We Buy Houses


In my favorite book, Zen and the Art of Motorcycle Maintenance, Pirsig describes a process he calls analytic description. Such a process "discusses things in terms of their underlying form". He then gives us an example by describing a motorcycle:

A motorcycle may be divided for purposes of classical rational analysis by means of its component assemblies and by means of its functions.

If divided by means of its component assemblies, its most basic division is into a power assembly and a running assembly.

The power assembly may be divided into the engine and the power-delivery system. The engine will be taken up first.

The engine consists of a housing containing a power train, a fuel-air system, an ignition system, a feedback system and a lubrication system....

And so on... This is a classical approach to understanding something. You take it, you divide it up into pieces. Then you divide those pieces into more pieces, and keep going until you feel you can divide no longer. The "it" in this process can be a thing, a role, an idea, or even a process itself. Scientifically the goal of such a practice is to accurately describe the components of whole. Philosophically the process can be used to "Look Closer" and force yourself to see things that your mind has been filtering out.

For example, the goal of real estate investing it creating value. Value can be realized either at the time of purchase or the time of sale.

At the time of purchase value can be realized by purchasing undervalued property, which can be divided into buying from a "motivated seller", buying in a soon-to-be-improved area where prices will climb, and buying a distressed home.

Buying from a "motivated seller" can further be divided into buying a foreclosure from a bank, buying at an auction and buying from a seller in financial trouble.

Of course, once, we've finished dealing with all the subsets of motivated sellers, we have to go back up to describing the process of buying in a soon-to-be-improved area, and eventually we need to go all the way up to the top and describe the means by which value can be realized in selling. I hope you can start to see the interest in such an exercise, because I'd like to stop here and discuss one of the "motivated sellers" I described.

One of the time honored business models for buying discounted homes has been the "We Buy Homes" model. You've all seen the signs on the side of the road, variations of "We Buy Homes in a very short time and pay cash!"

The purpose of such a business model is to find sellers in dire financial straits who are either currently facing foreclosure, of will likely be so soon. Then you can swoop in and offer to pay cash for their home (usually at a 70-80% discount, from what I hear). Why would a seller ever agree to that?

Let's imagine for a second that you are a hard working American. You bought your house 10 years ago (say for $100,000) and have seen properties rising all around you. Unfortunately a medical disaster has crippled your finances and the creditors have come calling. You don't have enough money to make your house payments. The bank is threatening to foreclose. The rising property taxes is only making the situation worse.

Then a buyer comes knocking on your door and offers you $200,000 for your house. Other houses in the neighborhood are selling for $250,000. If you accept their offer you will walk away with $100,000 cash (more since you have paid down some principle on your mortgage through the 10 years).

Now the situation is not quite as dire as you think. If the bank forecloses on your home, they will then sell it (first through a realtor, and then at auction), and after they've paid all creditors who have a lien against your home (which it typically just them and any second mortgages), they have to turn over the balance to you. However, it's uncertain on when the home will be sold, what fees will be paid to Realtors/auctioneers, AND there will be a foreclosure on your credit report for the next 7 years.

So by taking the buyer's offer you are trading the possibility at some extra money (depending on the offer, it could be a considerable sum), for the certainty of money now and the prevention of a foreclosure on your credit report. For many people this is a very fair deal, often people in these circumstances have far too much uncertainty in their lives already and could use help in resolving a couple of their issues.

The business models is certainly a sound one, but it relies on a few conditions that are going to be harder and harder to meet in the coming years. It's my belief that this model will struggle greatly for the next 3-5 years, and may never quite recover due to the recent revolutions in the finance industry (and personal financial habits).

First I feel it is my duty to mention that one of the conditions of making this model work is having enough cash to pay for the home outright. Because the deals you are offering have to close very quickly, there often isn't time to bring in a mortgage, and the appraiser, and the paperwork... etc. This is not a model to follow if you have "No Money Down!"

But the number of people with enough money to make this model work is only growing, as is the number of individuals who are unable to make their mortgage payments and are facing foreclosure. So why is this model in trouble? Because it relies on one last, crucial, condition. The distressed home owner must own a reasonable level of equity in their home to make this work.

The home owner's equity is everything. The value you get is the equity that the home owner is willing to forfeit to make the deal go quickly. The value the homeowner gets is the remainder of their equity in cash form. If the home owner has little, or no, equity the deal simply can't be done. What homeowner is going to accept $200,000 for a home when they owe $225,000? At that point you are facing trying to accomplish a short sale, which is a completely different set of circumstances.

So the problem with the We Buy Homes business model is that the number of potential sellers is declining rapidly. It used to be that everyone bought a home with 20% down, guaranteeing a certain level of equity. Today 100% mortgages are one of the fastest growing loan types. Owning a home for 5 years used to mean at least a small level of equity with a fixed rate mortgage. Today, with interest-only loans and negative amortization loans, there's no guarantee. Even someone who has owned their home for 15 years isn't guaranteed to have any equity built up thanks to the proliferation of refinancing and home equity loans...

Since the vast majority of foreclosures we'll see over the next 5 years will tied to people with crazy ARM loans, who bought houses at inflated prices, it's unlikely that a discount investor will find many deals out there pre-foreclosure, if any.

Could this business model make a comeback? Possibly, but that would rely upon two things happening:
  1. American home prices stabilizing. A wild market (which is what we've had for the past 6 years) is not good for this type of investing. To ensure a profit, we need to understand the home pricing within the area, which means somewhat stable growth.
  2. Americans getting wise about their finance. We've become too much of a consumer society, where we're completely unafraid to sell our future for a toy today. As long as that mindset persists, the odds of actually finding a distressed seller with actual equity is very slim.
The first is extremely likely. Housing markets, like every other market, follow a cyclical pattern. After the current housing slump, it's likely that we'll get many years of solid, stable growth, and then have another boom, followed by another slump. The pattern is definite, the timing is not.

The second is very hard to predict. I would hope that American society at large would eventually settle down from it's consumer binge and enter an era of fiscal responsibility. But trying to predict whether or not that will happen is an exercise in futility. If the above model interests you, then the best you can do is try to build up your cash reserves and prepare yourself for a time when you can find distressed buyers with equity.

48 comments:

Anonymous said...

When the bank forecloses on the home and sells, the bank receives any gain upon sale. The homeowner never recieves any sales proceeds. The statement in your post is incorrect.

The Landlord said...

"If the bank forecloses on your home, they will then sell it (first through a realtor, and then at auction), and after they've paid all creditors who have a lien against your home (which it typically just them and any second mortgages), they have to turn over the balance to you."

anonymous said:
"When the bank forecloses on the home and sells, the bank receives any gain upon sale. The homeowner never recieves any sales proceeds. The statement in your post is incorrect."

Mortgage law varies from state to state. Most states that I am familiar with require that a foreclosed house go on auction within 60 days of foreclosure. Sales proceeds from the auction satisfy liens on the property (taxes, mortgages, etc.) in order of priority. If all the liens are satisfied then the original owner takes home the balance of the sale.

However when an auction occurs the mortgage lender is automatically submitted for a credit bid equal to what they are owed. This essentially means that if no one offers more for the house than they are owed, they get to keep the house. After that point, any sale proceeds are owned by the bank.

Avoid Foreclosure in Virginia said...

The finance faff of building a house is a lot more complex. For some time we'd have to be paying a mortgage on an unfinished property while paying rent to live elsewhere. It would also require a planning application, and a lot more risk. New-builds can spiral in cost enormously.

Anonymous said...

When some one searches for his essential thing, thus
he/she needs to be available that in detail, thus that thing
is maintained over here.
My site: handyvertrag trotz schufa eintrag

Anonymous said...

Nice weblog here! Also your website lots up fast!
What host are you the use of? Can I get your affiliate hyperlink on
your host? I desire my website loaded up as quickly as yours lol
Feel free to visit my webpage ... kredit für selbstständige

Anonymous said...

This post gives clear idea designed for the new viewers of blogging, that really how
to do running a blog.
Here is my web-site : quick loans bad credit

Anonymous said...

Yesterday, while I was at work, my sister stole my iPad and tested to see if it
can survive a forty foot drop, just so she can be a youtube sensation.
My apple ipad is now destroyed and she has 83 views.
I know this is entirely off topic but I had to share it with someone!
My page :: british virgin island vacations

Anonymous said...

Hurrah, that's what I was seeking for, what a data! present here at this weblog, thanks admin of this web page.

Take a look at my webpage:
Also see my website ::

Anonymous said...

Fine way of explaining, and fastidious post to get information concerning my
presentation subject, which i am going to convey in academy.
Also visit my web-site - Schuhe Onlineshops

Anonymous said...

It is appropriate time to make some plans for the future and it's time to be happy. I have learn this put up and if I may just I desire to counsel you some interesting issues or suggestions. Maybe you could write subsequent articles regarding this article. I desire to learn more things approximately it!

Have a look at my site ... affiliate marketing programs
Review my blog ::

Anonymous said...

It's an amazing paragraph for all the web users; they will obtain benefit from it I am sure.

Have a look at my web page; affiliate sites
Have a look at my web-site -

Anonymous said...

Hi ехceрtional website! Does гunning а blog similar
to this require а laгge amount of
woгk? I've very little understanding of programming but I had been hoping to start my own blog in the near future. Anyhow, should you have any ideas or techniques for new blog owners please share. I know this is off topic but I simply wanted to ask. Thanks!
Visit my webpage ; http://aws.clouddesignpattern.org

Anonymous said...

An impressive share! I have just forwarded this onto
a friend who has been conducting a little homework on this.
And he actually ordered me lunch simply because I found
it for him... lol. So allow me to reword this.... Thanks for the meal!

! But yeah, thanx for spending the time to
discuss this matter here on your web page.

my web page - günstige privatversicherung
Feel free to visit my page :

Anonymous said...

This is very interesting, You are a very skilled blogger. I've joined your rss feed and look forward to seeking more of your great post. Also, I have shared your site in my social networks!
Here is my webpage krankenversicherung direktversicherung

Anonymous said...

Hi there I am so thrilled I found your blog, I really found you by mistake, while I was searching on Yahoo for something else, Anyways I am here now and would just like to
say thanks for a tremendous post and a all round entertaining blog (I
also love the theme/design), I don't have time to browse it all at the moment but I have saved it and also added in your RSS feeds, so when I have time I will be back to read more, Please do keep up the superb work.

My website :: how to make money from clickbank
My website

Anonymous said...

Wow, marvelous weblog structure! How long have
you ever been blogging for? you made blogging glance easy.
The overall look of your website is excellent, let alone the content
material!
my website: private krankenvollversicherung

Anonymous said...

I for all time emailed this web site post page to all my associates, for the reason that if
like to read it afterward my links will too.
Feel free to surf my web blog ... seo expert Pakistan

Anonymous said...

Hi colleagues, how is everything, and what you desire to say on
the topic of this post, in my view its in fact remarkable in favor of me.
My blog post - clickbank Secrets

Anonymous said...

What's up it's me, I am also visiting this website on a regular basis,
this web site is in fact good and the people are
in fact sharing good thoughts.
My web site: private student loan debt consolidation

Anonymous said...

I love your blog.. very nice colors & theme. Did you design this website yourself or did you hire someone to do it
for you? Plz respond as I'm looking to construct my own blog and would like to find out where u got this from. many thanks
Also visit my blog :: private krankenversicherung vergleich rechner

Anonymous said...

Hello There. I discovered your weblog using msn. That is an
extremely well written article. I will be sure to bookmark it and return to read
extra of your helpful info. Thanks for the post.
I'll definitely return.

my web site - Mouse click the up Coming article
Also visit my blog post home equity loan amount

Anonymous said...

Hey! I know this is somewhat off topic but I was wondering if
you knew where I could locate a captcha plugin for my comment form?

I'm using the same blog platform as yours and I'm having trouble finding
one? Thanks a lot!

Here is my web site - mouse click the next article
Feel free to visit my web-site - privat versichern

Anonymous said...

This piece of writing will help the internet viewers for creating
new weblog or even a blog from start to end.
Also visit my webpage - private krankenversicherungen vergleichen

Anonymous said...

Simply want to say your article is as amazing.

The clearness in your post is just great and i could assume you're an expert on this subject. Well with your permission allow me to grab your RSS feed to keep updated with forthcoming post. Thanks a million and please carry on the enjoyable work.

my website: please click the up coming post

Anonymous said...

This paragraph gives clear idea for the new viewers of blogging, that genuinely how to do running a blog.



my site: free clickbank products

Anonymous said...

Every weekend i used to pay a quick visit this website, as i want
enjoyment, as this this web page conations actually nice funny information too.


my blog - getting a home equity loan
Also see my site - Discover More

Anonymous said...

I love what you guys tend to be up too. This type of clever work and coverage!
Keep up the great works guys I've added you guys to my blogroll.

My web site - toronto seo firm

Anonymous said...

It is appropriate time to make some plans for the future and it's time to be happy. I have read this post and if I could I wish to suggest you some interesting things or tips. Maybe you could write next articles referring to this article. I wish to read more things about it!

My web blog :: internet jobs from home

Anonymous said...

I am regular visitor, how are you everybody? This paragraph
posted at this web site is genuinely nice.

Here is my blog post; Usuario Discusión:MicahMile - Ateneo Virtual

Anonymous said...

It's amazing to pay a visit this site and reading the views of all colleagues on the topic of this post, while I am also eager of getting know-how.

Here is my webpage schuhe online billig

Anonymous said...

Howdy! Do you know if they make any plugins to safeguard against hackers?
I'm kinda paranoid about losing everything I've worked hard on.
Any tips?

my webpage - g�nstige kinderschuhe online kaufen

Anonymous said...

Hello, its good article on the topic of media print, we all be aware of
media is a enormous source of information.

Here is my weblog ... Cantilever Umbrella

Anonymous said...

I absolutely love your blog.. Pleasant colors & theme.
Did you build this site yourself? Please reply back as I'm planning to create my own site and would love to learn where you got this from or what the theme is called. Appreciate it!

Also visit my page: simply click www.l-ump.net

Anonymous said...

pqm2pzlzg

my web-site :: electric toothbrushes

Anonymous said...

Thanks in support of sharing such a fastidious
idea, paragraph is fastidious, thats why i have read it entirely

Feel free to surf to my blog post - Full Report

Anonymous said...

After looking over a few of the blog articles on your site, I truly appreciate your way of blogging.

I book marked it to my bookmark website list and will be checking back in the near future.
Please check out my web site too and let me know what you
think.

My website :: Read This

Anonymous said...

Wow that was unusual. I just wrote an incredibly long comment
but after I clicked submit my comment didn't show up. Grrrr... well I'm not writing all that over again.
Anyway, just wanted to say fantastic blog!


Visit my blog: Author's external home page...

Anonymous said...

Great blog! Do you have any suggestions for aspiring writers?
I'm planning to start my own website soon but I'm a little lost on everything.

Would you propose starting with a free platform like Wordpress or go for a paid
option? There are so many choices out there that I'm completely overwhelmed .. Any recommendations? Kudos!

My blog post ... pay day loans uk

Anonymous said...

Aw, this was an incredibly good post. Taking a few minutes and actual effort to make a
superb article… but what can I say… I put things off a
lot and don't manage to get nearly anything done.

Review my homepage: Bench Craft Company advertising jobs descriptions

Anonymous said...

With havin so much content and articles do you ever run into any problems of plagorism or copyright infringement?

My site has a lot of unique content I've either authored myself or outsourced but it appears a lot of it is popping it up all over the web without my agreement. Do you know any methods to help protect against content from being stolen? I'd definitely appreciate it.



Feel free to surf to my webpage: smart circle directv

Anonymous said...

It is the best time to make some plans for the future and
it's time to be happy. I have learn this put up and if I may just I want to counsel you some interesting things or suggestions. Maybe you could write subsequent articles regarding this article. I desire to read even more issues approximately it!

Review my web blog RV & boat loans

Anonymous said...

I have read so many posts on the topic of the blogger lovers but this article
is truly a good paragraph, keep it up.

My weblog - high yield checking account

Anonymous said...

Hello, I log on to your blog on a regular basis.
Your humoristic style is awesome, keep it up!

Feel free to surf to my web blog; atlanta car accident attorney

Anonymous said...

http://sunchasersportfishingcharters.com overcome you therefore look occasionally tighter. is diminished accessories (especially those which squeeze properly
[url=http://freemasonryinbermuda.com]Louis Vuitton Outlet[/url] hopeful lyrics saxon mortgage prurience in a sentence twelfth night characters answers yahoo resuscitate me lyrics summarization techniques snack bar maplestory intimation meaning scalp treatment odyssey putters ministerio el rey jesus petunia dursley offer philander chase dawn french ragtime movie oh holy night lyrics variety wholesalers insults in spanish stereomood establishing credit immature publishing an ebook liquidation preference probity transcription scottish names behavioral therapy louie viton purses william shatner

Anonymous said...

pet insurance for dogs Don't subscribe to health insurance until finally you've deemed every one of the charges and located the least expensive and finest program for your requirements. If your loved one has something wrong with them a trip to the veterinarian can get very expensive.

Monika Lucas said...

Get a no hassle, no obligation cash offer on your house.
We buy houses in any condition anytime.

Lucas Properties
www.distressed-property-solution.com

Unknown said...

Our business is that we buy houses and we changed it to become more beautiful and then we sell it.

nickmiddleton010 said...

We work with sellers in many different situations, pay cash, and will close on a date of your choice. We Buy houses