We Buy Houses: UGLY Truth About Selling To A Cash Buyer Company

31 October 2018Home Selling

 

JOE BUYS
UGLY HOUSES
FOR CASH!
555-555-5555

 
We’ve all seen those types of signs plastered on billboards, community bulletin boards and yard signs littered around street corners, telephone poles and exit/entrance ramps to the highway.

They’re Basically Everywhere!

The best and most recognized advertisement of all is the cartoon caveman on a billboard or yard sign that goes by the name of Ug Lee. Get it? “Ug Lee”…we buy UGLY houses? It may be silly, but it’s good advertising because it made you chuckle or laugh and especially because you remember it.

And then there are the postcards and handwritten notes on yellow paper, aka yellow letters in the industry, that show up in your mailbox or tucked in the front door of your house. Which sounds kind of weird, doesn’t it? Getting a personal note from a stranger that is offering to buy your house for cash?

Surely you’ve seen some or all of these tactics. And it’s highly likely that you’ve wondered “Why do they think my house is UGLY? or How can anyone afford to pay cash for my house?  or Oh My Gosh  – what a scam! No one wants to buy my old house for cash!

But you might also be wondering,  how much they would give you for your house right now, because you just might sell if the price is right.

picture of a real we buy houses company

Are These Legitimate Companies That Can Be Trusted?

 
Yes, but proceed with caution. Let me explain.

The signs. The letters. The postcard. The ugly caveman. They all have a buyer behind them. They all have an investor, flipper or wholesaler person or company that really is interested in buying someone’s house.

But for the right price, their price.

For them, it’s a matter of investment and most of these investors and companies are legitimate real estate experts. So don’t expect to get full price or market value when being offered cash for your house. These cash buyers are looking for houses that may or may not need some work and can be sold or held for profit.

How much cash they offer, really does depend on their reason for buying it and the amount of money needed to renovate, repair, upgrade, hold, and sell (or rent) to someone else.

What about the scams you hear about?

As for the scam part – that depends completely on who is doing the buying and in most cases, they’re not a scam. A scam implies that something illegal is happening and honestly, being a real estate investor, wholesaler, or flipper isn’t illegal.

Someone may think they got scammed if they didn’t know what to expect, got less money than they thought they should, or didn’t understand the risks of selling to a wholesaler instead of an investor. Which I get into the differences between the two in another section of this article.

Really, whether or not the seller can make any money or relieve the headache of owning the house depends on the reason the person is selling.

And, just as with any real estate transaction, there are legalities involved. And taxes. And marketing. And home inspections. And all the things that come with buying and selling a house. Things that you might not want to deal with and look for a cash buyer as a solution.

These cash buyers are one of the many options available to sellers and it is up to the seller to be fully informed about how each type of cash buyer works.

But the “We Buy Houses” and “Cash For Your House” companies are mostly 100% legitimate real estate businesses.

 
picture of house on top of cash pile

Why Would I Want to Sell My House For Cash?

 
Okay, let’s start with the understanding that not everyone needs or wants to sell their house quickly enough to consider selling it for a low cash offer. Some people are okay waiting a few months or longer to sell their house, in hopes of securing a better deal with more profit.

Others? Well, they need to get rid of the house as quickly as possible. These people are what real estate agents and investors call a “motivated seller”.

Now, just who is this “motivated seller” and why would they consider selling their house for cash?

Well, to begin with, whatever the circumstances, it will be someone who doesn’t want the hassle of selling the house the traditional way and dealing with prepping the house to sell, the marketing involved, the inspections required, the various types of financing that may or may not work for the buyer and all of the other details involved with the home selling process.

A motivated seller is willing to look at non-traditional ways to sell their house quickly and can be just about anybody and often is someone you didn’t think would need or want to sell their house for cash.

Types of motivated sellers include:

  • Inherited or Probate Properties: Someone inherited some real estate, doesn’t need the house to live in and doesn’t want to deal with all the details of the home selling process because the house is in Probate and needs to be settled or dealt with quickly.
  • Disgruntled Landlords: Someone who has a rental property and is tired of dealing with tenants, chasing the rent payments, getting new tenants, and the overall headache of being a landlord.
  • Distressed Property Owners: Someone who has a house that is considered a ‘distressed’ piece of property because they’ve not maintained it very well, it won’t pass a home inspection, and they don’t want the headache of fixing it up.
  • Flippers In Over Their Head: Someone who bought a house to fix up and then realized they don’t have the stomach, back, cash or time to do the project and are ready to just get rid of it quickly.
  • Financially Distressed Property Owners: Financially troubled homeowners who are strapped for cash and need relief fast. It’s possible that they’re facing foreclosure or were hit hard by the costs of care with an unexpected illness. Of course, the catch here is they need to have quite a bit of equity in the house so that when they sell it for cash it’s enough to pay off the mortgage and to get them out of financial trouble.
  • Divorcing Couple: A couple going through a divorce, may want to sell the house and divide the proceeds between them. In this case, they’re likely fighting each other over ownership of all the stuff they had while married. They figure it’s easier to just sell everything so they can split the cash as part of the divorce settlement and quickly go their separate ways.

As you can see, this doesn’t describe most homeowners. But, it does describe some. And it’s the “some” that the “Buy Your House for Cash” people want to attract with their advertising. This explains why they cast their marketing net wide to include street corners, community bulletin boards, random postcards, and letter mailings and banners in odd places.

 
picture of a suitcase with cash in it

How Much Money Will They Buy My House For?

 
Ah, this is where many and maybe you, think that this is a scam.

Remember, the people and companies that offer to buy your house for cash do it with the intention of later selling it for a profit, as a flipper might do.

Or, they are the “finder” and sell the contract on the house to someone else for a fee, this is something a wholesaler will do.

Or, they want to buy and hold while maybe renting it for a while, this is what a real estate investor will do.

Next I’ll show you how they will figure out how much cash they will pay for your house.

How they will determine the cash offer to buy your house

The “We Buy Houses” people are in a lot of ways just like people you may enjoy watching on TV.

They’re the couples on home improvement television shows who look for run-down houses and properties, replace everything inside with designer fixtures and flooring, and then in less than 90 days, they sell the house for a HUGE profit.

Of course, with the magic of television, it’s all done in 30 minutes. Seriously, even doing it in less than 90 days sounds good, doesn’t it? Until you learn just how much risk (and work) is involved.

What risks? To begin with, the flipper must know the area, the real estate market, and have buyers in mind (or know they are out there) before they take on a new project.

Then, they must figure out all the selling costs associated with making the house ready to sell, while figuring in the amount of profit they need to make so that it makes sense to even offer to buy the house in the first place.

And, for all of that to happen it takes some analysis, prior experience and guesstimates.

Here’s the formula that a flipper uses to determine the cash offer:

 
After Repair Value (ARV) – Renovation Costs – Holding Costs – Selling Costs – Desired Profit  = Buy The House for Cash Offer

So what do all these mean? Let’s take a look at each item.

After Repair Value (ARV)

ARV is a common acronym used by real estate investors and flippers. It stands for After Repair Value and is what the house will be worth after repairs and upgrades have been made.

This is the first step every flipper takes when evaluating a potential house to buy. When they know what people will pay for the house after everything is done, then they begin listing their anticipated expenses for repair and upgrades.

Sounds simple, but let’s do a quick review of how the flipper gets to the cash value they’re willing to give your house.

Where do they get the After Repair Cost from? Well, they do a bit of research online and look for similar houses that recently sold in the area and from there they figure out the “going rate” and use that as the ARV.

This is part art and part science, so it is important they know the local real estate market well in order to correctly estimate the ARV. Or partner with a Realtor who can help them out with determining the ARV.

Renovation Costs

How do they figure the Renovation Costs?

This is the estimate they work with to budget the cost of repairs and upgrades. Some flippers are so experienced at flipping that they may be able to just look at pictures or use descriptions someone gives them, add that to the age and size of the house and be able to make a really good guess on the repair costs!

Others might use a $$/square foot base to start estimating basic cosmetic renovations.

These repairs could include minor electrical and plumbing fixtures, new flooring (carpet, hardwood, vinyl), painting of the inside and outside, new baseboards, new kitchen and bathroom cabinets and countertops and appliances, interior doors and those leading to the outside, maybe a deck or patio, fencing, and possibly some landscaping.

As an example, their $$/square foot formula would look like this, with a $30/square foot estimate.

  • House is 1,200 square feet, plan to spend $36,000 on basic repair and renovation (1,200 x $30 = $36,000)

The more major or minor the repairs that are needed to your home will increase or decrease the $$/square foot estimate used in the formula.

Holding Costs

The next step for the flipper is to estimate the Holding Costs. Remember, when they purchase the house they are now responsible for property taxes, insurance, utilities, maintenance, and any homeowner association fees.

Every single one of these costs needs to be account for during the entire duration they will own the property. Holding the property for longer than estimated will increase these holding costs and eat away at the flippers profits.

Selling Costs

Don’t forget, a flipper will most likely be putting your home back on the market to resell for that ARV we talked about. Selling a house requires a lot of money.

For example, they will want to stage the property with rental furniture or use virtual staging for the photographs. Then, there is the big cost of hiring a real estate agent to market the property. Or, they might opt to list a house on the MLS without a Realtor to save on selling costs.

Profits

And finally, the flipper needs to consider what they want their Desired Profits to be after selling the house. A good rule of thumb for most flippers is to figure at least a 10-15% profit. That’s 10-15% of the ARV (After Renovation Value).

A different formula that many flippers will use is a very simple formula to get the Cash Offer Price is ARV x 70% – Repair Cost = Offer Price.

  • Which would look like this:  $250,000 X .70 = $175,000. So $175,000 – $36,000 = $139,000.

In this formula that 70% difference from ARV is to account for profit, holding and selling costs.

$139,000 is the cash offer for a house that will end up being worth $250,000 on the market after all said and done.

Whichever formula the flipper uses, you can always count on the “We Buy Houses for Cash” offer to be based on a 60 – 70% After Repair Value (ARV) of the house based on the surrounding area.

This might sound like a bad deal because the cash price is so low. But in reality, you need to look at all the money and time the flipper will put into the house to make it sellable at the highest possible price. Also, then look at the risks the flipper is taking, with one of those big risks being unable to sell the house quickly or at all!

This may make the cash price look a lot more attractive to you once you see their perspective and business model.

Please Note: A wholesaler will use the same numbers and formulas but they also have to secure buying your house for a deal that they can then sell to a flipper, so their offer could be even less. More on wholesalers in a bit.

Also, if you were interested in trying out some online calculators that investors/flippers/wholesalers use to determine all these estimations, check out BiggerPockets, they have the most helpful resources available for this sort of thing.


 
picture os a sign that says pros cons

What Are the Pros & Cons of Selling To a Cash Buyer?

 
 
There are several different Pros & Cons to selling your house to a real estate investor. Below are the most common.

Pros
  • The selling process is usually the quickest way to sell a house and get rid of a house you don’t want anymore
  • You won’t have the hassle of making repairs to your home before selling
  • Your out of pocket costs for the entire process will be the lowest option
  • No hidden problems that can come up with a traditional real estate sale such as mortgage financing or inspections
  • You can always find a buyer and probably multiple buyers if you are willing to sell for a low price and won’t have to worry about not selling
Cons
  • You are going to have to settle for a lot less money that if you were to do a traditional real estate sale
  • You won’t have a real estate agent working on your behalf and you will deal directly with the cash buyers for negotiations
  • The chances of dealing with people who are willing to take advantage of you are increased

The biggest Pro in the above list is probably the guarantee of getting rid of the house quickly and the biggest Con is obviously having to settle for a low price. Carefully weighing your options out is prudent of you if you are considering this type of real estate sale.

 
picture of a keyboard with a verified key

How Do I Verify Who These Companies (or People) Are?

 
Now that you know the “behind the scenes” reasons why someone would sell their house for cash and why someone would want to buy a house for cash and all that it involves, you may decide that you are one of the “some” people mentioned earlier.

Whatever your circumstances, you decide that maybe selling your house for cash is a good idea. Now what? You don’t want to be scammed.

You don’t want to lose more than you need to when selling to a cash buyer. How do you figure out whether or not the company or person that is offering to buy your house for cash is who they say they are?

Here is how you can determine if they are valid cash buyers for your house.

Due Diligence is Important

Due diligence – reasonable steps taken by someone to satisfy a legal requirement, especially when buying or selling something.

In this case your due diligence will be to determine if the person or company has the money to cover the Cash Price Offer, has a reputation in the community or area for following through on contracts and keeping their word, and that they are a legal entity according to the county and state, and are able to purchase your house.

Get their Credentials and Do Some Verification Steps

Start at the beginning and do some basic research in order to determine who these companies and people are. If you are not familiar with basic online and in person measures you can take to look up people and companies, follow these tips.

  • Ask for the full legal company name and the state they are registered to that allows them to do business. Typically, the business will be an LLC, S-Corp or C-Corp.
  • Ask and get the full name(s) of the people you will be dealing with and their role or title in the company.
  • Ask for the full name of the owner(s) of the company (because you may not ever deal with the owner, only the salesperson or an individual representing the owner).
  • Look up their names online. Look for LinkedIn and social media profiles and read through them and see what information you discover.
  • Go to the Secretary of State website for both your state and the state they say they are registered in and search for the company name to verify their standing.
  • Do some Google searches of the company name, the owners’ name and the individual names you received. You never know what will come up but look for a positive online presence.
  • Go to your County and State justice/law enforcement websites (or in person to the offices) and search for pending lawsuits, settled lawsuits, and any other court related issues involving their name.

All of this information will give you an excellent idea of their reputation and how they do business. It will also help you decide whether or not you want to do business with such a person.

Please Note: Be very suspicious of anyone or company with a negative online presence or even a lack of a basic online presence.


 
picture of a man being cautious

What Do I Need To Watch Out For When Dealing With Them?

 
Okay, you decided to go ahead and either entertain or take the Cash Offer. How does this work so that you get what you want, know what to expect, and can walk away feeling like you got the best deal possible?

Proof of Funds

First, the person you’re dealing with needs to actually have the funding to purchase the house with cash. So how do you do that? With what is called a proof of funds letter or statement.

A proof of funds letter or statement should have the following:

  • Be on official letterhead from the institution where the funds are held, whether it’s a bank or stock brokerage firm.
  • Date it was issued
  • Name of the account holder (should match one or more of the full names you got during your initial due diligence)
  • The balance of funds on deposit

The proof of funds document shown to you could be any of the following:

  • An original bank statement
  • An online banking statement that you can print out
  • An open line of credit, equity or otherwise
  • A copy of a money market account balance
  • A certified financial statement (usually offered by a company representative)

Get Professional Legal Advice (Read the Fine Print)

With all cash buyers, protect yourself by working with a real estate attorney. That attorney will represent you throughout the whole process and have a goal of protecting you each step of the way. They will advise you of the laws in your state as well as review the contracts to make sure you’re getting what you want from the deal.

Speaking of contracts, they can get complicated. Which is also why you need a real estate attorney. Yes, even if you have experience reading contracts and understanding most legalese, having an attorney will stop you from overlooking something or misunderstanding something.

Even the best business people have an attorney and you can bet that the real estate investor has an attorney.

In the end, you will make more money and walk away from the deal with more confidence. If you leave the contracts and legalese to your real estate attorney to figure out.

Double Check Everything & Plan for the Unexpected

Okay, what can you possibly overlook? What about the contingencies that the cash buyer attached to the contract? Are you ok if it says they can back out of the deal if a buyer isn’t found in 30 days? Because that’s 30 more days that you will have added to your finances for mortgage, taxes, insurance, utilities, etc.

And, if you’re looking to sell quickly (which you are if you are working with a Cash Buyer) then 30 days can be a long time for you to find out they are going to back out and you are back where you started. You might want to tighten up the timelines or be ok with what could happen as a result of the contingencies.

Another possible contingency to watch out for is an inspection period and contingency. If you are selling for cash, it typically is an As-Is sale. But if you have an inspection contingency that could open the door for a renegotiation with the buyer. This is a common tactic some people use to get a better deal than the one they originally negotiated.

This is where the real estate attorney can be very helpful. Not only can they catch a bad contingency plan, but they can also help you understand other things about the contract that will prevent the buyer from renegotiating the contract at some point.

picture of a real estate investor and a wholesaler

The Difference Between Selling to a Real Estate Investor and a Wholesaler

 
The flipper has been covered extensively by now and is a type of investor. So, let me explain what a wholesaler does and how that is different than an investor.

Wholesalers

Now let’s take a look at what wholesaling is. The goal with real estate wholesaling is to lock the house up in a contract that allows them to assign the contract to another buyer. They are basically selling a good deal to an investor (usually a flipper) and taking a cut for finding the deal. They never actually buy your house or own it at any time.

A lot of these “We Buy Houses” companies are actually wholesalers that are masquerading around as cash buyers.  They are not bad necessarily, hopefully they will have an investor lined up and ready to go, or they have a large network of investors to tap into and find a buyer.

But what happens if they don’t find a buyer to take on the contract?

This is where you have to watch out for a contingency in the purchase contract that allows the wholesaler to back out, if they are unable to find a buyer before that date. This limits the risk to the wholesaler but is something you need to be fully aware of because there is a risk that you won’t get the cash as quickly as you had hoped or at all.

Just think, you were expecting to have cash in hand in less than 30 days, the wholesaler doesn’t get a buyer and backs out in 24 days and you’re left with the house that you wanted to sell quickly.

If you do decide to work with a wholesaler and they find a buyer to take over your contract, it shouldn’t cost a seller any more money when they assign the contract.

But this is another example of where you will want your attorney to help you navigate through the process.

Real Estate Investors

Real estate investors can be a general term for a few types of people.

  • Landlords otherwise known as buy & hold investors
  • Flippers which is usually who is behind the We Buy Houses companies
  • Passive investors who typically just invest money and don’t get involved in any work

All real estate investors are looking for property that will bring in a future income stream.

A buy & hold investor is looking for a rental property that can be filled with a tenant quickly after the purchase. So their goal is to buy and hold the house so they can make returns on the rent and appreciation of the house.

They will definitely consider the costs associated with repair and upgrades, but instead of an immediate cash profit, they will factor in the monthly rent they can expect. Sometimes this results in you getting a better cash offer than if you were dealing with a flipper and the risks aren’t as high as they will be with a wholesaler.

You would not be dealing with a passive investor because they are well, passive! So this type of investor can be ignored here.

picture of a maze and the word options

What Are The Alternatives To Selling To A “We Buy Houses” Company?

 
Okay, so after a bit of research and learning about these “We Buy Houses” and “Cash For Your Ugly House” companies, you decide that really, you’re better off going a different route.

Alternatives to selling to a “We Buy Houses” company:

  • List your house with a real estate agent
  • Sell your house yourself – as a For Sale By Owner
  • Make the repairs and upgrades yourself and sell it for a profit
  • Keep the house as a rental property
  • Sell it online using an iBuyer real estate website like Zillow Instant Offers, Opendoor or Offerpad

Lets dive into each of these options.

Listing with a Real Estate Agent

Listing your house with a real estate agent means you are putting the responsibility on someone else to market your home, find a buyer, make sure the buyer has approved financing and is able to navigate you through the sales process successfully.

Yes, you pay them a commission, but they pay for all the marketing to find a buyer with nothing from you until the sale of your house. They put time, money, and effort into making sure that your house sells. So, any commissions involved can be seen as money paid after the sale.

If you are looking to sell your house fast, a good real estate agent knows the correct marketing your home will need to attract multiple investors in todays real estate market. This could result in a higher sales price for you when you have multiple people interested in your home.

Selling Yourself (FSBO)

Selling your house yourself can be done, and is done by many people everyday. So what do you do? Just put a sign in the front yard and wait for the buyers to come in?

Well, actually there’s more to it than that. If you look at what a real estate agent does to sell your house, you can figure that you’ll be doing the same. Marketing, showing the house to prospective buyers, making sure the buyer has approved funding, working with attorneys and more.

The best option when selling your house by owner is to use what is called flat fee MLS listing. This allows you to list your house for sale on the MLS and other websites that real estates agents use but still retail the right to sell a house yourself.

Renovate and Cash Out

Make the repairs and upgrades yourself and sell it for a profit. Honestly, unless you purchased the house two years ago, the chances are very good that it needs repairs and upgrades. And, if it’s a house that you inherited, you likely have no idea what needs to be done for it to be sellable. If that’s the case, get a home inspection so you know what needs to be done.

Which repairs or updates should you focus on? That depends on your budget and ability to do the work or find good contractors to do the work for you.

Bathrooms, kitchens, and a good painting inside are a good start. How old is the roof? 25 years or close to that? Then consider replacing it. How’s the HVAC system? What about the wooden deck out back? You may need to replace a few boards, power wash, and seal, or even replace the entire deck.

You’ll need to view your house with fresh eyes, and this is where bringing in a home inspector or a general contractor is a really good idea. They are objective and their final report will lay out what needs to be done.

Follow the same formula we described above that flippers use to score a nice profit after renovating your house and selling for a profit. Then the television networks will come looking for you as their next big home flipping star!

Transition it to a Rental

Maybe you should keep the house as rental property? Are you ready to be a landlord? Or hire a property management company? Be prepared to do repairs before you can legally rent. This depends on your local and state real estate laws, so make sure to read them and understand them. Understand that many states have different laws for people who live in the house and those who use it for an income stream.

If you properly account for all the costs and are able to have money left over after collecting rents and paying the bills every month, that is what is called cash flow. This type of monthly reoccurring revenue could be a solid option for you to make some extra cash and continue to build equity in your home.

Sell Using an iBuyer Service

Sell it online using a iBuyer real estate website like Zillow Instant Offers, Opendoor or Offerpad. This is the newest hot thing to make waves in the real estate industry. These companies act a lot like the “We Buy Houses” companies but they make you an offer within 24-72 hours based on what you submitted online. They use a lot of artificial intelligence to run through very sophisticated algorithms and figure out what an appropriate offer is.

Keep in mind, after they make an offer and you accept, they will have a home inspection period in place where they can verify the information you submitted online is correct. If they are not comfortable with the condition, they can renegotiate or back out of the offer.

 
picture of woman thinking

Final Thoughts on “We Buy Houses” Companies

 
Selling a house isn’t the easiest thing to do. The options covered here are all good options. Among all the choices available to you, only you can select the one that fits your situation and your level of risk sensitivity.

Even though this started out as an “UGLY Truth About We Buy Houses Companies”, the reality is that when you’re strapped for time and/or cash the “We Buy Houses” and “WE BUY UGLY HOUSES!” companies are excellent choices as long as you understand who is doing the buying and you have done your due diligence.

Keep in mind, there are more than just the big brand name franchise companies out there. In your market, there are a lot of local investors who do the same thing and would be happy to see if they can make a deal with you to buy your house quickly and for cash.

The other choices are just as viable and likely more familiar to you. What matters most is that whichever choice you make, you make sure you’re fully informed and do your due diligence and that you consult the professionals in areas you aren’t fully knowledgeable about.

That’s the only way you’ll be comfortable with the decision you make and to ensure that you get the best deal for your house.

Hopefully you are not better informed about the “We Buy Houses” companies. Still have more questions or have an experience you want to share? Drop a comment below and I’ll get back to you!

picture of kris lippi
About the Author: This article was written by Kris Lippi, the Broker and Owner of Get LISTED Realty. He enjoys writing about real estate related topics such as buying and selling homes, how-to guides for around the house and home product recommendations. He has been featured in Inman, Readers Digest, American Express, Fit Small Business, Policy Genius, Lending Tree, GoDaddy, Manta as well as others. Want to know more? Read more here.

 

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