Are Those "We Buy Homes" People Legit?
You are driving through town, and there is another one. This is probably the fourth one you have seen this week. You think to yourself, "Who in the world are these 'We Buy Homes' people? Are they some kind of scam artists?"
If you are like most people, you have wondered at some point who these people are, how they make money, and if they are a legitimate service to others. Well, guess what, we are here to share more and hopefully answer any questions you have about the process of working with a "We Buy Homes" investor.
Who Are They?
Generally, the people behind the signs you see are no different than you are anyone else you know. They have friends, families and usually, they live in your city! Maybe the only real difference between them and you is they have made a decision to invest in real estate. Here at Olive Tree, my wife and I are Fort Wayne natives who want to make Fort Wayne a great city to live. We believe we can make a difference by improving the real estate in our area. We want to provide great affordable homes for people to buy and rent. But otherwise, we love TinCaps games, Shoaff Park, Hoppy Gnome, and Powers Hamburgers (well, Gabe does). Pretty normal people if you ask us.
How Do They Get Started?
As we mentioned above, real estate investors (or professional home buyers as some like to be called) are as diverse as anyone else, and that includes their journeys into Real Estate. Some people start by inheriting a house that they decide they want to rent. Others may have bought a new house and kept their old ones. Some heard about it being a great way to diversify their portfolio and began saving money to buy their first investment property.
Some start with single-family homes (or SFHs as we call them in the industry), while others dive into Multi-Family Homes (MFHs, but you probably already guessed that).
Our journey began when Gabe picked a book on real estate investing and started learning about how to use homes as part of a retirement plan. After spending over a year reading, attending meet-ups and listening to podcasts, he and Olivia decided to start Olive Tree Properties. We bought our first home in 2019 and successfully flipped the property. Now we are looking to expand our portfolio and bring more great homes to Fort Wayne.
How Can They Buy Homes So Fast?
A little skeptical on the "We can close in a week!" thing? Totally understandable! If you have bought or sold a home in the past you know how big of a headache it can be. But in reality, there is very little involved in buying a property if you don't include a bank. Most of the time, all the hoops you have to jump through are because the banks require it to protect their investment.
This could help explain it:
When a bank gives a loan for a property they make the buyer sign a promissory note stating "We promise to pay this money back." We are sure at some point in history banks accepted this as is. Well, until the banks got burned and people broke their promise to pay them back. So banks started saying, "Thank you for promising, but can you sign this thing called a 'mortgage' stating we can have your home if you don't?"
Because banks are using the home as collateral (a fancy way to describe something of value that can be sold to cover the loan), they have a vested interest in making sure that home is actually worth more than the loan amount. They don't want to loan $200,000 on a $50,000 house and find out they can't get their money back.
This is why banks need appraisals, repairs, comparables, etc. The sale takes a long time because banks are trying to answer two questions: "Can the person we are giving this loan to pay us back?" and "If they can't pay us back, will this home sell for enough to pay us back?"
Hopefully, this paints a clearer picture of why real estate investors can close so quickly. Using cash, they can bypass all of the bank's evaluation. The investor can speak with you, look at the property, and decide in under 24 hours if they want to make an offer. If you agree on an offer, the investor calls the title company to prepare the deed and title. The title company can usually have the title insured and paperwork ready in as little as 7 days.
So long story short, Investors can close quickly because they are the decision-makers, not the banks.
Where Do They Get The Cash?
"Okay, I get the speed thing, but where does these 'normal people' come up with $70,000 cash?" you ask.
Great question. And our response? "It depends."
We are an expert on every investor's situation, but we have been around long enough to have a general feel for how people get their funds. Here are just a few ways:
They have actually saved up $70,000. Weird, but it can happen.
They have proven to be successful investors and have raised money from friends, family, and acquaintances. They share part of their returns with these people in exchange for the use of their money.
They have relationships with lenders that trust them as an investor and loan them money without the need for evaluating the house.
Sometimes investors still get loans on properties down the road (known as leveraging a property), but when an investor makes a cash offer to you it means that you don't have to worry about a "financing contingency."
A "financing contingency" is a little loophole in a buyer's offer that says, "If I can't get the bank to approve this, I get to back out of this sale."
An investor's cash offer says "I have the funds available to close this transaction." It's just how those funds become available that can vary.
How do they make money?
Frankly, professional home buyers make money by buying homes that are under market value or by finding homes where the market value can be increased through renovations, updates, and remodels. Then the investor will decide whether to make money over a long time renting and holding the property or try to make the money now buy flipping and selling the updated property.
In exchange for getting the home under market value, they provide convenience, speed, and a transaction that usually requires no money out of pocket for the seller.
You could literally sell your house in a week and walk away with the garage and attic full and the investor won't mind. You don't need to fix the leaky faucet, repair the roof, update the furnace, or paint the kitchen. The investor is going to take care of all clean-outs, repairs, and updates.
There may be other times when investors pay a little closer to market value for a property when they know they can do remodels to increase the After Repair Value (ARV). Some investors add additional rooms, bathrooms, or even add another story (Pop-Top Remodel). They can buy your home, invest more money into the renovation, and then they hopefully make it worth more than the money they put in. But hey, you win some, you lose some.
Once they own the home, investors usually decide whether to flip it or hold it long term for a rental hoping the value of the home will increase over time, just like investments that you make. If the investor decides to flip, they are betting that after spending money for improvements, paying for holding costs, and after all the sale fees that they can still make a little money.
Where can I find one?
Well you already have! Olive Tree Properties buys homes for cash and our passion is to provide great houses for renters and buyers who call Fort Wayne, "Home."
But it is important that you find a buyer you connect with and can trust, so if we aren't your cup of tea, jot down the phone number on the next sign you see and give them a call! Most likely, they are a person just like you, the only difference is they have decided to make a living in real estate.