Are 'We Buy Houses' Companies a Rip-Off?

If you're looking to get top dollar for your home, you're probably not going to get it from a 'we buy houses' company — but that doesn't necessarily mean they're a ripoff.

In a situation where you've fallen behind on your mortgage or need to quickly offload a home that needs major repairs, a fast cash offer might be your best option — but be prepared to leave some money on the table.

• As a general rule, the investors behind 'we buy houses' companies cap their offers at about 70% of a home's after repair value (what they think it'll be worth after fixing it up), minus expenses.
• If a home could sell for $300,000 after $50,000 in repairs, an investor might offer $160,000 for it.

Your best safeguard against getting ripped off by a 'we buy houses' company is to compare multiple offers to ensure the terms you're getting are fair. You should also have a trusted professional — such as a lawyer or licensed real estate agent — look over the contract before signing. 

Free services like Clever Offers can help you gather multiple competing offers from legitimate cash buyers. They also provide you with a professional home valuation and one-on-one support to ensure offers are fair and investors follow through on their end of the agreement. 

If you want a convenient way to compare offers, we recommend starting with Clever or looking into other well-rated companies that buy houses for cash.

Is selling a home for cash a good idea?

"The only time you should sell to a cash buyer is when you have some reason when you need to handle it fast," says longtime real estate investor Don Chambers. 

"With an agent, it's going to take six weeks, three or four months, maybe. But if you get an agent and list it on the MLS, you're going to expose it to many more buyers. And when you get more buyers, you'll get a higher price," Chambers says.

Plenty of data supports Chambers' opinion:

• Similarly, a study of probate home sales conducted by Maker Real Estate found that properties sold on the MLS earned estates an average of $49,000—110,000 more than selling directly to a wholesaler or investor.
• A survey of 1,000 American home sellers conducted by Clever found that those who sold with a realtor made $79,000 more in profit than those who sold without one. 

That said, there are a few scenarios where selling to a 'we buy houses' company may be a viable option.

"Usually the sellers have inherited a home and don't live here. They just want to get it over with because they've got creditors to pay off and attorneys that are charging fees, and they just want to get everything settled," says Chambers. "That's the most common reason."

Problematic tenants, unprofitable rental properties, foreclosure situations, a home in poor condition, and concerns about privacy (i.e., not wanting a lot of people coming in and out of the house) are other common reasons for seeking out a cash offer, the investor says.

In situations where selling to cash buyer makes sense, a legit 'we buy houses' company can typically offer:

• Speed: Legitimate cash buyers can close in as little as 1–2 weeks. In a traditional home sale, it takes 25 days, on average, to get an offer and another 30–45 days to close.
• Certainty: If a property needs a lot of work to make it livable, lenders may not agree to finance a mortgage on it. Therefore, your buying pool may be limited to cash investors and bargain hunters willing to take on a project. Investors can generally close on properties that other buyers would have trouble getting financing for.
• Convenience: Cash buyers purchase homes as is, letting you skip the repairs and move on while avoiding some of the time-consuming steps in a traditional home sale. Many cash buyers offer flexible closing dates and the ability to leave unwanted things behind.

What is the best company to sell your house to?

Our research team has evaluated more than 3,700 companies to find the best cash home buyers across the United States. Options range from iBuyers like Opendoor to local 'we buy houses' companies. 

The best company for you will depend on factors like your home's condition and location, as well as your situation and priorities as a home seller. 

• If your home is in decent condition, but you want to avoid the hassles of the traditional listing process, you could consider selling to an iBuyer. iBuyers are large companies that purchase newer, well-maintained homes in select cities. You can get an offer in 24–48 hours and close in as little as 10 days. iBuyers typically pay more than cash investors, but they only buy certain types of homes.

• If you're under financial pressure, have a home that needs a ton of work, or you just need to get rid of a property fast, a cash investor can provide an easy out. But keep in mind that investors typically pay just 60–80% of your home's potential market value. 
• If you want an easy way to see if a cash offer is legit, you can use an offers marketplace to quickly get competing offers. Marketplaces like Clever Offers help you compare multiple cash offers and other sell-fast alternatives side-by-side. Cash buyers are pre-vetted, making them a safer and more efficient option than fielding cash offers on your own. Most are free to use and there's no obligation to accept the offers they bring you. 
• If you want to avoid repairs without sacrificing your bottom line, you're likely better off selling as is. When selling your house as is, an agent will list and market your home with the caveat that you won't make any repairs. An as-is sale can net you significantly more than selling directly to a 'we buy houses' company, even if your home needs work. And, you can set a deadline for accepting offers to ensure your home sells fast.

Get the best of both worlds: Compare instant cash offers worth up to 100% of your home's value or test the waters with a no-obligation 7-day MLS listing, allowing you to sell as is for the highest possible price. Answer a few quick questions and start comparing offers.

'We buy houses' scams to watch out for

Even though there are lots of legitimate cash buyers out there, scams do exist.

As a home seller, there are a few common cash-buying scams that you should be aware of:

• Email phishing: Someone sends an email to you with an all-cash offer and requests more information, like where to wire money. In the end, they end up using the information to access your account information and withdraw funds.
• Wholesaling: Someone puts your house under contract, and then tries to resell the contract to another buyer at a higher price. This is technically legal, but it can lead to trouble for the seller if the wholesaler is inexperienced and doesn't know what they're doing — for example, if they price the home too high and then can't find a buyer to take over the contract. Often, less ethical wholesalers try to include a clause in the fine print that allows them to walk away penalty-free if they can't find a buyer.
• Up-front fees: The cash buyer requests that you pay a fee or put down a deposit before they proceed with buying your home. You should never have to pay anything upfront, so don't! In all likelihood, the buyer intends to keep your payment and then cancel the deal.
• Equity skimming: A more elaborate scam in which the investor buys a property from a distressed homeowner, and then promises to let them buy it back when they're able. Instead, the investor refinances the home and takes out all of the equity.
• Foreclosure relief: The supposed buyer contacts a homeowner facing foreclosure and promises to negotiate with the bank to pay off mortgage delinquencies in exchange for an upfront fee. Instead, they take a few months of payments from the struggling homeowner, then break contact without ever speaking to lenders. The homeowner loses their home and the “rescue” fees paid to the investor.

More 'we buy houses' red flags

A buyer who doesn't visit the property before making an offer

Igor Avratiner of We Buy Houses in Philadelphia advises caution if a buyer offers to purchase a property before actually seeing it and doing a home inspection. 

"If an investor says they're going to have their inspector or contractor come out to evaluate the property after an agreement is signed, it's a good indication that they're going to try to lower their offer later on," says Avratiner. 

Often, the inspector will find issues with the property and the buyer will try to re-negotiate with the seller at the last minute, hoping that the time and energy they've already invested will compel the seller to keep moving forward. 

"All of this due diligence should be done before we sign a deal," says Avratiner.

Contingencies that let the buyer out of the contract late in the game or without penalty

Before signing anything, says Avratiner, "you really want to look at the contract, and you want to understand 'what are the contingencies?'" 

Contingencies are clauses in a purchase contract that allow the buyer or seller to back out of a deal under certain conditions. Often, they protect buyers from having to follow through on a home purchase if a serious issue is discovered during an inspection or if they're unable to qualify for a loan due to underwriting or appraisal issues. 

However, in the case of less ethical 'we buy houses' companies, contingencies can be abused.

Particular clauses to watch out for in a cash offer contract include:

• Statements indicating the buyer can cancel the agreement at any time or for any reason
• A closing date more than a few weeks out (buyers with cash shouldn't need more than 1–3 weeks to close)
• Clauses that allow the seller to relist the house while you're under contract 

These contingencies may indicate that the buyer isn't actually intent on following through with the purchase. Instead, they may be trying to wholesale the deal under the table — meaning, they'll walk unless they can find another buyer willing to purchase the contract at a higher price.

Unwillingness to put down a significant deposit

According to Avratiner, an investor should typically put down 1-2% of the purchase price on a house when going under contract — the equivalent of $1,000–2,000 on a $100,000 house. 

Buyers unwilling to risk this much earnest money may not be serious about following through on their offer.

As an example, Avratiner recently had a home seller reach back out to him after declining his initial offer. Another buyer had offered the owner $90,000 — about $40,000 more than Avrantiner thought the home was worth.

But at the end of the contract period, the original buyer threatened to cancel unless the owner agreed to take just $35,000 for the house — less than half the original offer price. 

"He showed me the contract," says Avratiner, "and it contained a clause that said the buyer could cancel at any time and for any reason." 

To make matters worse, the buyer had only put down a $100 in earnest money deposit — allowing them to walk away painlessly after stringing the seller along for more than a month.

Inability to show proof of funds

"If a buyer or wholesaler cannot provide proof of funds, stay far away from them," says Mike Bennett, a seasoned real estate investor and general manager of Clever Offers. "They are likely a novice and have little to no experience as an investor.

Proof of funds can come in the form of bank statements or a letter from a financial institution indicating the amount of funds the buyer has available.

Pressure to sign a contract before you've had it professionally reviewed

Just like with a standard real estate transaction, says Bennett, "sellers are advised to have legal counsel or a CPA review their contract before signing to ensure the seller is protected and has favorable terms."

"Some investors try to sneak in unfair contract terms like unreasonably long due diligence periods, low earnest money deposits, or clauses that can get them their earnest money back even if they cancel," explains Chambers. 

A real estate attorney can spot loopholes that leave you unprotected and without compensation should the deal fall through. Buyers who try to get you to sign a contract before you've done this type of due diligence are a strong red flag.

How to tell if a cash buyer is legit

• When vetting a cash buyer, look for a professional website showing the names and contact information of the people you'll be working with, and positive customer reviews on sites like Google and the Better Business Bureau.
• Make sure the buyer has completed their inspections before accepting an offer. You can also ask them for a breakdown of how they arrived at their offer price.
• Ask the buyer for proof of funds and closing statements showing recent home purchases.
• Never pay a fee to a buyer — a legit investor will typically be the one to put down a deposit and cover the closing costs.
• Never feel pressured to accept an offer — especially before having it reviewed by an attorney or other professional you trust.
• Watch out for clauses in the contract that let the buyer out of the deal without forfeiting their earnest money deposit, which should typically be 1–2% of the offer price.
• Collect the earnest money deposit upon signing the contract — this should generally be wired to an escrow account set up through a title company or attorney.
• Perhaps most importantly, get competing bids before accepting an offer from a cash buyer and look over the contract terms (not just the offer price). Increasing the competition over your home is the best way to boost your sale price and ensure that a buyer is offering you a fair deal.

Bottom line: Are 'we buy houses' companies a rip-off?

"We buy houses" companies aren't necessarily a rip-off — but they do make money by buying low and selling high. Understandably, some homeowners have felt ripped off after accepting a cash offer and then finding out their home was worth a lot more. 

Additionally, cash-buying scams do exist, so look out for offers that come out of the blue from individuals or entities whose identity you can't verify.

You should also take note of red flags — such as vague contract terms or inability to provide proof of funds — that may signal unethical practices when dealing with a cash buyer. 

If you'd prefer the speed and simplicity of a cash offer, but want to be sure you're getting a fair deal, we recommend starting with Clever Offers. With Clever Offers, you can compare cash offers from multiple vetted investors or test the waters with a no-obligation 7-day MLS listing — allowing you to sell as is for the highest possible price. Answer a few quick questions and start comparing offers, with no added fees or obligation to move forward.

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