What Price for Convenience

Mike Cooke September 29, 2017 Buying Selling

What Price for Convenience

There was an ad on TV many years ago by a large, nationally franchised real estate firm … let’s call it ABC Realty because we can’t remember the actual name.

The Scene: Husband and wife in kitchen. Man in suit with briefcase walks through swinging door from dining room. Couple looks surprised.

The Dialog (paraphrase): Man says, “Want to sell your house? I’ve got a buyer. He’ll pay cash (man opens briefcase, which is full of money). Top dollar. Close whenever you want. Stay as long as you like after closing.”

The Pitch: If selling a house was this easy, you wouldn’t need an ABC Realty agent!

The scenario from the ad would be amazingly convenient for a home seller, wouldn’t it?

  • No listing the house
  • No figuring out an asking price
  • No pre-sale preparation
  • No showings
  • No contract negotiations
  • No buyer asking for repairs
  • No buyer getting turned down for a loan at the last minute

The convenience angle has been around for generations. Small players in niche markets have bought houses directly from owners for cash … you know, the “we buy ugly homes” sort of approach.

Recently, the notion that home owners will opt for convenience over listing with an agent has taken wing like geese flying south in winter. Flocks of companies are jumping in, from Wall Street funded startup firms to national real estate brokerage companies and even individual agents with access to capital.

The Pitch: We buy your home for cash at a fair price saving you the time and hassle of a traditional sale.

The catch is in the “fair” price aspect of the proposal. The purveyors of convenience offer a fair price … it’s just that it is the fair “wholesale” price.

The question for a home owner is does she want to sell at wholesale price for the sake of convenience or at a full market value to a retail buyer.

The fact that convenience shops must purchase at the wholesale price is proven by both common sense and statistical data.

The convenience organizations acquire a property and turn around and resell it immediately. There must be some differential between the price they paid and the price they get when selling, after deducting for their selling costs. Otherwise, they have no way to make a profit.

Let’s use some actual numbers. The average single family home price in metro Denver right now is around $473,000. Using an agent and paying normal closing costs, the owner sells for $473,000 to a retail buyer. Subtract 6% in closings costs and the owner walks away with $445k.

In contrast, a Wall Street funded convenience firm offers that same owner full price at $473k but minus a 13% “acquisition fee”. The net price the owner receives at closing is just $411k.

The owner gets $445k net from a retail sale at full market value versus $411k net for the convenience of not going through the normal sale process. The owner has paid $34 to avoid the “hassle” of a normal sale.

Are most owners willing to pay that price?

Just to follow this through to its conclusion, here is what it looks like for the convenience company that acquires the property for $411k. It turns around and sells that property through normal channels at the retail price of $473,000 a couple months later. Their costs of holding the property, making minor repairs and commissions are $25k. They’ve pocketed $38,000 in profits.

Actual data backs up what common sense tells us: There must be a difference between acquisition cost and final sale price for the convenience company to make a profit. Some of these outfits selling convenience have been rolling out their programs in selected test markets and we are just beginning to see actual results.

One example is Utah, where a Wall Street backed firm has been buying homes and quickly reselling them. Public records reveal a likely 6% net profit to the convenience company. The sellers of those properties could have gone through normal channels to sell their properties and put that much more money in their pockets.

It turns out that the world of convenience portrayed in the old TV ad is possible. Whether the cost for such convenience is worth it is another question. We suspect it is not for the overwhelming majority of home owners who will be happy to invest a bit of time and effort in home selling to put tens of thousands of dollars more in their pockets.

 

Subscribe To Our Blog

PreviousNext

Share