Ask Eli: Six tips for selling to a builder

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: I’m planning to sell my home to a builder to be torn down, do you have any advice?

TL;DR (1:37)

Answer: For many homeowners with older, smaller homes in expensive markets, selling to a builder is the easy and most profitable option when you’re ready to move. If you live in a home like this, you probably get hundreds of calls and letter from builders, investors, and real estate agents offering to buy your home as-is.

Here are six tips and ideas if you’re considering this option…

Don’t Overvalue Cash

The idea of somebody paying cash for your home sounds exciting and more reliable than somebody getting funds from a bank. “They pay cash” is one of the most common reasons I hear from homeowners explaining why they prefer selling to a builder.

The truth is that many builders don’t buy homes with a mountain of cash they have sitting around; they rely on strong banking relationships to finance their purchase with cash-like deals (the money is available quickly and easily).

The real value of cash is that a buyer can close quickly and does not require any bank approval, but a cash-like deal from a well-qualified buyer working with a great bank can often mirror this by removing any finance or appraisal contingency and closing as fast as the bank will allow (many can close in 2-3 weeks).

The contingency (or study period) structure and Earnest Money Deposit terms are more important than the funding source being a buyer’s private cash balance vs a trusted bank/lender. I would also argue that it’s more likely that an individual or builder cash-buyer will run into a cash crunch prior to closing than an established bank/lender.

Your Home May be Worth More to a Homeowner

It’s no secret how hard it is to find entry level homes these days. You may think that your current home with a small kitchen, old roof, and unfinished basement is only worth the land it sits on, but buyers are hurting for inexpensive homes, even if they need loads of improvements. Don’t assume that just because your home is small and dated that a builder is your only option.

Make sure you’re comparing builder offers to what you can get on the open market, taking into consideration other financial (e.g. differences in commission) and non-financial (e.g. timeline and showings) differences between the two routes. There may be little downside to testing the open market before committing to a builder, depending on your situation.

Your community will also appreciate your contribution to preserving the local tree canopy!

Builders Can Offer Attractive Rent-Backs

A rent-back means that you can live in your home after closing (aka after getting paid) for a specified period, usually for little or no cost, for months after a sale. For many sellers, this extra time is perfect for searching for your next home or apartment, with cash in-hand, or taking time to clear out decades of personal belongings.

A normal buyer can also offer a rent-back, and are often happy to, but if a home is being purchased using a mortgage for a primary residence, the buyer cannot offer a rent-back over two months. A builder, even if the funding comes from a bank, or cash buyer has no restriction on the length of rent-back. It’s well within reason to negotiate 3-4+ months of free or low-cost rent-back from a builder after closing.

Share in the Builder’s Profits

Jealous of the profit a builder will generate from building a new home on your lot? Rather than selling your home to a builder, consider negotiating an equity stake in the project and getting paid based on the sale of the new home. It’ll take 10-12+ months longer to be paid and there’s more risk, but you can make a lot more than you would selling your existing home.

Use Missing Middle to Upgrade, Stay Home

The new Missing Middle zoning code may be a great solution for many Arlington homeowners by allowing you to partner with a builder to build a Missing Middle product (duplex, townhouse, or small condo building), live in one, designed to your specifications, and leverage profit sharing on the others to significantly reduce the cost of your new home.

The cherry-on-top is getting to stay in the same place you have lived in for years/decades!

Realtor Representation Can Be a Net Benefit

A direct sale without agents/commissions is one of the primary selling points builders offer and it’s certainly a good one, but representation and commissions come in many shapes and sizes that sellers can benefit from when selling to a builder. Benefits range from understanding how to measure the value/risk of contract terms like a study period or deposit, knowing what to negotiate for based on your needs/preferences, or effectively soliciting more bids to ensure you’re getting the best price.

Even though working directly with a builder can be simple, it’s important to remember that a builder’s core business is acquiring lots with favorable terms/prices, which runs counter to your best interests.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460