Blog > Working with Investors – What to Watch Out For

Working with Investors – What to Watch Out For

by Marcus Rincon

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Understanding Investors in Real Estate

If you're facing foreclosure, one of the most common groups reaching out to you will be real estate investors. They will call, text, send mail, and even knock on your door, offering to help. While many investors have your best interests in mind, there are others who may not. Knowing what to look out for can help you make an informed decision when working with an investor.

Who Are Real Estate Investors?

Real estate investors purchase properties with the goal of making a profit. They typically fall into one of the following categories:

  1. Wholesalers – These investors get a property under contract and then sell the rights to that contract to another buyer for a profit. They do not intend to purchase the property themselves.

  2. Fix-and-Flip Investors – These investors buy homes that need renovations, make improvements, and then resell the property for a higher price.

  3. Buy-and-Hold Investors – These investors purchase properties to rent out for the long term, either as short-term rentals (like Airbnb) or long-term leases to tenants.

Red Flags to Watch Out For

While many investors operate ethically, here are three major red flags you should be aware of when dealing with an investor:

1. Unreasonably Low Offers

  • Investors typically purchase homes at a discount, but be cautious if an offer is extremely low (e.g., 20-50% below market value).

  • If your home requires significant repairs, a lower offer may be justified, but if you receive an offer that seems drastically undervalued, it’s worth getting a second opinion.

2. Suspicious Non-Refundable Deposits

  • Some investors include non-refundable deposits with unusual or vague terms.

  • If the wording seems unclear or unreasonable, it’s a red flag that they may not be serious about purchasing your home.

3. Long Closing Timelines

  • A legitimate cash investor should be able to close quickly.

  • If an investor's contract includes a 60+ day closing period, they may not intend to purchase the home themselves. This is a sign they might be wholesaling the contract rather than buying the property.

How to Protect Yourself When Working with Investors

To avoid scams and ensure you’re making the best decision for your situation, consider these three steps:

  1. Get Multiple Offers

    • Reach out to multiple investors and compare offers before accepting one.

    • This will give you a better idea of your home’s true market value.

  2. Review the Contract Carefully

    • Read every detail of the contract, paying close attention to contingencies, deposits, and closing timelines.

    • Look for hidden fees or terms that seem unclear.

  3. Work with a Professional

    • Consider working with a real estate agent, a reputable investor, or a real estate attorney to review the deal and ensure your best interests are protected.

Example: When Does Selling to an Investor Make Sense?

Let’s say:

  • Your home needs $60,000 in repairs.

  • Once fixed, the property could sell for $300,000.

  • You still owe $180,000 on your mortgage.

  • An investor offers you $200,000.

In this case, selling to an investor might be a fair deal because:

  • The investor pays off your mortgage balance ($180,000), allowing you to walk away with $20,000 in cash.

  • The investor takes on the renovation costs and resells for a profit.

This is an example of when an investor offer may be reasonable. However, if an investor were to offer you significantly less, such as $120,000, this would be a red flag.

When Should You Consider Selling to an Investor?

Selling to an investor may make sense if:

  1. You have a tight timeline – If your auction date is approaching, selling quickly to an investor could prevent foreclosure.

  2. Your home needs significant repairs – If your home is outdated or requires major renovations, traditional buyers may not be interested.

  3. You understand the terms of the contract – If you’ve reviewed the contract, know what you’re signing, and are comfortable with the terms, then selling to an investor could be a viable solution.

Final Thoughts

Not all investors are bad, but it’s crucial to recognize the warning signs of a bad deal. Take your time, read the contract, and seek professional advice if needed.

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