If you’re selling your home and an investor walks in offering you all cash, you might think you’d died and gone to heaven. But before you sign that purchase agreement, think it through. Investors are not always the gifts they appear to be.
Most of the home buyers you’ll meet are individuals, couples or families looking for a place to live. They might be looking for their “forever” home or a place to raise their young kids, and they probably consider their home an investment, but they aren’t what we would call investors.
Investors are people or companies that want to purchase your home in order to make money. So negotiations will go differently (and hopefully easier) than they would if the buyer was going to live on your property. But sometimes the investor(s)’ intention should be reason enough to give you pause.
The Pros of Selling Your Home to an Investor
As-is purchase. The investor isn’t planning on living in your home so he or she (or the company), doesn’t care if your kitchen has been updated with a vibrant backsplash or if your toilets are new. In fact, many investors look for homes that are old or outdated so they can fix them up and flip them.
Little risk you won’t close for lack of funds. Most investors pay for properties in cash so you won’t have the uncertainty that comes with a buyer applying for a mortgage. Even when a buyer has been preapproved for a loan, the lender can decide the buyer’s credit-worthiness has changed and refuse to issue the funds needed to buy your home.
Before you sign a purchase agreement you should ask the investor for proof of funds. This can come in the form of bank or money market account statements that show cash or liquid assets in an amount that exceeds the purchase price of your home.
Quicker closing. Since most investors purchase with all cash, you can sell your property as soon as your two parties agree on the conditions of sale. The average time it takes sellers to close with an all-cash investor is two weeks. If you’re selling to a buyer who needs a mortgage, it’ll take you 60 days’ minimum.
Potential for flexible purchase arrangements. If your home is underwater or you’d like to get out of the real estate game altogether but don’t want to move, selling your home to an investor could be the way to go. Some investors will agree to take over your mortgage and some will even rent the house back to you in what’s called a sale-leaseback transaction.
The Cons of Selling Your Home to an Investor
You don’t always know who’s buying your property. Investors aren’t legally required to tell you who or what is actually purchasing your home. So it could be a landlord known for shady renting practices or a developer who wants to tear down your house and turn it into apartments.
You might not sell your home at true market value. Most investors are looking to buy homes at below-market value. Or at least at a bargain. And because they don’t have to tell you what they’ve planned for your home—like tearing it down to build lucrative apartments— you might not know its true market value.
If an investor owns a parcel of land that’s adjacent to your home, and the investor wants to build a large apartment or commercial project, this investor would theoretically be willing to pay more for your home than a family looking for a place to live. To negotiate successfully you need a real estate agent familiar with selling to investors.
The cash buyer is potentially a scam. A common scenario is someone posing as a foreign or out-of-town buyer (or a real estate agent representing one) will contact the seller and say the investor wants to close right away. The investor never wants to see the house; they just want to purchase it. The investor will then give a false cashier’s check or have an unsophisticated or unrepresented seller sign a purchase agreement for unfavorable terms and before the seller knows it, he or she has been swindled out of money. To prevent this from happening, hire a real estate agent familiar with selling to investors.
If the cash buyer is a legitimate foreign investor, it could take much longer to close than with a domestic buyer who needs a mortgage. Investors who aren’t US citizens could suffer negative tax consequences in their home countries by purchasing your home. So the sale could be delayed for months while the investor works out the logistics of closing.
When a buyer offers to purchase your home all-cash and without asking for any of the punch list items a normal buyer would, it could seem too good to be true. And it might be. Before you sign any purchase agreements, you should do your research on the potential buyers and ask a real estate agent for guidance. You don’t want to lose thousands of dollars just because you were too trusting or unprepared.