We Buy Homes for Cash (Seller Beware)

We Buy Homes for Cash (Seller Beware)

You have seen these signs on telephone poles, but what exactly are they all about? Can they be legitimate?

Maybe you’ve received a flyer in the mail that promises investors will buy your house – in any condition – and for all cash. 

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, and often it is just that.

Ads Target Certain Types of Home Sellers

Companies that pay cash for homes prey on Sellers who are in distress or need to quickly sell. The cash-paying Buyers often advertise the types of situations they’re searching for in hopes that you’ll recognize your predicament and call them. They look for:

* Sellers who can’t sell or whose listings expire

* Sellers who are divorcing

* Bankruptcies

* Homes in probate

* Homes in foreclosure

* Sellers whose employers transfer them

* Owners who are evicting tenants

* Vacant home

* Trashed or damaged homes

No-Commission and No-Fee Promises for Getting Fast Cash

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, 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.

Watch for Disclosures they will want you to sign.

How Much Do Fast-Cash Companies Pay?

These firms used to be referred to as EPs, meaning equity purchase companies. These fash-cash Buyers focus solely on 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 a sale, first consider the following:

The basic formula is: After Repair Value times 70% minus Repair Costs equals Maximum Allowable Offer. (Or ARV*0.7=MAO) This means they’ll determine what the house should sell for in good condition. Then they’ll take 70% of that. Then they’ll subtract repair costs. That’s the maximum they’ll offer. And they’ll generally start out lower. In areas with really soft or declining prices, they may use a multiplier of 65%, rather than 70%.

For example: A house in a neighborhood that, in good condition, would sell quickly for $500,000 (good comps are probably in the range of $501,000-$510,000.) 

Let’s say the house needs $30,000 in repairs and upgrades – new roof, new carpet, kitchen and bath updates, plus a bit of landscaping. You begin at $500,000. Take 70% of that, or $350,000. Then subtract the $30,000 repair costs. The maximum they’ll offer is $320,000.

And they’ll begin lower. Among the questions you’ll be asked on the phone is: “How much do you owe on the house?” “If I could make you an all-cash offer and close in 10 days, what’s the least you’d accept?”

If you owe more than $320,000, to use our example above, they’ll have to try a different strategy. If you answer with anything less than $320,000 to the other two questions, and you owe under $320,000, that’s what their offer will be. So if you say, “I owe $285,000, and I just want to get rid of it,” they’ll begin at $285,000.

Buyers take title “subject to” your existing loans, meaning they take over your mortgage payments. You’re still on the hook for that loan until it is paid off. Subject-to transactions are generally against the law (check your state). 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.

For this strategy to work, the Seller must have substantial equity in the property. If you do, then they’ll buy your house for cash quickly. If not, they may propose several other options. 

After Closing

Whether you sell to a fast-cash or a conventional Buyer, you will receive cash either way. The difference is a conventional Buyer will probably pay more, and 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 – this is called “flipping a property.” 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’re 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.

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Charles McDonald
Charles McDonald
Charlottesville Solutions
2013 Woodbrook Court, Charlottesville VA 22901
REALTOR® - Licensed to sell Real Estate in Virginia
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