There is no way that price will work for me! Are you trying to steal my Household Shifting Pune! That’s a statement real estate investors hear a lot. This statement obviously comes after an investor offered the seller a ridiculously low ball price. But was it really a low ball offer? And why do those guys need the price to be so low? Are they trying to steal your house from you? Well if we look at the facts there is some logic behind their offer. Here are 4 of the biggest reasons why you are getting that offer:
I hate to say this, but the real estate bubble had a huge effect on everyone. Someone might’ve bought a home in 2005 and the value doubled within a few months. This was not a healthy increase in value, which is what led to the bubble bursting. Nowadays property values are going back up but at a much slower rate and banks aren’t lending the way they used to so less buyers are in the market. The value your house had 5 or 6 years ago will be seen again but not for awhile.
Because so many people were given loans that they could not afford, it created a huge surge in foreclosures that the banks now have to get rid of. Most times the banks will take whatever offer they can get which usually isn’t close to the value of the home. Because of these foreclosures, the values of the neighboring homes also go down when you look at comparable sales. An appraiser will take a look at the surrounding home sales and make a comparison to your house. If the foreclosures are anything like your house, they’ll most likely put the same value on yours.
When people think of the value of their house, they usually think of what’s selling down the street. That might work but the truth of the matter is that the house down the street sold because it was fixed up and remodeled otherwise it would’ve been still on the market. People are spoiled in today’s market. They want stainless steel appliances, granite countertops, hardwood floors, you name it. So if your house has those things and has been remodeled, then absolutely your house will sell for the same price. The problem is homes are selling for a discount that haven’t been remodeled yet. You have to factor in those costs dealing with contractors and handyman all the while deciding exactly which appliances and tiles to use to make the house sell for top of the market value. A lot of homeowners don’t factor in these costs and are shocked when they get the low offer. So when an investor offers you a lower amount than what you were expecting, he/she is going off the price of homes that are in “as-is” condition with no fix ups being done yet. There are also a ton of expenses that need to be factored in not to mention being able to make a living off of fixing up houses
Most people think that investors are just there to steal your house and take as much money away from you as possible. While some might have that mindset, most of the people you meet are just trying to make a living. They’ve got families to feed and colleges to pay for. This might be their only job so they need to factor in some type of revenue that they’ll make from the sale of the property once it’s fixed up. There is a lot of risk involved and I’m sure you can relate. If you were to put 100,000 dollars of your own money down on a house, you would want to make sure that you would get your money back and be able to make enough to supply you through the next few months if you can’t find another house. On top of that you’ve got all the repairs to pay for as well as the marketing for new buyers once it’s complete. The problem is usually it’s not the investor’s money that they are using. They are getting what’s called a Hard Money Loan which is a short-term loan with a ridiculously high interest rate. They get the money to buy the house and fix it up but they have to pay cash from their own pockets every month to cover the loan. What happens if the house doesn’t sell? They’re on the hook for that loan and they’ll need to pay it back. I don’t know about you, but I certainly wouldn’t want a home mortgage with a 15% interest rate would you?
Another thing to consider is the appraised value. A lot of times appraisers go to a house and value the house based on foreclosure prices in the area and not necessarily prices of remodeled homes. This can significantly reduce the value. On top of that, if it’s an appraisal for an FHA buyer, the appraisal stays with the house for 6 months and the investor is stuck trying to get that price which might be at break even for him/her.
Putting it all together let’s come up with an example. Let’s say I buy your house for 100,000 cash. I am going to put in 30,000 in repairs for redoing the landscaping, putting in a new kitchen, painting walls, adding another bathroom, and all the other things to make it look like a brand new home. I think I can sell it for $150,000 and make a nice $20,000 profit. Sounds great right? Well when I resell it I have to pay out $4,500 to my agent (3%), $4,500 to the buyer’s agent (3%), so now I’m down to only $11,000 in profit. But wait. I have to pay another 3% in closing costs for the buyer as an incentive. Take another $4,500 off of the profits. So I only have $6,500 in revenue from the sale. What happens if the house needed other repairs that I didn’t factor in or there was mold in the basement that we couldn’t find until we removed some things? Another thing is what if the buyer needs an FHA appraisal and the appraiser values the house at $140,000 instead of $150,000. Well with all of my costs, I’ve lost money on this. I would’ve been better off not buying the house in the first place. And if this is my livelihood, where am I going to come up with the money to feed my family or pay for anything?
So to sum up, investors aren’t making a killing off your house. They are trying to factor in all the costs as well as create some type of cushion in case anything goes wrong. Ultimately it’s a business and they need to be able to make some money off of fixing up houses. Some investors make a great deal of money, but most are in the trenches trying to find the next house to remodel to support their families.