Selling Your Home – Agent vs. House Buyer
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You've likely seen billboards, signs, or other advertisements from house buying companies touting lines like “We Buy Houses for Cash.”
What does a House Buyer do?
A House Buyer is a common term used to describe a real estate investor. They're also commonly referred to as Cash Buyers or Professional Buyers. A House Buyer is someone who buys houses to:
- Fix and hold onto them as a rental
- Flip them – which amounts to fixing them up and selling them to another end buyer
- Or wholesale them – where they sell their interest in a contract for a home – also referred to as assigning – to another investor or 3rd party for a fee paid by said investor or third party separate from the sales price
Often times House Buyers are purchasing homes that are in some state of disrepair – such as flooded homes – or from sellers that are in some sort of distress – such as a seller who is about to have their home foreclosed on.
Since House Buyers are investors, they often purchase the home at below market value. In exchange for taking on the debt, effort, time, and risk, the investor has to make a profit. The price of the house and its needed repairs minus what the house will be worth once repaired is their gross profit. It's important to understand it's not their net profit as they investor will need to pay interest, closing fees upon the sale of the rehabbed home, and can incur other various costs and unexpected expenses.
What are some reasons someone may choose to sell a home to a professional House Buyer?
There are multiple reasons a homeowner may choose to sell to a Home Buyer vs. listing their home the traditional way. The below chart shows a comparison between the process and costs involved with selling your home via a traditional agent vs. selling to AMI House Buyers. (If you're looking into selling to an iBuyer, you'll find out what you need to look for when it comes to their “instant offers” and the potential pitfalls here.
| Agent | AMI House Buyers | |
|---|---|---|
| Commissions & Fees | Yes - 6% of the sales price is the average commission rate paid by Texas sellers | None |
| Closing Costs | Yes - Typically 2% of the sales price on average is paid by Texas sellers | None - We pay closing costs |
| Option Period | Yes - Usually 7-14 +/- days and the seller can back out for any reason | None - We're buying as-is |
| Inspection | Yes - The seller may back out or want to renegotiate the price based on the inspection report | None - We're buying as-is |
| Financing Contingency | Almost always | None - We pay cash |
| Sale of Another Home Contingency | Sometimes | None - Our offer has no contingencies |
| Appraisal | Yes - if it doesn't appraise, buyer may back out | None |
| Photograph Prep | Yes - You need good photos for the MLS | None - We don't need photos |
| Medan Days on Market | 35 days in the Houston area as of July 2022 | Immediate offer |
| Number of Showings | 10-25 times on average according to a recent study | One - us |
| Closing Date | Typically 30-60 +/- days after accepting an offer | Whatever date you choose and in as little as 10 days! |
| Who Pays Repairs | Negotiable | No repairs needed |
| Heavily Damaged Homes | Typically not able to get traditional financing without first being repaired | No repairs needed |
| Set Sales Price | Most buyers will try to negotiate a price lower than the list price and then attempt to renegotiate again after inspection | Yes - We agree on a price and are buying as-is, so no additional attempts to haggle the price based on inspections, etc. |
| Stress | One poll found that selling a house was more stressful than bankruptcy or divorce | Simple & low stress |
Obviously, there are a lot of benefits that come with selling your home to a Cash Buyer. In addition to the reasons shown in the side by side analysis above, House Buyers can also deal with special situations that make it tough or not possible to sell a home on the traditional market, such as issues with property taxes or a house that is in such disrepair that a traditional mortgage lender won't lend on it.
But of course there are some drawbacks – or else everyone would use them. House Buyers have to be able to make a profit on the purchase, and therefore have to purchase the home at a discount.
The question a seller needs to ask themselves is if the benefits of selling their home to a House Buyer outweigh selling the home at a discount based on their personal situation.
Scenario breakdown
A common scenario where this might occur is with selling an inherited home. Let's say three siblings – Jack, John and Jane – all inherit their mother's home. Each sibling lives in a different state, none of them have the time, money, or desire to go to where the house is to find and secure an agent and get it ready and do needed repairs and improvements to put on the market. Nor do they want to have to turn on all the utilities or potentially wait months for the home to sell and deal with buyer negotiations.
Let's take a look at this example scenario in more detail. The siblings' mother's would be worth $160,000 if it were brought completely to the top of the market (making it comparable to other homes obtaining top dollar in that market). The repairs to get it there would cost $20,000 and the siblings don't want to put any money into the house. So, we'll say that the current market value of the home is $140,000.
| Market Value = $140,000 | Traditional Sale | House Buyer |
|---|---|---|
| Negotiated Price | $130,000 | $102,000 |
| Agent Commissions | $7,800 | None |
| Closing Costs | $2,600 | Paid by House Buyer |
| Time until home was under contract | 120 days | Immediately |
| Time from contract execution til closing | 45 days | 10 days |
| Mortgage, taxes, insurance, and utilities during the time from under contract to closing | $5,800 | $480 |
| Inspection | Issues arise and buyer now wants another $5,000 off the house, bringing the price down to $125,000 | None |
| Amount to Seller* | $108,800 | $101,520 |
* Amount to seller prior to mortgage payoff.
In this scenario, the siblings would have made an additional $7,280 on the sale of the home by using a real estate agent. But Jack, John, and Jane decide that selling to a Cash Buyer will save them headache, stress, time, travel expenses and put cash in their pockets immediately – and that the advantages to them are worth taking $7,280 less than they could have made selling the home via traditional means.
Whether to work with an agent or a House Buyer doesn't have a one size fits all answer. You'll need to look at your specific situation and make the decision that works best for it.