Cash Home Buyers: How "We Buy Houses" Companies Work

A practical review of offering your home for sale to cash home buyers and traditional home buyers (through a listing agent). If your home needs repairs, you are facing a foreclosure, or you simply need to sell it within a short period of time, you may choose to offer it to a cash home buyer for immediate purchase. The price you receive as a cash home seller will usually be less than the retail price you would receive by offering the home through a listing agent. A seller must weigh the net proceeds that a cash deal can yield in light of the risks involved in exposing the home to multiple showings, repair delays from lender underwriting, and contingencies. We have designed this section to help a seller evaluate his or her options.

Quick Answer

Cash home buyers pay cash or from private funds. They estimate the repaired resale value of the home and then subtract repair costs, upgrades, and their own profit to arrive at a price. Sellers avoid multiple showings, delays from lender underwriting and negotiations, custom improvements, lender requirements, and personal repairs. In exchange, the home seller must accept the risk that the cash buyer takes on the repair and resale risk. To begin the review, compile the written offer from the home buyer, contact the title company selected by the cash buyer, review the buyer's projections for closing, including closing costs and allocation of expenses, and note the closing dates and deadlines in the offer. You can then proceed to weigh the advantages and disadvantages of a cash home buyer as compared with a listing agent and agent-assisted traditional home buyer.

Decision Inputs

A review of the following inputs will assist a seller's evaluation of a cash home buyer:

• Property Condition: Request a list and description of any and all assumptions made by the cash buyer concerning the needed condition of the home at closing.
• Deadline: Compare the anticipated closing date with your existing or anticipated deadline based on (1) a potential foreclosure; (2) a contemplated relocation; (3) a mortgage payment problem; (4) a probate estate; or (5) the pressure on available capital caused by carrying costs, condo or HOA dues, property taxes, insurance, or inadequate rent compared with the amount of the monthly mortgage.
• Net Proceeds: Compare the gross proceeds of the cash offer to the net proceeds that would be available to the seller if the home were offered in the conventional market, including agent commissions, normal repair costs associated with home improvements in the current local market, concessions, and other applicable costs such as property tax, insurance, or monthly mortgage payments during the period of time that your home is listed for sale.
• Closing Certainty: Obtain confirmation that the buyer has verified funds as proof of the purchase price, as required by the title company handling the transaction. Request that the title company arrange the disbursement of any remaining funds to you following the settlement at closing. Determine whether an inspection is incorporated in the contract and, if so, what rights of inspection are included, the terms of delivery, cancellation, or renegotiation, and what portion of any purchase price adjustments will be allocated to you. Request that the cash buyer sign a copy of the closing settlement statement to confirm all costs and expenses allocated to either party.

What a Cash Home Buyer Does

A cash home buyer is an investor or a company that buys your home directly for their own account. The cash buyer generally plans to repair the property as needed, rent it as is, and sell later when a satisfactory price is available, or they may simply want to assign the contract to another investor or assignee. As a private transaction, there are no public listings, open houses, or mortgage loan underwriting. A cash home purchase fits real-world situations such as homes that have just been inherited and put up for sale, homes that have been acquired as rental properties, homes with major or moderate system failures (e.g., roof, plumbing, heating, air conditioning), or homes that are part of a contemplated divorce. The buyer offers money now, rather than waiting for a conventional buyer, in exchange for a lower price. Make certain the closing is handled by a neutral or independent settlement or closing service provider. Consumers need to understand their closing process; the Consumer Financial Protection Bureau has a summary description of the real estate closing here.

How the Offer Is Calculated

Illustrative example — replace assumptions with current written figures for your property.The cash home buyer starts with an estimate of the amount that a rehabilitated, market-ready home would sell for in the current local market, commonly called the "after-repair value" (ARV). They then subtract repair costs, holding costs (such as ongoing insurance and taxes during the period of ownership), selling costs, and their profit target to arrive at their purchase price offer to you. Example: $300,000 (after-repair value) minus ($40,000 for repairs to bring the property up to market standards; $30,000 for holding and resale costs; $30,000 target profit) equals $200,000 purchase offer to the owner. The offer is generally lower than what could be obtained from a conventional buyer who could finance the purchase and does not assume the obligation to repair the home or bear the risk of a downturn in the housing market. If you are considering a cash home buyer, ask the buyer to include the anticipated categories of repairs to the home, the costs assumed by the buyer for each category, the amount and source of financing for unexpected repair costs, and the profit objective.

From First Call to Closing

The seller process with a cash home buyer is straightforward but busy, consisting of the following steps:

1. Free Intake: Involves a simple exchange of information: the listing agent or cash buyer requests the home's address, desired listing price, condition, type and status of mortgage, and desired closing date.
2. Walkthrough: The home is walked through in person or by video-cam to allow the home buyer to take note of needed repairs and/or estimate probable repair costs, so the buyer can come up with the appropriate purchase offer.
3. Written Offer: The home buyer will send a written offer that will detail the offer price, deposit to be paid upon acceptance, closing date, extent of inspections being conducted (if any), whether the buyer intends to assign the contract for resale, and anticipated repair costs, holding and resale costs, and target profit, as discussed above.
4. Acceptance or Rejection: The seller considers the offer and accepts or rejects it. Upon acceptance, a title company or closing attorney is brought onto the team to ensure that the buyer will receive clear title to the home upon closing and to assure that all obligations owed by the seller will be paid at or prior to closing. The title company or closing attorney will obtain copies of title, liens, easements, encroachments, address for payoff statements, current property taxes, and outstanding judgments affecting the property. These documents must be collected in advance, along with any payoff statements from the mortgage lender or lender servicing the loan, current or unpaid HOA fees, real property tax bills, outstanding tenant leases, and any written court orders (e.g., restraining order).
5. Closing: Upon the scheduled closing date, the seller signs a deed conveying clear title to the home, along with a mortgage and other documents requesting payoff of a mortgage, and the buyer sends the agreed-upon funds to cover the purchase price, mortgage payoff, seller concession (a credit in lieu of repairs), and likely any current property tax payment or HOA fees. The buyer will pay all outstanding liens or debts against the property first, then the seller will receive the remaining proceeds. If the property has clear title, the closing may occur within a few days of the scheduled date. If there are title problems (e.g., involvement of the probate court, divorce, or other matters affecting ownership or liens), title problems with heir(s) or other interested parties, outstanding liens affecting title, seller has tenants not yet vacating, existing municipal or school taxes or assessments not currently paid and outstanding, or incorrect payoff statements from the lender, the closing will require additional time.

What Is the Discount Buying?

• Control of When the Sale Occurs: Sellers are often flexible on closing on the exact date envisioned by a cash buyer because a fixed close date is helpful in getting relocated or dealing with a possible or inevitable foreclosure of the home. Realizing the quick close time is not guaranteed (see section heading below), a cash home buyer can allow a seller to specify a "fix close" (or "preferred close").
• Avoids Market Selling Efforts: A cash sale also has the benefit of not requiring the seller to spend time and effort selling on the open market, including making repairs, staging, waste, and showings that delay the sale, require attention to the property, and distract from other priorities. Instead of waiting for a financing-ready offer that may never come, the seller can just accept the cash offer. Note, though, that even a cash buyer will require the seller to disclose all known material defects in the home required by state law.
• Foregoes Market Benefits: While cash transactions allow sellers to skip the trouble of repairs and real estate agent attention, the seller forgoes several of the benefits of selling on the open market: the agent's successful marketing of the home to willing buyers and expectation of an exchange rate greater than offered by a cash buyer.
• Comparing Net Proceeds: A fair way to sort through the pros and cons is to take the cash buyer's net proceeds in hand and pit it against an estimated net proceeds after selling the home the traditional way. While exact figures can't be known for sure, the estimate would include the agent's commission, estimated renovation or repair costs, several month's worth of utility and insurance payments, taxes, and mortgage interest, not to mention the risk that the negotiated contract to sell ultimately falls through for some reason.

A cash home buyer can be a great option for sellers in these situations:

• Selling under the threat of foreclosure by lender on a financed home
• Unable to move until a specific date
• Dealing with the estate of a deceased relative (probate proceedings)
• Deciding to part with inherited property to go back to live elsewhere
• Recently divorced and unable or unwilling to deal with pending legal matters and encumbrances
• Having a tenant in a current rental property not yet ready to vacate
• Recently relocated for a new job and needing to move quickly
• Needing to move quickly and unable to make repairs in time for an open-market sale
• Existing code violations, fire damage, foundation problems, roof leaks, etc.

The question becomes, what is the best net result after absorbing deadlines, legal or other constraints, managing allocation of repair money and routine cash needs, considering the risk of a vacant (and possibly unrepaired) home during a sale, and coping with the stress of one or more difficult situations.

As with any buyer, verifying their identity and confirming where the money to buy the home is coming from helps identify the legitimate cash buyer and provides protection against fraud. This includes:

• Who the buyer is: Individual, company, trust, or other entity
• What entity records (e.g., DBA, assumed name) are available, if applicable
• Whether the buyer has an assignment from another party to purchase the home
• Proof of funds to purchase the home
• Who holds any escrow proceeds (cash, title insurance premium, etc.)
• Whether a deposit was paid under the terms of the offer described in the contract
• Not signing the deed until actual closing
• Not paying any closing fees, costs, or transfer taxes prior to closing

Just as it is for a traditional listing, the seller should carefully read and understand all the terms in the contract/agreement, including:

• Purchase price and form of payment
• Closing date
• Inspection rights and any exception from seller
• Opportunity for contract cancellation if pending repairs or other issues emerge
• Right of assignment of the contract to another buyer, if any
• What happens to your personal property at closing
• If the seller can occupy the home beyond the closing date (if at all), and if any additional rent will be paid by the buyer
• Proration of property taxes
• How closing costs will be allocated between the parties

For promises and representations that are not in the contract/agreement, get things in writing. A legitimate cash home buyer who wants your house will want to close quickly, and you may have multiple offers worth considering. Compare the promised net amount from each, as well as each buyer's certainty of closing, and choose the offer that delivers the best result.

GetHomeCash was designed as the simplest, easiest way to sell your house as is, avoiding any agent commission, showings, negotiations, credit checks, repairs, and inspections entirely. Sellers use our offer as a comparison point beside their agent's listing estimate (with all the unknowns mentioned above), a contractor's repair cost bid, and the payoff on their current mortgage. If your house is clean and presentable, has no repair needs, and no tight deadline, a traditional listing could end up bringing you much more money. If you need to move quickly and your home has problems or other title complications, or if you have a current rental not ready to be vacated by tenants, the certainty of selling directly to the buyer can be worth waiting for a retail buyer.

Before you sign a contract/agreement with a cash home buyer, confirm these five items in writing:

• The actual purchase price and total settlement proceeds
• Who pays or allows for which closing costs and expenses
• Who holds any escrow of money pending completion of title work
• When either party can cancel the contract, and any penalties for canceling
• Target closing date

Once payoff and title reports are available, request a preliminary closing statement. Review the provisions for transferring real estate taxes, applicable liens, any HOA transfer fee, utility balances and deposits, removal of a tenant with prorated rent or vacate bonus, etc. Be sure to keep copies of all the documents you sign.

Common Questions From Cash Home Buyers

Here are some common questions from our members regarding selling their house to cash home buyers:

• Q: Do I have to accept an offer?

A: No. All offers from GetHomeCash and similar cash home buyers are no-obligation. The offer sets forth the intentions of the buyer and is not a binding contract until all parties agree and sign, at which point the offer becomes a contract.

• Q: How quickly can we close?

A: For a clean title with no complications, it is possible to buy a house and close the purchase within seven to ten days. If an heir is in probate, there are title issues (such as an outstanding lien or judgment), there are tenants in the home, or any documents are missing, the closing will take longer.

• Q: Will I have to pay real estate commissions?

A: No. Direct home buyers do not charge a listing commission, just as they would not charge it were they selling a home they owned. Just like everything else, though, make sure all the fees are specified in the contract and confirmed on the closing statement.

• Q: Are cash home buyers legitimate?

A: Yes, many are. Just make sure all promises are in writing and verify their identity, as discussed above. Use a reputable title company. Do not pay the closing costs or any additional fee in advance. Make sure the offer is well thought-out and request and review multiple offers.

Sources and related reading

• Consumer Financial Protection Bureau describes real estate closing
• Federal Trade Commission warns homeowners to be cautious of foreclosure-related operators that demand fees before providing real help

Primary sources

• Texas Real Estate Commission — Contract Forms — current promulgated contract forms and form notices.
• Texas Real Estate Commission — Seller’s Disclosure Notice — current state-promulgated disclosure form and seller-disclosure prompts.
• Federal Trade Commission — How to Avoid a Scam — current federal consumer guidance on payment pressure, impersonation, and verification.

Texas all-cash sale safeguards

A cash buyer typically estimates resale or rental value, subtracts repairs, holding costs, transaction costs, financing or capital cost, and a risk margin, then proposes a price for speed and condition certainty. Keep the signed contract, disclosures, title documents, settlement statement, payoff and lien records, proof of funds, inspection amendments, and communications after closing.

As-is does not mean silent: disclose known material facts as required, read assignment and cancellation clauses, and confirm the title company independently. Cash may shorten financing risk, but it does not guarantee market value or remove probate, lien, tenant, or title requirements.