Cash for your House – Are House Buying Companies a Scam?

You’ve seen the signs I’m sure – Cash for your House or We Buy Houses CashCompanies that buy houses signs Maybe you’ve even gotten postcards or letters from some of them.  If you have had a house you haven’t been able to sell, you may have even thought about calling one of the signs posted in your neighborhood.

Julie Terruso a reporter from Philadelphia decided to call on all of the signs she could find.  She called 59 different  “We Buy Houses” signs and only reached a real person 16 times.  Of those, only four would give her their full name, even before they knew she was a reporter.  You have to begin to wonder if every We Buy Houses for Cash company is a scam.

Some Realtors® may tell you that these companies are all scams.  However, even those agents who tell you this, often have at least one cash investor in their list of phone contacts.   When your house needs a lot of work or won’t sell for some other reason, they call their list of investors.

Sometimes, it makes sense to sell your house to a cash buyer.   But, before you do, make sure your buyer is legitimate and not a scam.  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.

Below are five warning signs to watch for when talking to potential cash buyers that will help you avoid seller’s remorse.

1.  No Money Down Scam

Many of the scam buyers don’t have any money at all.  This may seem odd since they advertise that they “Buy Houses for 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 did not have the money to 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 student who shelled out $25,000 at one of these seminars at the back table.  The attendee didn’t have any money to buy a house.  Presumably they used their credit card to buy the “special training” at the back table.  In exchange for the student buying the special premiere training, the student was given a letter by the seminar company promising to fund the purchase of the homes the student found.

To a normal seller or real estate agent, this looks very similar to the typical pre approval 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 company 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 them more for your home.  Often the marked up price is more than the commission you would have paid if had you sold it through a real estate agent.

Most of these buyers are not really investors, but are brokerages, who sign a contract with you only to then “lure other investors in to make the purchase”.  These wholesalers as they are known, now collect 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?

Assigning of ContractAssigning Contract

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 was going to make such a large sum of money selling or assigning your contract.  How do you know if 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.  They Don’t Know the True Costs of Repairs for your Home

Okay, yTrue Costs of Repairs when Selling your Houseou have your house sold, or so you think.  You’re in contract with a “We Buy Houses” 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, and a fast close.  Your buyer didn’t do any inspections other than a brief walk through.  They may have given you an estimate of what they thought the repair costs were going to be.  But, did they really know what repairs were 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 the repairs because they’ve never paid for repairs themselves.

As a result, when they try to shop their contract with you to legitimate buyers, no one wants to buy it.  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?  They try to renegotiate the purchase price.

Experienced and professional buyers know the true costs of repairs and will only renegotiate if they discover something significant that you haven’t told them about before.

4.  Try to Renegotiate the Price after you’re in Contract

Cash for your house - close the dealWhen 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 its 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.

5.  Don’t have any Reviews or Testimonials

Anyone who is legitimately in business will have a website and a history of previous seller experiences.  Not every review will be 5 stars or A+, but their customer experiences tell you what it’s like to work with them.  I’m proud to have testimonials from homeowners and Realtors® who have worked with us in the past and know how professional we are.  You can also look for customer reviews on Yelp, Google and Facebook.  I rarely look at the best reviews when researching a product as they may be suspect.  Even the best companies sometimes provide a less than perfect customer experience.

How to Avoid Being Scammed and Work Only 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.

  1.  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 their recent 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.

  1.  Check references

Want to really 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.

3.  Legitimate Cash Buying Companies return your call and give you their full name!

It’s hard to believe that people spend $1 to $2 per sign, have them placed around town and then when you do call them, they won’t call you back.  Maybe that’s because of all of the angry neighbors and code enforcement people who call about the signs.

There are legitimate companies that buy houses for cash, for a fair price and close in the time frame they promise.  You don’t have to sell to a buyer who comes back to renegotiate the price when they have a problem.  Make sure you are dealing with a professional who does what they say they will do.  Do your due diligence before selling your home or you may end up with seller’s remorse.

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