By Sally Jones
Jun 15, 2023
If you’re a would-be seller, it might be thrilling to get an offer before your listing even goes online. Or better yet, you get an all-cash offer the very day it goes on the market.
Wow! You might feel like the luckiest seller out there—until you realize it’s not a young homebuyer or a family purchasing your house but faceless real estate investors looking to turn your beloved home into a pricey rental or to tear it down.
There’s nothing inherently wrong with investors trying to make a buck in the real estate market. But perhaps you’re sympathetic to the challenges facing first-time buyers and would like to pay forward the dream of homeownership that you experienced.
Here’s what to know about investors and how to know if one is making an offer on your home.
How investors can affect your local market
One of the biggest frustrations for all homebuyers right now is low inventory. And this affects sellers who will also need to find a new home, too. The U.S. has been under-building since the housing crash of 2008, and it’s now hitting a critical level.
“Over the last 10 years, the gap between single-family home construction (including multifamily housing) and household formations has grown to 2.3 million,” says Matthew Ricci, a Rhode Island–based home loan specialist for Churchill Mortgage.
Low home inventory and higher interest rates have somewhat cooled investor interest in recent months. But one type of investor is doubling down: small investors, defined as those owning fewer than 10 properties.
Small investors are often looking for the same type of home as first-time buyers: lower-priced starter homes. Investors generally buy these homes to rent out or to flip and sell at a profit.
“With the demand for rental housing continuing to rise, especially in urban areas or regions with growing job opportunities, small landlords see an opportunity to capitalize on this demand and generate consistent rental income,” says Adam Garcia, founder and CEO of The Stock Dork.
But the result of growing rentals is even less housing inventory in the long run.
Signs you are selling to an investor
So how would you know if you are selling to an investor? The truth is that often it’s impossible to know. Some investment offers will come to you through a real estate professional, just like with any other buyer.
The best way to find out is to simply ask. If you are approached by a buyer’s agent, inquire upfront if the buyer is an investor or represents an investor.
Of course, the agent may or may not tell you who the buyer is. So here are some signs that you might be dealing with a real estate investor:
- A buyer approaches you by email or with a flyer left at your door.
- A buyer approaches you with an offer—before you list your home.
- You get an all-cash offer that’s significantly lower than the asking price. (Investors often underbid.)
- A buyer doesn’t care if the home is being sold as is.
- The buyer’s name on an offer is listed as an LLC or Inc.
How to avoid selling to an investor
If you want to ensure that your single-family home is sold to a person or a family as their primary home, write it in your home description on your listing.
You might also ask that all offers include a letter in which the buyers share their plans for the home.
If you have multiple bidders, when reviewing mortgage pre-approvals, you could give preference to buyers who have an FHA loan or VA loan. (These types of loans are often favored by first-time buyers as the financial requirements are less stringent than other loans.)
If you are genuinely resolved not to sell to an investor, put a deed restriction in the contract, which will limit what buyers can do to the home.
The downsides of not selling to an investor
You should know that taking any of the above measures might mean possibly getting fewer offers, taking a longer time to sell, and maybe even making less profit on the sale of your home.
So you will have to weigh the pros and cons for yourself if you decide to not sell to an investor.
“Many investors offer cash and favorable terms for the seller, and that is what the sellers will focus on,” says Ricci.
Ways to give first-time home buyers a break
To better even the playing field, incentives would need to change, according to housing activists. First, government-sponsored enterprises Fannie Mae and Freddie Mac would need to stop subsidizing investment loans. These organizations’ mission is to help first-time homebuyers, not investors.
And a bill called the Stop Wall Street Landlords Act of 2022 would also prevent Fannie Mae, Freddie Mac, and Ginnie Mae from purchasing and securitizing mortgages held by large institutional investors who use debt to buy single-family homes.
Communities could also consider deed restrictions. Many believe this would have to be an initiative at the state level, but some states are very committed to helping first-time homebuyers.
“In Rhode Island, they have tried to remedy this problem by increasing the grant available for first-time homebuyers,” says Ricci.
At the community level, homeowners associations trying to discourage Airbnb investors have put restrictions on how long owners have to live in the home before they can rent it out. Some are even restricting the rental terms that can be offered, requiring a lease to be at least a month long but no longer than 10 months.