Should You Sell to a Cash Home Buyer?
September 11, 2019
Should you sell your house to a cash buyer? Why would you sell fast for cash when you can list with an agent for a higher price? This is of course a valid question! I always strive to be completely transparent with all of my clients regarding our processes and all options that may be available.
Basically, a cash sale to an investor provides the advantages of speed, simplicity, and flexibility at the possible reduction of maximum sale price. A ‘traditional’ agent listing will likely provide top gross sale price, at the expense of speed, simplicity, flexibility, and fees. I say gross sale price, because when factoring in all costs it is possible for a traditional sale to actually net a lower total net profit. Likewise, some traditional sales do go smoothly and quickly with no complications as well.
There are a lot of moving parts in a traditional agent sale. I don’t mean this as a disparagement; we are licensed as agents as well, and frequently help our clients list and market their homes to buyers. Multiple parties are involved including inspectors, lenders, agents, brokers, title reps, transaction coordinators and escrow officers. There are also typically contingencies for inspections, loans, title, and disclosures. All of these additional pieces are in place to protect buyers and sellers alike.
Because the buyer in a traditional sale is most likely not an expert on the home buying process, it’s important to have a team of professionals evaluate the condition of the property, approve and underwrite a loan, and guide both parties through the contracts and negotiations. All of these professionals need to be paid for their work, and there are additional costs and time requirements for all of these tasks.
Because the current owner is selling to a traditional buyer, they are hoping to get full market value or ‘retail’ price for their property. The trade-off for this is having to navigate and pay for agent commissions and other associated closing costs, as well as typically a minimum 30-45 days to locate a buyer and close escrow. Many homeowners don’t realize that the seller is normally expected to pay the sale commissions for their agent as well as the buyer’s agent. Buyers may also cancel and have to be replaced if their loans are not approved, or issues are found on the inspection reports, or for many other reasons. Combine this with the very real possibility of it taking longer to find a buyer in the first place, and you see why some home sit on the market for a year or longer without selling.
A good agent will price and market the home correctly to get the highest and best offer as soon as possible, but nothing is guaranteed. If a qualified and motivated buyer is found, however, and the home is updated and well-maintained, going through all of this should hopefully get a top purchase price for the home. It is worth considering, however, that combined commissions and closing costs on a $500,000 home typically run upwards of $40,000.
Should you sell your house to a cash buyer, you are selling to an experienced expert with cash on-hand. Because of this, most third parties and contingencies are removed. The trade-off for this of course is that an investor is not going to live in the home and needs to renovate and resell for a profit. For this reason, an investor needs to buy at a discount to be able to make money. Basically the seller trades a part of the potential value of the home in order to have a fast, easy, flexible and convenient sale. Typically an investor will also cover all closing costs themselves to streamline the deal. In addition, an experienced investor will complete most if not all of their due diligence up front and can remove almost all contingencies immediately.
With a reputable and experienced investor, once you are in contract it is very unlikely that the deal will fall apart. They will be fully prepared to complete any needed repairs and updates themselves, and will factor these costs in to their offer price. Investors actually prefer homes in poor condition or in serious need of updates as there is a greater potential to increase the value of these properties.
When making a choice between the two options, a traditional sale often seems like the easy choice if you are just comparing the expected sale prices. When you look closer, however, a cash sale to an investor may become more appealing.
Figure a traditional sale at $500,000 like the example earlier. Once you factor in closing costs, this is actually a net sale price of around $455,000. There will also likely be at least 30-60 days of showings involved, and if the home is in need of repairs that come up during inspection, the buyer may require those to be completed before closing. A roof replacement may run $10,000 or more and plumbing or electrical problems can be very expensive as well. Once all is said and done with completed repairs and closing costs, it is not at all unrealistic to net less than $440,000 on a $500,000 home sale.
Using the same example but with a cash investor-buyer, the initial offer will be lower as they will see that the roof is old and needing replacement, and maybe the home needs to be painted and the flooring replaced. These repairs will be calculated and some room will be made for a profit margin, so their offer may come in at $400,000. If accepted, however, the whole process can be completed in a week or less with cash in the seller’s hand. For some sellers, that $40,000 cost is well worth it to save the headaches and uncertainty of a traditional sale. This can be even more advantageous if there is a pending foreclosure making a fast close necessary, or it is an inherited property or rental that the owner just wants to quickly cash out on.
Should you sell your house to a cash buyer? As you can see, there are many factors to consider when determining the best option for you and your family. As CalHomeCo combines a full service brokerage with an investment and construction company, we specialize in providing free consultations and creative solutions. Book a completely free, no-obligation consultation with us today to discuss your goals and options, and whatever the end result may be we are happy to help!