Corporations Are Buying Houses And They Don't Want You To Know This
Updated: Aug 1, 2022
A quick sale to a cash buyer is what many sellers dream of when selling their home. But seller beware! Not all cash buyers are created equal.
The last several years has seen a rapid growth in corporate buyers of single family homes. These buyers come in several different varieties as you’ll see below.
And while their business operations may look slightly different, their general goal is the same: Buy your property for the least amount possible in order to maximize their profits.
Now, ‘profit’ isn’t a dirty word in our book, but as a homeowner who is selling what is often your biggest asset, we think you need to look out for your own best interest.
In this post we want to educate you regarding:
Who are the corporate buyers
What to expect when working with one
Pros and Cons of working with them
And what you should do if they contact you with an offer
>> Here is a video we made entitled "Corporations Are Buying Houses And They Don't Want You To Know This":
Corporate Buyer Types
As mentioned above, there are a variety of corporate buyers who are actively buying single family homes today.
An iBuyer, or “instant buyer”, uses technology and algorithms to value properties, make offers on properties, and buy and sell them quickly and efficiently.
Common names in this space include Offerpad, Opendoor, Redfin, and our brokerage Keller Williams even has an instant buyer program known as Keller Offers.
These companies may find prospects via a variety of advertisements, but just as often the homeowner will reach out to them on their website, enter in some information about their property on a digital form, and then receive an offer within a matter of a few minutes or a couple of hours.
Property Wholesalers are a unique type of “buyer”. We put “buyer” in quotes here, because wholesalers rarely actually buy the houses they target.
Generally a wholesaler will negotiate with the homeowner and agree upon a “purchase price”. They will then take the purchase contract and sell it to another buyer/investor for a fee.
In most states the wholesaler never actually closes on the purchase. They let the second buyer close and they simply collect their fee at closing.
Large Corporations, many which are Wall Street based, have gotten in on the homebuying action in recent years.
With interest rates at historically all time lows, these institutions have seized on their size and large cash positions to buy up single family homes that they can turn into long-term cash flow by turning the properties into rentals.
These companies consist of private real estate investment funds, publicly traded REITs, and investor platforms like Fundrise, Crowdstreet, and Arrived Homes.
Even though large corporations are purchasing a growing number of single family homes, small mom-and-pop LLCs still make up the largest percentage of investor buyers in most markets nationwide.
These LLCs can consist of one-person companies or small organizations that own less than 100 properties or only buy a handful of properties each year.
Whether large or small, these organizations seek to maximize profits for them and their investors buy buying properties at a discount and either renting them out or reselling them as quickly as possible for financial gain.
Lance Lambert with Fortune.com recently wrote an excellent in depth article on these corporate home buyers and the impact they are having on real estate markets nationwide. Check it out here: https://fortune.com/2022/06/26/housing-market-and-home-price-boom-made-bigger-by-investors-and-wall-street/
What To Expect
There are generally two paths to working with a corporate buyer. More often than not, they will reach out to you via mailers, email, phone calls, text messages, or even by knocking on your door.
In other instances a homeowner may have seen an advertisement with a “we buy houses” or “cash for your home” style messaging and they proceed to contact the company.
No matter how you connect with these buyers, they share a common playbook with some variation.
Here’s what you will typically find when working with a corporate buyer:
Initial Contact - During this contact they will gather information about you and your property and build rapport.
Initial Offer - After a period of time (within hours if working with an iBuyer up to possibly a couple of days if working with a smaller firm) the company will make an offer on your home.
Inspection Period - Most offers will include an inspection contingency allowing the buyer to send a home inspector to the property to evaluate its condition.
New Offer - In nearly every case, the buyer will make a new offer based on what was found during the inspection. Any defects they found are often used to renegotiate the original offer to a lower price.
Closing or Cancellation - If the seller agrees to the new terms then the deal will move to closing where the property is legally transferred to the new buyer. If the seller doesn’t agree to the new terms, often the buyer can withdraw with little to no penalty.
Pros and Cons
Working with a corporate buyer has both pros and cons. As Realtors, we typically think most sellers would benefit from exposing their property to the open market in order to maximize profit potential, but we do recognize there are situations when pursuing a corporate buyer can make sense to consider.
Quick - Many corporations can buy with cash or lines of credit and they have processes in place to make the selling process go very quickly in most cases.
Convenient - Instead of putting your house on the market and having dozens of potential buyers tour the home, you can narrow it down to just one or two corporate buyers who will often negotiate up front without ever seeing the home and only send someone to visit the property in-person at the time of inspection. Also, because the corporate buyer won’t be living in your home they sometimes give flexibility on taking possession of the home that may benefit the seller.
These are the two main benefits you’ll see corporate buyers use when attempting to attract homeowners. If you are someone who needs a quick, convenient sale and you are less concerned about the money you make on the sale, then considering a corporate buyer for your home may make sense.
(Note: we can still help you with this!)
Less Money - An investigation by MarketWatch, a financial media organization, found that on average homeowners who sold their houses to an iBuyer received “11% less than owners who choose to sell their homes on the open market”. Even in instances when the corporate buyer’s initial offer was near fair market value, it is often renegotiated and reduced after inspections take place.
Here is a link to their full article: https://www.marketwatch.com/story/selling-your-home-to-an-ibuyer-could-cost-you-thousands-heres-why-2019-06-11
Higher Fees - Other studies have found that many corporate buyers charge fees higher than the national average listing fee of most Realtors. One study by Collateral Analytics showed that iBuyers charge between 6%-9.5% in “convenience fees” in addition to other charges that are typically associated with a real estate transaction.
Their Contracts Required - Many corporate buyers use their own purchase contracts to spell out the terms of the transaction. Why does this matter? The contract may contain clauses that give advantages to the buyer. Such clauses may give them opportunities to escape the deal if certain boxes aren’t checked or if the buyer simply decides they are no longer interested in the property. Most contracts used by licensed Realtors are created by a state’s real estate board and are designed so as to not give an unfair advantage to the buyer or seller.
So What Should You Do?
So what should you do if you receive an offer from an iBuyer or other corporate buyer?
We say, “Great”. Be thankful that you have an offer. But we would encourage you to use it as a starting point, or a safety net if you will.
Often, not always, but often the amount of money you get from a corporate buyer after all fees and renegotiations are done will be less than what you would get if you sold it on the open market.
We recommend that if you get an offer from one of these institutions that you get a second opinion from a Realtor regarding.
At the 812 Living Group, we provide our seller clients with an Estimated Net Sheet that spells out what they are likely to get when selling their home with detailed estimates of the selling costs that will likely occur along the way. This offers you a good estimate of what will go in your pocket when all is said and done.
While the corporate buyers often use an automated valuation software to determine their offer price, we actually visit your home to see the condition of your home, note any valuable updates you’ve made to the property, and take into account local market conditions that may impact the value of your home.
Best of all the second opinion is free and can give you more options as you decide which opportunity to take.
And even if you decide to sell to a corporate buyer, we can often represent you in the transaction at no additional cost to you.
The corporate buyer is a growing movement that is not likely to go away anytime soon. And as we stated above there are definitely times when it makes sense for a homeowner to sell to one of these buyers. But we encourage you to not accept that offer without discussing other options that may be better for you.
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