Identify the Type of Buyer Before Flipping

InvestorDirector.com

Recognizing the two types of buyers and what they seek can help streamline profits

If done properly, the buy side of a real estate deal puts an investor in a position where they have what someone else wants: a house with a lot of equity and financial terms that can be collectively structured with a buyer. Equity and potential profit are made on the buy side of a transaction, and can be obtained by controlling someone else’s property, or by acquiring a property priced below market value. Money is made in a real estate “flip” by converting all, or at least some of a property’s equity into cash through selling. Wise investors are familiar with the two types of buyers that exist, recognize what their needs are, and market properties to them accordingly. Structuring deals based around buyers’ needs minimizes time spent on a particular deal and maximizes profits. This article will introduce the two types of buyers and explain what each looks for in a particular home. Having the ability to identify the type of buyer with each deal you do will help you structure deals, set pricing, tailor marketing campaigns and even set a limit on rehab expenses.

Understanding a buyer’s needs combined with simple but creative marketing, creates the sell side of a transaction. There are only 2 types of buyers to sell to. They are listed below. Next to the two types of buyers and separated with a forward slash are the two price points that each genre of buyer generally purchases at. Note how the type of buyer dictates pricing:

1. 1. Owner Occupants/Retail Pricing – This type of buyer will want to live in the house you’re selling as their own. They will pay close to retail price (Fair Market Value/FMV) or what other similar houses are going for in the same area. These buyers look at the house from an amenity standpoint (i.e. the home’s features) rather than looking at it from a potential profit standpoint. They aren’t buying to make money on the house; they’re buying to live happy in a clean home that looks great and has great features. It’s important as an investor to know what this type of buyer wants. To cater to them, many savvy investors are purchasing homes in good areas through sheriff’s sales, short sales, or through REO agents. Then, they are “decking” these homes out with granite custom kitchens, updated bathrooms etc. and are pricing their homes as high as that particular neighborhood will bear. Some investors who have bought really low can afford to deck a house out and still price it below what other homes with fewer features are going for in the area; doing so generates a fast sale.

To set your sales price for an owner occupant buyer, get with a real estate agent who is popular in your general area. A good real estate agent will clue you in as to the FMV of your home based on recent sales of similar homes. Selling at FMV to owner occupant buyers is the “bread and butter” exit strategy right now as the foreclosure crisis continues to unwind in suburban areas. Banks will begin to release more and more properties, while 4.5 million more homeowners are expected to lose their homes in the next 2 years, creating more bargain deals in the future.

1. 2. Non-Owner Occupants (Investors)/Wholesale Pricing – This type of buyer only cares about buying a property at a price low enough to hold as a cash flowing rental, or to rehab and sell to another party. Making a profit is their bottom line. There are two ways an investor buyer will make money from purchasing another individual’s property:

a) Buying (tenant ready or tenant occupied) a home and renting it to a tenant long term. Investors will only buy a home only if there is substantial equity in the property. Some investors are willing to pay up to 75 cents on the dollar for a turnkey rental property. This type of buyer is not looking for property features; therefore performing a basic cost effective rehab is all that’s needed to market homes like this for sale. It can help to place a good tenant before the property is marketed for sale to attract investors looking for cash flow. Placing a tenant prior to sale also deters vandals and thieves and makes the property more marketable to first time investors. Experienced investors usually don’t buy wholesale priced turnkey rental units from other investors. Those that do usually demand a jaw dropping deal.

It is important to note that selling property to this type of buyer is much more difficult now than in years prior. Lending guidelines are extremely tough for non owner occupant buyers to overcome, and will be for quite some time. Larger down payments are required, which most new investors don’t have.

b) Buying an ugly home to rehab and rent or sell. This type of investor buyer wants to make money by rehabbing an ugly house and employing their own profit producing exit strategy. Obviously, ugly house wholesalers must acquire or control properties at prices much lower than what an investor buyer will want to pay for those properties. The savvier the investor buyer is, the lower the sales price must be. Generally, this type of buyer will usually not pay more than 60 cents on the dollar for a light rehab (<10K in work) or 45 cents on the dollar for a major rehab (>10K in work). With so many foreclosures being listed with REO agents, property wholesalers are having a much tougher time finding deals to feed this type of investor buyer. In many cases, the best deals are being sold through a local Multiple Listing Service through real estate agents. This will be the trend as the foreclosure crisis continues to unwind and REO inventory becomes available over the next 2-4 years.

Knowing what types of buyers exist, what they are looking for in a property, and what financing options exist for them are crucial factors in determining marketing regimes and profitable exit strategies before embarking on an investment deal.