'We Buy Homes for Cash': Is It For Real?
Are You Getting Ripped Off By Cash Buyers for Houses?
On a leisurely ride around town, you've likely seen signs that read: "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 won't charge you a commission. A smart person might wonder what's the catch since it sounds too easy and too good to be true. So, what is the catch?
Cash Buyers for Houses Target Certain Types of 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 you'll recognize your predicament and call them. They typically look for:
No-Commission and No-Fee Promises for Cash Sale
Generally, these companies will point out that you'll 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 don't charge commissions because there'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 in 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 altogether. Saving every dime they can.
How Much Do Cash Buyers for Houses Pay?
Back in the day, before the boom of social media, we used to refer to these cash buyers for houses 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 percent of your home's market value, and your equity position could be discounted by more than 50 percent.
- The buyers take title "subject to" your existing loan, 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.
What to Consider After Closing
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 for your home and will also take out financing that will pay off your existing loan.
After closing, the fash-cash buyer will most likely turn around and resell your home to a conventional buyer for a higher sales price, making a whopping profit in the process.
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 buyers who are looking to pay cash. Regardless of what they say to you, they're looking to make a fast buck off your situation.
In cases where you're struggling to sell your home, you might want to consider alternatives to home selling and preserving your equity.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.