Maybe you wonder which one you are. Maybe you are a real estate agent trying to determine who your buyer is. Maybe you just want to know the definition of each. Well, this is the post for you.
The difference comes down to mindset and what is the thing each buyer wants. At its basic level, the retail buyer is looking for something for their self, while the investor is looking for something for others (to attract their money). The wise buyer considers these motivations before negotiating on a price.
The Retail Buyer
This guy might have an idea of what he wants, but more likely hasn’t really thought about it too much. He probably has a list of things he doesn’t want and maybe one or two must-haves, such as a pool. Beyond this, he will go by gut instinct. He can generally afford to pay more than an investor, because he is not looking at cash flow. He likely hasn’t considered the cost of insurance, property tax, and repairs. He knows what his monthly income is and maybe his banker has told him how much he can afford in monthly mortgage payments (which probably include escrow for taxes and insurance so he doesn’t have to think about it).
This buyer plans to live in the house for an indefinite period and is looking for comforts and things that are intangible but mean a lot to him. Perhaps he loves sauerkraut. He might be very comfortable buying a house near a sauerkraut factory. The location is meaningless to him, but it is going to scare away other buyers. Similarly with a pool. He might demand a pool, where another buyer might demand a pool is not present, not wanting to do pool maintenance. To summarize, the buyer wants:
- to buy based on emotion.
- to pay a low amount, but is willing to overpay for the right features.
- his own unique features.
- an easy purchase, where most things are already done for him.
The Investor Buyer
This buyer probably also has an idea of what he wants. He isn’t worried so much about how it looks, as whether it makes money. The extreme investor would purchase an ugly black box if it was proven to give a certain monthly income. This investor isn’t concerned about aesthetics if it is producing income. He is concerned about aesthetics to the degree that it attracts tenants or clients or buyers, or whatever the place is producing.
He is much more concerned with the purchase price because it has a direct impact on the mortgage payment and the take home cash at the end of the month. To summarize, this buyer wants:
- to buy based on bottom line income.
- to pay a low amount, and is very worried about overpaying.
- only the features that attract income.
- an easy purchase, but is willing to think creatively to get the deal done.
So, which one are you? Neither is right or wrong. An investor mindset would not be great when buying a personal residence. The challenge exists when there is crossover. Try buying one condo of a duplex right now to rent out – values are so high that only retail buyers can purchase them. Investors would lose money, but retail buyers don’t care. On the other hand, as a retail buyer of a condo on the beach, you might be willing to pay a pretty penny, to enjoy that place yourself. Determine your motivations for buying before you even start looking.