We buy houses for cash. What does that even mean?

I’m sure you’ve seen the signs attached to telephone poles. They say “We buy houses for cash,” stapled to a telephone pole or maybe stuck into the ground. They include a phone number and maybe a promise of a cash advance or a quick closing. You may have even received a post card in the mail offering to buy your house for cash. Who are these people, and should you consider selling to them?

If you’re not interested in selling and aren’t already working with a realtor, you have every reason to ignore those signs and postcards. If working with a realtor isn’t an option for you and you do need to sell your house or risk losing it, going the cash route may be an option for you.

Why you might want a cash offer

We buy houses for cash
When you see signs that say “We buy houses for cash,” you can expect a fast deal, but don’t expect anything close to full value. Cash buyers are looking for profit margin.

Normally it’s very difficult to sell a house in less than 30 days. Typically it takes a bank 30 days, even with a pre-approval, to pull together all of the paperwork necessary to close the deal and get the money to you, the seller. And that assumes you find a buyer right on day one. When the real estate market is hot, sometimes you can find a buyer on day one. It happened a lot in 2018. Sometimes it takes a lot longer than that.

The other problem can be major repairs. A bank won’t make a loan if it’s too risky. And a bank considers a sub-par house a risk. If the buyer gets foreclosed on, suddenly the bank owns a house that needs major work. Banks aren’t in the business of renovating and flipping houses. So they’ll have to wait longer to find a buyer, and they won’t be dealing with top-dollar buyers.

If your house needs major repairs and you can’t afford to do them, the bank may refuse to loan the would-be buyer the money.

If the buyer has cash, none of these things are an issue. A cash buyer can close very quickly, usually in a matter of days. And as long as the two of you can agree to terms, which can certainly include selling the house as-is with no repairs, it’s not a problem when there’s no bank involved. If the buyer is happy and you’re happy and you both sign and the buyer gives you a check, you’re off the hook. Any repairs that have to happen are now between the buyer and the municipality once you get your money.

The downsides of selling to the “we buy houses for cash” people

Of course, there’s a downside to this. The biggest downside is you’re not going to get full market value for your home. What Zillow says your house is worth doesn’t matter here: You won’t be getting that. The buyer assumes your house is damaged goods, and is going to give you a damaged-goods offer. That’s really what the buyer is looking for. The buyer is looking for damaged goods owned by someone with no other options.

If you’re facing foreclosure and you’re going to lose the house in 30 days, a lowball damaged-goods offer is probably better than losing everything. You’ll probably lose some equity, but you’ll save a hit to your credit rating and having a foreclosure on your record.

And if your house needs major repairs and you don’t have the money to get the repairs done and you just want to get rid of the property, one of these buyers may be the best option.

The other possible downside is the risk of the deal falling through anyway. Before you agree to a deal, it makes sense to ask some questions. Because there are three types of people fall into the “we buy houses for cash” category.

Brokers

Some of the people who will offer to buy your house for cash are brokers. Brokers don’t intend to keep your house. They want to buy your house, then quickly find someone to flip the house to, and they want to line up that buyer before closing. They’re literally looking to buy your house for cash, then sell your house for a little more cash, perhaps hours later. They make their living by taking a little bit of profit on the deal.

How is this not like a realtor? When an agent is involved, you, the buyer, pay the agent’s commission. The broker doesn’t take a commission. The broker just buys low and then sells higher.

The danger when dealing with a broker is that you may not close right away. The broker may give themselves 29 days to find a buyer, and if they fail, they may back out of the deal on day 29. If you’re facing foreclosure in 30 days, that’s a problem. You thought you had a deal, then you found out at the last minute you don’t. And in the worst case scenario, you may not have enough time to find another cash buyer who can move before you lose the home.

Always ask how quickly they’ll be able to close. Don’t take, “as soon as three days” as an answer. Ask how quickly this would-be buyer would be willing to commit to close. Make sure you’ll have enough time to find another option if you have to.

Individual investors

Other people who fall into the “we buy houses for cash” category are individual investors. They intend to buy your property, rehab it, then either flip it for a profit or rent it out. Either way, they’re better to deal with than a broker because you eliminate the middleman. If you sell directly to an individual investor, you may get a slightly higher offer. You’ll also get a much more firm closing date. An individual investor may need a few days to pull everything together, but they won’t drag things out for 29 days and then leave you to twist in the wind if they don’t find a buyer before that day.

Companies

Sometimes you won’t deal with an individual investor but rather a company. But like an individual investor, the company probably intends to rehab your home, then profit off selling it or renting it out. From the buyer’s point of view, there’s not a lot of difference between dealing with an individual investor or a company. It may just be the difference between talking to one person or multiple people over the course of making the deal.

Selling to a company also eliminates the middleman, so it’s safer for you than selling to a broker.

Should you sell? How much is your equity worth?

So, should you sell? The question comes down to what your equity is worth to you. If you lose your house, that’s going to follow you around for nearly a decade in terms of higher interest rates potentially, and potentially, higher rent payments. Consider that you’ll have a harder time finding a place to live and a car to drive, and you’ll pay more for it.

I’m sure the cash buyer told you these things, possibly as a scare tactic. Consider the actual costs. Consider you may pay $100 more in rent each month. That’s $1,200 a year. If that follows you around for seven years, that’s $8,400. Follow the numbers, not your heart. If you’re looking at losing $20,000 in equity, weigh all of your options before accepting. If you’re looking at losing less than that, and you don’t have other options, that’s an easy decision to make.

Is this vulture capitalism?

It’s easy to look at cash home buyers as part of vulture capitalism. The business model does trade on people’s misfortune. But a home builder offered a contrarian view to me a few years ago. This segment of investors does offer people an escape from a bad situation. Losing a lot of money by selling to a cash buyer is probably better than losing your credit along with your equity. It’s trading off desperation, but it almost certainly offers a better deal than giving the house back to the bank.

My advice to you, if you’re in this situation, is to take a hard look at the numbers. And if you made a mistake, learn from it and try not to repeat the mistake.

2 thoughts on “We buy houses for cash. What does that even mean?

  • February 28, 2019 at 2:01 am
    Permalink

    “Is this vulture capitalism?”
    – I would argue that entire capitalism is vulture:

    “This segment of investors does _offer_ people an escape from a _bad_ situation. Losing a lot of money by selling to a cash buyer is probably _better than_ losing your credit along with your equity.”
    – Even you ‘presidential race’ boiled down to ‘choosing less evil! It is insane. Same happened in France (Marie LePen vs Macron) but people in France are well aware what happened to them (as they start to rioting).
    It is quite hard to see all wrongdoings of capitalism if you never had, or lived, in country that take care of its own people and families. I had felling that capitalism, pull out all the worst human traits like: selfishness, every man (or woman) for him self, envy…

    Sorry for offtopic but I really enjoy reading your post about life in America ๐Ÿ™‚
    I come at you blog searching about Gary Kildall and stay for permanent ๐Ÿ™‚

    Reply
    • February 28, 2019 at 11:25 am
      Permalink

      I’m glad you stayed!

      I have to be careful what I say, sadly. But you are correct that when you have seen something other than capitalism, it is much easier to see that it has weaknesses. A large part of American society, perhaps as much as 1/3 of it, literally believe capitalism was a system invented by God and given to us. That is one reason there is such a divide here today between people who have a college education and people who do not. Those who went to college, at least a non-religious college, are much more likely to have had those beliefs challenged, and are more willing to see it as a system invented by humans that has weaknesses, just like any other economic system.

      People have called me a socialist. You would probably find that either amusing or confusing. We have real socialists here, but they are rare. We also have real Nazis here. They are also rare. The actual number of each is probably similar, but you wouldn’t think that from watching our television programs.

      Reply

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this:
WordPress Appliance - Powered by TurnKey Linux