Ever wonder what the “We Buy Houses” signs really mean? You see them mostly in the outer areas of Boston, usually in middle to lower priced neighborhoods, and older transitional areas with a lot of fixers. (I doubt you’ll ever see one in Beacon Hill) 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 Boston real estate wholesalers and flippers. Some of these guys are actually legitimate Boston real estate investors looking for motivated sellers with dumpy homes who want or need to sell fast.
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.
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 outside of Boston 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.
In almost all cases, the signs seek sellers for whom time or the “situation” is a bigger problem than foregoing top sales price.
Be careful. I think the “We Buy Houses” signs may create more victims than rescues. That’s because it’s not a regulated business, and you don’t even have to have a real estate license to do it. Nor do you need money. So all the risk is usually on the seller unless actually getting cash at closing.