We Buy Houses for Cash -- Is It For Real?
Are You Getting Ripped Off By Cash For Houses Schemes?
We have all wondered about the We Buy Houses for Cash guys. You've probably seen these signs: "We Pay Cash For Houses" or "We Buy Ugly Homes" nailed to telephone poles and stuck on barbed wire fences along the freeway. Maybe you've received a flyer in the mail that promises investors will buy your house -- in any condition -- and for all cash. These flyers are printed in bright colors with cluttered graphics and text in 24-point bold typefaces, urging you to call today for a fast sale.
Some of these signs say the buyers are real estate licensees but they will not charge you a commission.
A smart person might wonder what's the catch? Because a smart person would figure it sounds too easy and too good to be true. There is always a catch.
"We Buy Houses for Cash" Ads Target Certain Types of Home Sellers
Companies that pay cash for homes prey on home sellers who are in distress or need to quickly sell. The cash-paying buyers often advertise the types of situations they are searching for in hopes that you will recognize your predicament and call them. They look for:
No-Commission and No-Fee Promises for Getting Fast Cash
Generally, these companies will point out that you will pay no real estate commissions, and they take great delight in talking about how real estate agents don't deserve to get rich off you. The fact is a real estate agent isn't getting rich from a single sale commission, but these companies are getting rich by taking advantage of your situation. Most of the time, sellers net more by hiring a listing agent.
Further, the buyers would profit even further if they charged a commission. When acting as a principal, most do not charge commissions because it's such a strong conflict of interest. They don't want to get sued. There is only one thing worse than ripping off a seller, and that's ripping them off on top of squeezing a commission under dual agency.
They don't charge fees for a bunch of reasons. Also, they typically process the sales in-house instead of hiring an outside service, and they pay for their own title policies -- or even skip title insurance. Saving every dime they can.
How Much Do Fast-Cash Companies Pay?
Back in the old days, before Candy Crush and Facebook, we used to refer to these firms as EPs, meaning equity purchase companies. These fash-cash buyers focus solely with your equity position. The strategy used by cash-for-homes companies is to negotiate the lowest price possible for your home. To determine your net profits of sale, first consider the following:
- Your offer will likely be less than 80% of your home's market value, and your equity position could be discounted more than 50%.
- The buyers take title "subject to" your existing loans, meaning they take over your mortgage payments. You are still on the hook for that loan until it is paid off. Subject-to transactions are generally against the law.
- They raise pools of money or use lines of credit to cash you out, and the less cash they can give you, the faster they will close.
After Closing With Fast-Cash Companies
First, realize that whether you sell to a fast-cash buyer or a conventional buyer, you will receive cash either way. The difference is a conventional buyer will probably pay more, and the conventional buyer will probably take out financing that will pay off your existing mortgages.
After closing, the fash-cash buyer will most likely turn around and resell your home to a conventional buyer for a higher sales price. That's how they make a whopping profit.
If you aren't truly desperate, you might want to consider listing your home for sale with a reputable full-service brokerage instead of calling any of these types of fast-cash-for-houses companies. Regardless of what they say to you, they are looking to make a fast buck off you.
If you honestly cannot sell your home, you might want to consider alternatives to home selling and preserve your equity. Some people don't mind being taken advantage of. If you're one of those, it's OK.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.