Since 2012, the real estate market in the Dallas/Fort Worth metro has been red hot. Along with the strong market and popularity of shows like “Fixer Upper” and “Flip or Flop” there has been a dramatic increase of real estate “investors” into the market. The dramatic rise in housing prices has allowed amateur flippers to make the numbers work, even as rookies. The DFW housing market offers enough supply that not just he has seen everyone from a guy working out of his garage looking to buy houses as-is to hedge funds and big realty companies offering “cash” offers.
How Can I Choose The Right Investor The First Time?
If you live in the DFW metro area, you’ve probably received dozens of postcards and maybe even occasional cold calls from local investors looking to buy your house fast with an all-cash offer. You may have even met with different investors to gauge the value of your home and potential for an all-cash buyout. But what now? How do you know if the offer is legitimate? How do you know if they are going to follow through with the contract? How do I know if there are any hidden fees or commissions? We can help answer all your questions below, but first, let’s lay out the different types of “house buyers”.
The 3 Types of “House Buyers”
There are essentially 3 types of house buyers: the small team or one-man-show, the mid-sized local company, and the bigger, well-backed national companies. Each type of investor or buyer comes with their own set of pros and cons, so let us help break down your options to make the decision a little easier.
1. The Small Team/One-Man-Show
The smaller investors or one-man-shows typically only buy a few properties a year. Most of the time, these investors are newer to the industry and just getting started, so they can’t purchase homes at the rate of larger, more established investment companies can. They can often time offer very good customer service and a high level of touch throughout the transaction since your deal is the only one on their plate. With that level of customer service also comes some uncertainty. Often times, since they are new and don’t have a long track record their financing, can be uncertain and poses the potential of not being able to actually close on deals.
2. Mid-Sized Local Companies
The second type of investor is a mid-sized local company that has years of experience in the market. They can typically offer very good customer service, as well as the security of making sure the house actually closes on the closing date. If the company has been around awhile they have most likely built relationships with many lenders and therefore have multiple lines of credit to be able to close your house and on time.
3. Larger National Investment Firms
On the opposite end of the spectrum are the big national companies that have recently gotten into the “we buy houses” business. Often times sellers go with these companies because they want a name brand they feel they can trust. Many of these companies make offers that seem to be full market value for the property only to turn around and do inspections and add high commissions that drastically reduce the “offer” they originally made. There are many stories of homeowners that have gone this route and never really knew what they were walking away with until they got to the closing table to sign paperwork. To some sellers, it feels a little like a bait and switch.
4 Things Every Investor Offer Should Have
1. A TREC Contract
This is the contract that every realtor in the state of Texas uses. Often times investors will use their own 2 or 3-page contracts they had drawn up. If an investor is using a contract other than a TREC (Texas Real Estate Commission) contract, it is not for your protection — it’s for theirs. These contracts are usually written in a way that heavily favors the investor and does not properly protect the seller in the transaction.
2. Proper Amount of Earnest Money
The earnest money is what a seller would walk away with if the buyer does not perform on the contract. Many investors will try to only put $100 or sometimes even less down as earnest money. The minimum amount of earnest money that is typically considered reasonable is $1,000 and sometimes more depending on the purchase price. The earnest money should be deposited at the title company within 3 days of both parties signing the contract.
3. Proof of Recent Projects
It is a good idea to have anyone offering to buy your house show you proof of recent purchases they have made. It is even recommended you ask for references of clients they have bought from in the recent past.
4. Proof of Funds
If an investor is offering to buy your house for cash, make sure they can actually provide proof of those funds. “Cash” funds can be actual cash in a checking account or proof of a line of credit from a bank. These two cash funds are the most secure and guaranty of actually being available when it is time for an investor to close on your house. Hard money loans and commercial loans from banks are good but still require final approval from the lender. At the end of the day, make sure you know what type of “cash” financing your investor is using and verify they actually have the funds to close.