By now, most homeowners have heard of those companies to which you can sell house for cash. However, there are many misconceptions about working with direct buyers that are more commonly heard than truths.
There are many billboards with commercials such as: “We buy houses for cash,” or “We buy ugly houses.” While you may chuckle on them, these are real companies that have successfully existed for decades – and no, they are not frauds. Direct buyers, also known as real estate investors, really exist, and they do just what they advertise – they buy houses and pay in cash.
Most homesellers think that it isn’t possible to sell house for cash, not without some catch. Truth is, this is indeed possible, and many people choose to work with direct buyers instead of listing their property with an agent. But how does this work, and how can they afford to give you cash for your house? We’ll dive right in.
How Do These Companies Work?
Direct buyers will give you cash for your property. They will typically aim for rundown properties, which they can repair and upgrade and then flip or rent. Of course, as direct buyers aim to profit in the end, this means they’ll offer you less than the house is worth on the market. However, they’ll purchase your property as-is. In other words, while you’ll earn less when you sell house for cash, you’ll profit the same or even more than when you work with real estate agents, because you won’t have any expenses.
And if you worry about those fraudsters you’ve heard about – we can assure you most direct buyer companies, including Sparks Property Investors LLC, are not scams. People get worried when they don’t understand how something works, and how is it possible that someone will actually pay them in cash for their house. Another cause of concerns is the offered price, which sometimes seems too small. Truth is, whether you’re profit or not depends on your case. If your house is pitch-perfect and there’s no need to invest a cent more into repairs, cleaning, or upgrades, then you’d have a good chances of selling it the traditional way. However, if your house is in need of repairs, or if you have liens on it, then it would cost you way too much to improve its condition to make it sellable.
Keep in mind that, even if your house is in top-notch quality, there are still many expenses associated with a property sale. This includes legalities, home inspections, taxes, advertisement, etc. All of that is without counting in repair costs! Most of these expenses are non-existent when you sell house for cash. This is because direct buyers will pay anything they can pay, so the only thing you need to do is transfer ownership of your property and not worry about fees.
Why Would I Want To Sell House for Cash?
As we’ve already mentioned, not everyone will want to sell house for cash. This option is typically for people who want to sell their house fast, or who own a house that isn’t in good condition. If you have time to spare and you care about getting the best deal possible, then it’s worth it to risk by listing it on MLS.
However, not everyone have a luxury of waiting for their house to sell. These motivated sellers usually have a reason why they want to get rid of their property fast, such as foreclosure, rundown property, high taxes, unwanted inheritance, divorce, or similar. These properties come with high costs when you sell them – if you even manage to sell them via MLS. As direct buyers buy houses as-is, no condition is too bad for them to back off the sale – but, of course, the condition will influence the price.
How Much Can You Earn When You Sell House for Cash?
Direct buyers buy your house with the intent to rent or flip it. This is why many people think these companies are a scam, but you have to understand that everyone needs to profit from this sale. In the end, even real estate agents are working for commission, which is often higher than the end profit a direct buyer will have.
While there is no exact rule how much you’ll profit when you sell house for cash, this is a general formula:
ARV – Renovation Costs – Holding Costs – Selling Costs – Part of a Desired Profit = Offer
ARV, or After Repair Value, is the value of the house once it’s brought into a perfect condition. This is where it gets tricky for the direct buyer. There are no guarantees that the house will be worth as much, even after repairs. Valuing a property isn’t an easy step, and mistakes can cost the buyer greatly. Just to make everything easer, let’s say the ARV of your property is estimated at $150,000.
Renovation costs are costs of repairs and upgrades that are necessary for your house to be in order. This is determined in several ways, and more experienced direct buyers will know how much repairs cost just by looking at pictures of your house. Others might use a $$/square foot formula. If your house has 1,000 square foot, and the estimated repair price per foot is $20, then the renovation costs would be $20,000.
Holding costs are the same costs you would face if you were waiting on your house to sell. While this varies greatly, let’s say for a 5-month period they’ll be around $2,500.
Selling costs are usually around 2% of home value, if we don’t count in the closing costs. For a house worth $150,000, this is $3,000.
Desired profit varies, but most real estate investors will typically want to profit 10-15% of the ARV. Let’s round it to $10,000.
With all these numbers, our calculation will look like this: $150,000-$20,000-$2,500-$3000-$10,000 = $114,500. Of course, any liens you may have will also have to be deducted from the calculation, but you won’t even be able to sell your house with an agent if you have unpaid debts on your house.
While this may sound like too little, if you were to sell your house with an agent, you’ll face the same renovation, holding, and selling costs, as well as 6% commission ($9,000), and 2-5% closing costs (up to $7,500). This means that, if your house does sell at the listed prices, which rarely happens, you’ll profit only $108,000. And that is without counting in advertising fees, cleaning, staging, photographing, and similar costs! Not to mention all the unpredictable expenses that may occur when you sell your house the traditional way, such as inspections finding things wrong with the property. As you can see, with a house with a big number of needed repairs, it really pays off to sell with a direct buyer.
As you have seen from the calculation above, it does pay off to work with a cash buyer in many situations. While not everyone will profit when they sell house for cash, for people with a property in a condition that is less than perfect, this method is a life changer. People shouldn’t have prejudices toward things they’re not used to, or methods that aren’t for them. Direct buyers have existed for decades, and they are just as reliable as real estate agents.