Ever wonder what the “We Buy Houses” signs really mean? You see them all over Austin, usually in middle to lower priced neighborhoods, and older transitional areas with a lot of fixers. Often the signs seems homemade and haphazardly placed. The words “fast” and “cash” are on most. If you were to call this sign, would you really receive an offer to close fast, for cash?
Maybe, but probably not.
The signs, called “bandit signs”, are actually a lead generation tool used by real estate wholesalers and flippers. Some of these guys are actually legitimate real estate investors looking for motivated sellers with dumpy homes who want or need to sell fast. Most of the sign placers are “bird dogs”, who find the motivated sellers then turn the deal over to the investor for a finder’s fee.
Either way, the main goal is to make you an offer and get the home under contract at a price that will produce a profit on either a wholesale resell (selling the contract) or a rehab/flip.
What sort of offer will these guys (or gals) make you?
The formula is fairly universal and straight forward. 70% of market value minus repair costs. Market Value, also known in the business as “After Repair Value” (ARV), is the value of the home if it were in retail sales condition and able to sell to a buyer using a conventional mortgage.
So, let’s say you inherited an old junker in South Austin that would sell for $225,000 in good condition, but it has a bad slab, bad roof, major plumbing problems, severe neglect and multiple trailer loads of junk to haul out of the rat infested back yard. And let’s say it would cost $100K to bring the home up to par, including the investor’s holding time costs, interest, insurance, utilities, risk factors, etc.
That home would be worth (0.70*225,000) – $100,000 = $57,500.
I’m over-simplifying the formula, and there are a lot of other components that go into the “repair costs” part, but this is an accurate “quick and dirty” computation. Also, the terms of the deal will often not be “all cash”, but instead some sort of creative financing. And, these deals are very, very hard to find.
Will this investor make money if he can buy such a house at this price, owner financed? Maybe, maybe not. Many don’t.