how does we buy houses for cash work

Home Selling

How Does "We Buy Houses for Cash" Work (and Why To Avoid It!)

August 08, 2018 | by Reuven Shechter

At A Glance

If you need to sell your house fast, We Buy Houses for Cash - a catchall term for property investors and house flippers - is an option worth considering. However, know that this option will likely deal a hefty blow to your equity. Because they have to turn a profit on the flip, cash buyers typically make lowball offers, up to 30-50% below a home's fair market value. Read on to learn more.

how does we buy houses for cash work

Updated May 10th, 2019

“We Buy Houses for Cash” is a catchall term for describing real estate companies and individual investors who make all-cash offers on properties then turn around and resell them for a profit.

These investors offer two primary benefits:

  1. They make offers fast: many - particularly the larger companies, like We Buy Ugly Houses - will make an all-cash offer quickly, often in a matter of days
  2. They'll buy your house “as is”: most will purchase your home regardless of its condition, size, location, or age

Of course, as you may have already guessed, there's usually a catch: all that speed and convenience can come at a steep price.

Most cash buyers pay well-below fair market value for the homes they purchase - sometimes by as much as 30-50%. Remember, their goal is to turn around and resell for a profit, so they have to maintain a decent margin on your home (especially if it requires repairs or renovations).

If you need to sell your home quickly or “as is” but don't want to leave a bundle of cash on the table, you may want to explore a few other options for selling fastbefore pulling the trigger and requesting an offer from a cash buyer.

Alternatively, consider speaking to a top-rated real estate agent for advice on how to sell your home quickly and get a great price.

> Get in touch to interview top-rated agents in your area.

Read on to learn more about how We Buy Houses for Cash companies work and better ways to go about selling your home quickly.

How Does We Buy Houses for Cash Work? (and Why To Avoid It!)

Here are a few reasons why selling to a We Buy Houses for Cash company usually isn't a good idea.

They Prey on the Vulnerable

Home sellers who do not have time to wait for a conventional buyer, or to go through the usual property transfer process, are typically experiencing some sort of extenuating circumstances. These circumstances can greatly acceleratethe home buying process.

We Buy Houses schemes tend to prey on people in the following situations:

  • Sellers whose homes are stagnant on the market
  • Sellers who are divorcing and need to sell quickly
  • People experiencing bankruptcy
  • People with homes in probate or foreclosure
  • People who need to relocate for a job ASAP
  • Owners who are evicting tenants
  • Vacant homes
  • Trashed or damaged homes

These people are all typically in desperate need of selling their home. Sometimes they need to sell for financial stability. Sometimes they need to sell for mere convenience(like for those relocating for work). Sometimes they need to sell due to a need to be free from an emotionally turbulent situation, like a bad divorce.

No matter the reason, these companies are always waiting in the wings to swoop in and capitalize on people's sense of urgency and heightened emotions.

They Save by Cutting Corners

Some of the We Buy Houses for Cash companies work with actual real estate agents, but they attempt to “set themselves apart” by insisting that they don't charge a commission. That's because the real estate agent represents you, the seller, and the buyer – which in this case is the company.

This is a dangerous situation known as a dual agency. A dual agency is when one agent represents both the buyer and the seller. It is usually impossible for the agent to look afterthe interests of both parties. In this instance, the seller (you!) will get the short end of the stick.

The reason these agents don't charge commissions is they are already receiving money from the We Buy Houses company. The company will earn back tenfold when it flips your houseand makes a substantial profit on its resale.

Another way these companies keep costs low is to take care of all the sales in-house instead of working with a title company. They typically pay for their own title policies and usually skip title insurance altogether – all to cut as many corners as they can to maximize profits.

We Buy Houses for Cash Reviews

Selling property through a “We Buy Houses for Cash” company may seem like an easy option for sellers looking to quickly get rid of their home. The unfortunate reality is that these companies are only able to sell houses quickly because they list them at a significantly lower price than their current market value.

“We Buy Houses for Cash” companies, commonly referred to as Sign Buyers, operate within a similarly overpriced business model. “We Buy Houses for Cash” companies present sellers with low-ball all-cash offers to market and sell homes on a zero-fee online platform - the only caveat is that your house will be flipped and resold by the Sign Buyer at a considerably higher price within days of closing the sale.

Sellers should be careful, read Better Business Bureau and other online reviews, and ask friends for their personal experiences before using these services. Ultimately, 9 out of 10 sellers turn down these offers, and for good reason.

You Don't Actually Get a Good Deal

We Buy Houses companies used to be known as “EPs” short for equity purchases. This is the name for the kind of strategy these companies use to pay the lowest price on your home.

The strategy works like this:

  • Only offer a home seller 80% or less of the home's actual market value.
  • Take the title “subject to” your current home loans.

This means that the company will “take over” your mortgage. However, this doesn't usually work properly because you can't transfer mortgages like this.

  • Raise pools of money or credit lines to cash you out.

These companies are notorious for underpaying sellers. This because the less cash they give you – the larger their profits. They tend to rush the process because they don't want to draw out the closing process, as it eats into profits.

When these companies tempt you, it's important to remember: if you go the route of a traditional buyer, you can still receive cash. The only difference is that the traditional buyer will be willing to pay more for the property.

In fact, the traditional buyer will likely end up paying the same price the EP will attempt to flip the house for.

But What If I Am Desperate to Sell My House?

These companies are looking to fleece you for a fast buck – no matter what they say. If you are in a rush to get rid of your home, for whatever reason, you have other options, like pricing and marketing your home aggressively with a top-rated local real estate agent.

Are We Buy Houses Businesses Legal?

Yes. To be fair, we are calling We Buy Houses companies scams because they will consistently rip you off, but they are completely legal.

This is because while a tax assessor can determine a property's taxable value, the final say on its fair market value always comes from its owner. Fair market value is what a normal, unpressured buyer would be willing to pay under typical circumstances.

While we disagree that working with We Buy Houses companies constitutes typical circumstances, when you own something, you are legally allowed to sell it for whatever you want.

To take this example to the extreme, if you owned a multi-million dollar mansion, you could technically sell it for $1 if you wanted to. The IRS will definitely have some questions for you, but it is completely legal.

We Buy Houses companies are legally sound. They often employ trained brokers and Realtors. You will just never get the best deal from them. It's always best to go with a traditional real estate agentand a normal sale. Work with a Clever Partner Agent to save on commission while listing your home with a top 5% agent in your local market. You won't regret your decision, as you'll save time and money. Clever Real Estate and their Partner Agents have a 9.4 rating with close to 100 reviews on Trustpilot.

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