You’ve seen the signs I’m sure – Cash for your House or We Buy Houses Cash. Maybe you’ve even gotten postcards or letters from some of them. Sometimes it makes sense to sell your house to a cash buyer, but before you do, make sure your buyer is legitimate.
There are people who’s legitimate business is buying and selling houses. These buyers can help a seller in a difficult situation to be able to sell a house quickly or to sell a house that is difficult to sell. However, there are plenty of people pretending to be cash buyers. These pretenders, may not actually be able to buy your house.
Below are four warning signs to watch for when talking to potential cash buyers.
1. Buyers Who Don’t Have Their own Cash
This may seem odd since they all advertise that they “Buy Houses Cash”. How could it be that they don’t really have any cash? Let me clue you in to a recent strategy on the weekend get rich quick seminars. In the past few months one of these get rich in real estate, no money down seminars came through Sacramento. This seminar was being “taught” by some former television house flipping stars. These seminar gurus realized that many of their potential attendees may not have the money actually purchase a house. So they had to find a way to guarantee that their students could buy houses with “No Money Down”.
I talked to one person who shelled out $25,000 at one of these seminars at the back table. The attendee didn’t have the money to buy a house. Presumably they used their credit card to buy the “special training”. In exchange for the student buying the special premiere training, the student was given a letter promising to fund the purchase of the homes they found.
To a normal seller or real estate agent, this looks very similar to the typical letter a lender would give a buyer. This letter would say the bank was going to pay for the buyer’s purchase up to some specified amount. What the real estate agents and property sellers didn’t know was that the television/seminar backer had no intention of actually funding the purchase of the property unless it was at a ridiculously low price.
2. Sell your Contract to Someone Else
What the real game was with this training was teaching the attendees to get the property into contract and then sell their contract to another buyer. This process is called “wholesaling” in the industry. In this case, the student attendee is given a letter to show proof of funds to buy your house (assuming they paid $25,000 for the special training). The students then go out and write an all cash offer for your home. Should you accept their offer, they then take your signed contract and try to sell it to someone else who is willing to pay more for your home.
This wholesaler as they are known, now collects the difference between what you sold the house to them for and what they sell your contract to their buyer for. See how that works? I get calls and emails regularly from these buyers who have some house that they want to sell me their contract for.
Sometimes the difference between what the wholesaler pays you and what they receive from their buyer is $20,000-$30,000. Sometimes it’s only a few thousand dollars. Is this illegal? No. You and your buyer both entered into a contract willingly for what you considered a fair price. Once you’re in contract, your buyer simply chooses to sell your contract to a 3rd party which is done regularly in the business world. In contract speak, it’s called “assigning”. If you read your mortgage carefully, you’ll usually find a sentence saying that your lender has the right to assign or transfer your loan.
Now you may have no problems letting the other guy make a fast buck by buying your house for cash and then selling the contract to another person. After all, you agreed to a price that you felt was fair and you got to move on with your life. On the other hand, you may not feel that you got a fair price if you knew that your buyer is going to make money selling or assigning your contract. How do you know your contract may be sold? Just look for the phrase “and or assigns” following the buyer’s name. This is the way most of the seminar gurus tell their students to do it.
3. Don’t Know True Costs of Repairs
Okay, you have your house sold, or so you think. You’re in contract with a “We Buy Houses Sacramento” guy that you called off of some sign or letter. They did a walk through your house and promised to buy your house as-is, any condition. Your buyer didn’t do any inspections other than a brief walk through. They gave you an estimate of what they think the repair costs were going to be. But, do they really know what repairs are actually needed and how much they cost just by walking through your house and a quick trip to the local hardware store? Did they over estimate the needed repair? Did they under estimate the unknown issues?
I sometimes buy houses from these wholesalers. But most of the time I get calls from them with properties that the numbers just don’t make any sense. They tell me there’s only $15,000 in repairs. However, after I drive over to look at the house, I see that it’s actually closer to $40,000 in repairs. Many times these cash buyers have never written a check for any kind of repair. They don’t have any idea how much it really costs to do many repairs because they’ve never paid for repairs themselves. As a result, when they try to shop their contract with your, no one wants to buy it. Experienced and professional buyers know the true costs of repairs as well as the true potential resale value.
So what happens when one of these “We Buy Houses for cash” guys doesn’t have any cash, doesn’t know the true costs of repairs and because of that can’t find a buyer for your contract?
4. Can’t Close the Deal
When these buyers can’t find a buyer because they’ve misjudged the actual costs of repairs, then they start back peddling. They ask for an extension of time to close escrow, or for a price reduction. At some point they may simply cancel their contract with you. What does that mean for you? You are left without having sold your house, sometimes 30-60 days later. And if you needed to sell your house quickly you are starting all over.
I see this on a fairly regular basis. I’ll see a house listed for sale on the Multiple Listing Service have it’s status changed from Active to Pending – meaning it’s in contract with a potential buyer. Then someone will come to me with an offer to sell me their contract for the same house. I usually say “no thank you” after looking at the real numbers. Then after a period of time, the house is mysteriously back on the market as the potential buyer backs out of the deal because they couldn’t find a buyer themselves.
How to Know You’re Dealing with a Legitimate Cash Buyer
When you are really needing a cash buyer, or need to be able to sell your home quickly, you don’t need to be jerked around by someone who is playing games. You need to work with a serious professional, who can do what they say and when they say. The following are two things that you can do to help make sure you are dealing with a legitimate cash buyer. Someone who really can close the deal and help you move on with your life.
Look for proof of ability for buyer to purchase
Some cash buyers use loans from third parties or hard money lenders. There’s nothing new about that. But a better cash buyer is one who can show you a copy of a recent their bank statement. If their bank statement shows sufficient funds, you a probably dealing with a buyer who won’t be trying to sell your contract.
Want to really want to know if a person is a legitimate cash buyer? Ask them the name of their escrow officer and title company that they use. Then, call the title company where they do business. If they pay cash for houses on a regular basis, they will have an existing relationship with a title company who will know their reputation. Make sure you deal with someone who has the name of their escrow officer readily available.
There are cash buyers who can purchase your home for a fair price, close in the time frame they promise. You don’t have to sell to a buyer who comes back peddling when they have a problem. Make sure you are dealing with a professional who does what they say they will do.