Investors, flippers, and builders are all paying new record high prices for lots, tear downs, and fixers in Manhattan Beach CA. Often the transaction is "all cash" and can close in as little as 10 days.
Sellers often wonder what the benefit of selling to an all cash investor or builder is. Whatever the financial vehicle is, financed or not, the seller gets their proceeds at the end of the transaction either way. While that is certainly true, there are other considerations.
First, there are properties that simply can not be financed (appraisal condition C6). This could be because they have structural issues, are not habitable, or won't appraise (although for the most part the last condition is not relevant to this discussion).
Structural issues can mean cracked foundations while habitable may refer to the presence of mold. Even in a city with a preponderance of multi million dollar properties, you do find some with substantial deferred maintenance.
Another reason that homes are sold to investors, flippers and builders is that the sellers need cash fast and the normal listing process and 30 day escrow may not afford enough time. Additionally, when real estate fees are factored in plus termite and other repair work, the cash buyer starts to become more attractive. (Often agents who represent investors, flippers, and builders waive their commission in order to get a "list back".)
If you are considering selling to an all cash commercial buyer here's some things to consider.
Builders typically look to acquire lots at 30-33% of the final project cost. So, if they will build a $3M property, they may want to pay no more than $1M (although there are many instances where they go higher.) If the lot is on a hill, expect something closer to 25% but if it has an ocean view or is on a Walk Street or The Strand, builders will pay more. Often a lot more (no pun intended). As prices are escalating, many builders are "banking" land and holding on for an even more opportune time to sell. So, if there is a habitable house, or better yet a tenant in place, and the property can be leased, that is attractive to a builder as well.
Flippers look for fixers that have "good bones" and need either extensive cosmetic updates or can be enhanced by the addition of more square feet, bedrooms, baths, etc.
Many flippers work on 15-20% gross margins after their enhancements and almost always look for quick and easy exits strategies. So for a flipper to pay $1M for an older house that needs $100K of remodeling work, the remodeled house would have to sell in the $1.3M range.
A good question is why wouldn't a "retail" buyer just acquire the house and do the remodel? Truthfully, many do. But not everyone has the time or inclination to get involved in a remodel, particularly if they already have a full time job.
An interesting angle I've seen recently is that some flippers will let the seller participate in the upside of the flip. This only works when the house is owned "free and clear" or there is a very low mortgage or home equity line.
Instead of selling the house, and the flipper taking title, the flipper does the work on the house and cuts the seller in on some of the profit (after their fees). For a seller this may bring an extra 10-20% if they are willing to wait 3-6 months for their proceeds.
Ellis Posner represents Buyers and Sellers in Manhattan Beach. If you want a professional opinion on your home's value, want to list a home for sale, or are interested in selling to a builder, investors, or flipper, contact Ellis directly at 310 975 5139. Five Star Zillow Premier Real Estate Agent.