing costs, and have to cover title work, appraisal, inspection, and land survey where necessary. These costs could easily amount to a few thousand dollars: let’s pin them at around $6,000.
Numbers speak for themselves. In our case property is valued and appraised at $300,000. Some homeowners might be led to believe that these companies would agree to pay up to about $312,000 (a figure that includes all the costs excluding brokers’ commissions, as no agent is involved) netting them $300,000. A seller’s dream – but too good to be true! In a different scenario, if these companies were represented by a REALTOR®, and had a cash offer accepted at $300,000 on a listed property, with $1,200 in inspection, appraisal, land survey, and some closing costs, their total check would be cut for only $301,200, netting seller $275,979.27 – significantly less, but an amount to which seller has already agreed at the time of listing. This option would save any company $10,800 on just one single purchase! Or close to $1,000,000,000 (one billion) for any company that would pride itself of closing tens of thousands of transactions.
If one wonders why would any investors go to great length to buy random properties paying cash about 4% above market and appraised value, the answer is simple. They won’t. It is vastly more advantageous for any investment company to shop currently listed properties. And even more profitable to extend cash offers below market value to those random sellers who are still willing to accept an offer on their unlisted houses. If a seller’s best option is to net $276,000 at market value on our sample property, a cash offer from these companies at around $276,000 ($282,000 out of pocket to the investment company versus the $301,200 on the market) might be the highest and best they could expect to receive. But investors are typically extremely attentive to nickels and dimes. If we take into account the premium that a cash and hassle-free transaction would command, the offer could prove even more discouraging to seller, perhaps 10, 15, or even 20% below market value. How does it sound a hassle-free cash offer of $255,000 on a $300,000 property as-is?
In the end, sellers, enjoy your moment in the spotlight; and if the numbers do not meet your expectations please do not be disappointed. Before accepting any offer I would encourage any homeowner to seek the services and the experience of a REALTOR®. A listing with professional marketing would certainly provide a wider chance at a stronger net return by letting the market speak first.
Happy cash sales everyone!