Before I start it is important that I make something clear: fix and flippers aren’t “bad” people. In no way are we attempting to paint them in a negative moral light. In most cases they’re not trying to take advantage of anyone. They are simply running an inefficient business that (in the long run) can’t compete with more efficient models.
Why you shouldn’t sell your house to a fix and flipper:
- Fix and flippers need to make more money on your house than real estate investors.
- Fix and flippers don’t have the financial wherewithal to absorb market driven risk.
- Fix and flippers, in most cases, aren’t as equipped to properly value your home.
- Fix and flippers aren’t in a position to maximize the potential profit on your home.
- Most Fix and flippers aren’t using their own money.
- Many fix and flippers don’t know construction!
Let’s look at each of these in turn:
Fix and flippers need to make more money on your house than real estate investors
A real estate investment company (like GWG Properties) measures returns in annual percentage yield. Our goal is to place funds in earning mechanisms that return the highest percentage yield with the lowest amount of risk over the long term. The profit we experience is meant to be realized over a long term period of time.
Fix and flippers are making a living by flipping homes. Instead of an investment tool meant to yield returns over the long term, they are purchasing your property in order to create a job for themselves. The intention is to yield a large, lump sum in a short period of time. You can already begin to see how different the two models can be.
A real estate investor can afford to pay you more money for your house because the expectation of short term gains isn’t anywhere near what a fix and flipper needs in order to make his or her business model work.
Margin, in this case, is the difference between what your home is worth and what you are paid for it. The fix and flipper needs far more margin in order to profit from buying your house because his expectation of short term gains is much, much higher. Make sure you keep “margin” in mind as you read, it will come up often!
Fix and flippers don’t have the financial wherewithal to absorb market driven risk
The average fix and flip can take anywhere from three to six months in order to execute from start to finish. In the world of real estate that is a long time! What happens to a fix and flipper if they buy a property in January and, by the time they’re done with renovations in April, the market has taken a dive and the house is actually worth less than they bought it for? In this scenario the fix and flipper is under water, can’t pay himself, can’t pay his employees and can’t afford to keep the house to see if the market turns around. They are up the proverbial creek without a monetary paddle.
Fix and flippers can’t afford to absorb what we call “market driven risk”. Because they’re banking on a big, short-term gain, any change in the market compromises their profit position. This means that they need to get your house for as little money as is absolutely possible in order to put themselves in the safest, most leverageable position. There model can’t sustain if they’re paying based upon true and fair valuations. As a rule they’re attempting to get your house for the smallest sum possible.
Real estate investors, on the other hand, are not only used to changing markets, we’re expecting them! We are in a much better position to absorb the risk that a changing market brings and adjust accordingly. This means we are in a better position to pay you what your home is worth because we don’t need the safety net that a fix and flipper needs. Our first offer is our “real” offer and we will provide data in order to explain how we reach our valuation conclusion. We don’t start out with a low ball offer just to see if you’ll bite.
Fix and flippers, in most cases, aren’t as equipped to properly value your home
As a professional real estate investment company, one of the core tenants of our business (and the reason we have been so successful for so long) is the ability to properly value a piece of property. We have a unique, proprietary and highly guarded algorithm that we have been building upon for the past twelve years. We can gauge market conditions, anticipate changes, incorporate comparable properties and determine the cost of any repairs necessary almost to a penny. In fact, the team behind GWG Properties is building a SAAS product that is meant to assist other real estate investment professionals in more accurately valuing property.
Why is this important?
The closer a company comes to the true value of your home the better equipped they are to make you a fair cash offer. Because most fix and flippers aren’t sophisticated investors they aren’t going to be able to properly value your home to the same degree. This means that they will need to build in margin in order to account for any errors or missteps. Once again, they’re mitigating risks and using the money they pay you in order to do so.
An intelligent, seasoned and sophisticated investor can pay you more money for your property because he or she can be more confident in what your home will be worth over the long term. A fix and flipper is making educated guesses with far less data and analytics to go off of and, because of their inferior visibility, will have to lowball you to make sure they have room for their inevitable mistakes.
Fix and flippers aren’t in a position to maximize the potential profit on your home
Fix and flippers have one business model: to fix and then flip your property! There’s absolutely nothing wrong with this approach to investment. In fact it is a profit mechanism that GWG Properties has used in the past. However, it is one of many approaches we take when we purchase a property and every approach is customized to the unique situation of the property and the seller.
Why is this important? Fix and flippers are “one trick ponies”. No matter what your situation is, they’re going to want to flip your house. What if your property would yield higher long term profits if it were converted into a rental property? It doesn’t matter to the fix and flipper because they don’t have a “buy and hold” model. They need to flip your house so they can make their short term gains and start all over. This means your house is worth less to them than it would be to an investor with the ability to convert it into a rental. Obviously this means a fix and flipper will pay you less for the property.
GWG Properties, on the other hand, is in a position to maximize profits in a multitude of ways. This means that we can afford to pay you more money because we’re in a position take the best approach for each individual property and maximize profits.
Most Fix and flippers aren’t using their own money
This is a big one. The vast majority of fix and flippers are using capital partners, financiers and hard money lenders. Why would this matter to you? Because the money they use to purchase and repair your home is quite literally costing them money. They’re paying interest on the funds they borrow and it’s usually a very high rate of interest because of the short term nature of the loan. This means that they need to pay you less money in order to make up for the margin they lose in borrowing money.
The situation of OPM (other people’s money) is exacerbated when you consider the “holding costs” associated with the fix and flip model. A fix and flip can take months to execute, from start to finish. Even after the rehab is completed the fix and flipper still needs to sell your house on the retail market which can average six months or more! The entire time this is going on they’re paying high interest on the money they borrowed to fix and flip your house. This equates to less money in your pocket. If you think about it, you are financing their business!
If a fix and flipper (or any other investor) offers to buy your house make sure you request what’s called “proof of funds”. This is not uncommon at all in real estate and you shouldn’t be embarrassed to ask someone to “show you the money”. You’re willing to show them the house! If they balk or try to make excuses that should be a red flag that they are not actually self funded.
GWG Properties is always willing to show immediate proof of funds. We will not offer funds we don’t actually have available. We can also close on a transaction in as little as three days which is something that a company without the ability to self-fund is incapable of doing.
Many fix and flippers don’t know construction!
The vast majority of fix and flippers are business people who work mostly in “property acquisition”. Once they’ve secured a property they bring in a subcontractor to do the actual renovation on the house. There is absolutely nothing wrong with sub-contracting. However, when you’re selling your house to a cash buyer you want to make sure that they are properly equipped to adequately scope the true rehab cost of your home. Many (not all) fix and flippers aren’t versed in the actual “nuts and bolts” of property rehab. This means that they’re ballparking the rehab numbers using rehab estimation calculators in order to determine how much to offer you. What’s the problem with this approach? They need to pad the number in order to mitigate risk. This means they offer you less cash because they have to account for any mistakes they might make.
When you sell your property to a true real estate investment firm you will find that we have seasoned investment professionals who can determine exactly how much money your house will require to renovate with extreme accuracy. This means we can afford to pay you more money because we don’t have to adjust our cash offer to account for variables in an “approximate” rehab estimate.
Conclusion:
You want to sell your house fast, for cash and without having to pay commissions, closing costs or make any repairs. This means that the traditional retail market won’t be the correct approach for you. That doesn’t mean you’re out of options, in fact you have many more options than a someone trying to sell their home in a more traditional retail environment. However, a fix and flipper is probably not one of the best options for you. Make sure you use an actual real estate investment company.
If you’re interested in selling your property please take us up on our offer for a Fair Cash Offer.
