Examining the Rise of the Instant Cash Offer
Instant cash home buyers, also known as iBuyers, are popping up everywhere around the country. They are especially prevalent in the larger metro markets where there exist a larger number of potential targets with greater neighbor home types and a broad span of home prices. This gives the investor a wide net for their efforts.
Real estate represents the highest value consumer market in America accounting for 4 million homes annually, and more than $2 trillion. In 2023, investors purchased 25% of all the homes sold in America. This is an alarmingly high number! We have a housing shortage in most metro markets and with the high demand for homes, investors have been able to muscle in with cash offers taking homes purchases away from principal residence buyers only to offer them back up again at a premium. For the very well funded instituional home buyers, their operating margins and efficiencies give these companies an advantage in the market.
The investor utilizes many channels to attract prospective sellers. These channels include social media, direct mail, search engines, billboards, radio, and TV as principal modes of advertising. They also use data sources to find distressed sellers under circumstances such as divorce, death, birth, bankruptcy, job loss and other data sources that indicate hardship or possible need for faster liquidity. Finally, there are a host of licensed real estate agents that are working for investors to find opportunities.
Your Home Has Equity, Perhaps A Lot Of Equity!
Equity is the difference in the amount of value that your home has in relation to the amount owed in a mortgage or the entire value of the home if it is paid off. If you have lived in your home for many years, it is very likely that you have accumulated a fair amount of equity. Home equity has increased significantly in the last five years, with the typical U.S. home value increasing by 50% from $240,000 in 2019 to $360,000 in 2024. This increase has been driven by the pandemic-era housing frenzy, which caused home values to spike. In 2023, the median home price reached an all-time high of $335,000, which is $77,000 more than in 2019. Many parts of the country and certain markets has increased more dramatically.
Let’s use the $240,000 home purchase example for our discussion noting that in most instances we are really talking about a higher value market. If we put 20% down in purchasing the $240,000 home we took on a $192,000 mortgage. If the home value were to increase 50% as indicated, we would have more than $170,000 in equity accounting for paying down the mortgage a bit over the five years.
Another factor to cement in your mind is that the ONLY WAY to get fair market value from your home sale is to make it available on the open market so that it is available to home buying consumers buying their principal residence. Why? Because home buying consumers have done their shopping, evaluated this home against other homes on the market, and, based on many factors, they are willing to pay the highest reasonable price for the home.
Considerations With Instant Cash Buyers
The first consideration to illuminate about instant cash buyers is that they pay wholesale. They buy homes to make money, whether to flip or to hold as a long-term investment tp lease the home out for monthly return. In and of itself, buying wholesale from a willing seller is not a crime. SInce they are representing their investment goals and looking for the best deal, it is important to understand what your home is really worth.
Your local real estate agent(s) can assist you with the comparative madrket analysis (CMA) and give you a snaposhot of the current competition for homes that are active, under contract and recently sold in your immediate area. The agent(s) can also assist you with the cost of selling that will come out of the proceeds at closing, such as commission fee and escrow & title costs. Also note that some states have transfer tax that will be charegd to the seller. Investors will often have you focus on saving money in agency commission fees as one of their hooks so be sure to do the math when evaluating a cash offer noting that agency commission is negotiable and can be as low as 1% in today’s competative market.
Know Your Why
When entertaining an investor offer, it is importnat to reflect on your reasons for giving up part of your equity. In short, is the conveneience worth what could amount to tens of thousands of dollars. Are you experiencing hardship or facing foreclosure? Perhaps you have an immediate need for cash for yourself or a family member. Whatever the reason, you may have options that only a local real estate agent can address before you accept a cash offer of as much as 22% less than on the open market. Keep in mond that market dynamis may be such that a cash consumer buying for their principal residence may by in the market as has been quite common these past several years. Closing could happen in as little as 10-15 days to meet your needs.
You may be taken by the investors ads or promises. These bullet points can be be inticing – No Cleaning, No Preparations, No Showings, No Repairs and No 6% Agency Fee. They may also claim you can close when you like and stay in the home up to six months. These may all be valid concerns for you but be sure to weigh their value before making a decision.
Also, be sure to account for legal considerations that may affect your rights, liability and tax obligations. In woring with an investor, they will typically present the cash offer in a contract thay have created to their benefit. In most states, contratcs are bidning regardless the terms so long as the stipulations are not illegal – and even then there is nearly always a clause indicating that the remainder of the contract is enforceable should a clause be uninforceable. This can stick the seller with very unfavorbale terms, and legal fees. Therefore, having an attorney, review the sales contract prior to signing is highly advised.
Do the Math – You May Be Receive 20, 30, $40,000+ Less From Investors
- Cleaning & Preparation – since you are moving anyway, why not start packing and purging. Then, have a cleaner come through your home for $200-$300 to make it shine.
- Showings – the schedule is in your control. You can chose one day per week like saturdays bewteen 1p-4p
- Repairs – these can be negotieated in terms of closing concessions or price breaks
- Agency Commission Fee – 6% is negotiable and more commonly is 4.5-5% in today’s market.
- Post Close Occupancy – staying in your home after the sale – will be charged a per diem rate and is often readily negotiable in a conventional sale.
The Ethical Concerns Of Buyer Agent Representation
A seller should always do their own research on their home value and request a CMA from a local agent, or agents. It is worth your time to invite a few agents in to review the home to evaluate how your home will compete with other homes on the market. Armed with this information, a seller can determine if the math works to proceed with a cahs offer, negotiate for more, or decide to go the traditional route. In most cases the difference between an investor offer and the market value will be fairly big gap.
To ease this gap, the buyer will have a list of responses for the seller. They will often have a laundry list of repairs, general condition, feature obsolescence or even latent defects that they use as leverage on getting a lower price. These items will nearly always be itmeized as reductions from value that will seem legitimate and even resonable.
And when the investor is making an offer though a licensed real estate agent, the rebuttals may seem even more legitamate. The common direction an agent may use is that these “reductions in value” are items that a home buyer on the open market will expect to be remedied, Things like flooring, cabinet, counters, windows, roof, mechanicals age, etc will be itemized at replacement cost which can be quite large, and scary coming from an agent. But don’t be fooled! Never assume that an investor’s agent has your best interests in mind. The agent representing the buyer is being paid to make the deal happen on the seller’s terms. This can be bith unethical.
The Investor Is Licensed Agent
This can represent the worst case scenario of all and may even be unlawful. There are several ways this can be at least unethical if not illegal. For one, Realtors are licenced agents that are held to the National Association of Realtor’s Code of Ethics. Most state licensing departments take the Code of Ethics into account when creating and enforcing the laws of conducting real estate transactions, as do all regional real estate boards. Most states and boards also have a guideline, if not laws, regarding Implied Agency which means the buyers agent can be held liable for the seller’s right to agency. and finally, regarding the licensed investor, most rules of conduct as well as state laws prohibit a transaction called a “NET SALE”.
A Net Sale is where the agent is compensated based on one of two conditions:
- The Seller’s NET and the Sales Price – This is when a seller agrees to give the agent the listing to sell their home for an agreed price ($X) with the agent’s compensation being whatever they can sell it for over $X. If tghe seller were to agree to a $250,000 NET price and the agent sells it for $300,000, the agent would make $50,000 leaving a big question mark as to how the seller arrived at the $250,000 price tag.
- The Difference Between the Purchase Price and the Flip Price – This is where an agent or licensed entity buys the home at $250,000 and flips it for a profit.
Note that a third condition may apply where the seller assigns sales rights to the agent to sell their home. In this case the agent may market the home on behalf of themseleves with the conditional affidavit or quit claim rights allowing them to represent themsleves as the seller, with the title going from the titled owner to the new buyer skipping over the agent middle man. This practice is very commonly learned from the many “No Money Down” programs that have been circulating on the web. However, as a licensed agent this method of flipping can open a can of worms.
Timing Is Everything
Depending on the timing of your sale, many factors can affect your the NET of your home sale. Consider the state of the economy and inflation, interest rates, job market, consumer confidence, local & regional dynamics, crime rate, infrastructure, and several other factors may come into play. By having a licensed agent review your property and current market conditions you can be assured that you have the data needed to make an informed decision on how to best sell your home.
Depending on your “Why”, the value of an instant cash buyer offer will be affected by timing. And while the instant cash offer may be acceptable to you, chances are pretty good that putting your home on the open market will NET you more money and provide more peace of mind.