If you’ve been in the Phoenix area longer than seven or eight minutes, you’ve seen and / or heard at least a half-dozen advertisements for people and companies looking to buy your home. Have you ever wondered how that all works behind the scenes? Why they’re all so insanely frantic to get you to call them (and only them)? Allow me to lift the veil.
Distressed houses have what we in the real estate business call “margin”. There is a difference between what the home is currently worth “as is” and what it could be worth if it were in perfect condition. That difference is the margin and it is the margin not the home that people really want to buy from you.
There’s a long list of things a company can do with a property but lets assume for the sake of this discussion that they want to flip it. Meaning they want to buy it, rehab it and sell it for a profit. If that’s the case then they need to purchase the property at a rate that allows them to invest time and money into it and then sell it for a price that exceeds their original investment.
Here’s the equation:
(Purchase price + Rehabilitation costs) < Retail Sales Price
Makes sense so far right? Absolutely. It begins to make much more sense when you factor in the fact that most of these organizations have the ability to rehabilitate a home at a discount. Meaning it costs them less money to bring the home to retail ready condition than it would cost you. They have wholesale purchase agreements with material suppliers, they get bulks discounts on materials as well as labor and they have systems in place that help expedite the process. That’s the theory anyway, this is where it all gets tricky but lets keep going.
The whole reason this transaction works is because the home, when in your possession, has less margin than it does when in their possession. Their business creates a scale of efficiency that allows them to broaden the margin and actually make money.
The question you might be asking yourself right now is: “Why should I care? Once they buy my house I’m out of it anyway.” This is shortsighted thinking. Let me explain why…
Your primary interest is getting the most money for your house, getting the highest purchase (sales) price. In order to get the most money for your house you need to find the company that can create the most margin. Think about it, a company that has an inefficient rehab model won’t be able to create as much margin (because rehab will cost them more) so they won’t be able to pay you as much for the house. In the same way, a company that isn’t effective at marketing and selling houses on a retail market isn’t positioned to get the maximum amount of money out of the house when the rehab is complete; because of this shortfall on their end, they’ll want to pay you less money.
These companies all have an equation – every single one of them – that they punch your house’s numbers into to see if they can make money. This equation is based on their historic averages. How much does it cost to change out carpets? How much to replace roof tiles? How much to fix drywall? How much do we typically sell the house for compared to market averages?
If you sell your house to a cash buyer that isn’t good at what they do you can bet that they’re not paying you as much as a cash buyer that has an efficient model. And investors are inherently risk averse, they try to reduce risk at every turn and every decision. The more an investor pays for your house, the more risk the burden, in short: “more capital outlay = higher risk.” So there is a tremendous amount of pressure for investors to “buy low” and the investors that have an inefficient model it’s compounded even more.
How can you find a cash buyer with an efficient model?
Ask!
You don’t need to know the answers to ask the right questions. You’ll be able to tell immediately who knows what they’re talking about and who is an amatuer or, worse, just not good at what they’re doing. Here are some great example questions you can start with:
- If you bought my house what would you do with it?
- What upgrades and updates would you make to my house? Please be specific.
- Where do you source your material?
- Do you have an in-house team or do you outsource your work?
- Do you have a Realtor in-house or do you outsource that too?
- When you sell a house how do you know how much you’re going to get for it?
A sophisticated cash buyer will have an immediate and intelligent answer to every one of these questions because they’ve been in the business long enough to know. And there’s not always one right answer – there could be a dozen. The point isn’t to box them in, its to reveal whether or not they know what they’re doing. If you find a cash buyer that can competently create margin it means that the money they’re in a position to offer you more money for your house.
And now, the part that you saw coming, the sales pitch:
We are the company that I’ve been describing when I talk about competent cash buyers. We’ve been in this business for ten years, we have an in-house staff of professionals and we have a huge network of resources that enable us to create much more margin than our competition. This margin translates into us being able to pay you more money for your house. The plot thickens…
Flipping a house isn’t always the most profitable thing to do with a property. Sometimes a “buy and hold” model will yield much higher returns in the long run. However, most cash buyers (and I mean 95%) aren’t equipped to handle this type of model. They don’t have the liquidity or the know-how. This is a huge problem for you because, in a world where you’re looking for the company who can create the most margin, the other guys have thrown away half of the play book.
Here’s where our sales pitch starts to make so much sense its scary. Contact us to get a free cash offer in less than 24 hours. Then contact three of our competitors (you pick, we’re impartial) and make sure you ask all three of them some of the questions I’ve outlined. You’ll be blown away at the difference and I promise there will be a clear winner.
