Thousands of real estate investors across the country use a variety of techniques to find potential sellers and plan their next deal.
A recent ProPublica investigation looked at how HomeVestors of America, one of the house flipping industry’s leaders, teaches its franchisees to seek out people in “Ugly Situations.” (In a statement, the company said it does not target vulnerable sellers and pointed to an internally calculated 96% seller satisfaction rate.)
In the course of our reporting, we interviewed dozens of experts, attorneys, advocates, sellers and investors to better understand the world of cash home buying. Here’s what they say you should know to get the most money for your home.
Why are cash home buyers advertising to me?
There are many reasons a cash home buyer might advertise to you. You may live in a neighborhood that has a high percentage of homeowners with a lot of equity, meaning you wouldn’t be left underwater on a mortgage even if a company paid you less than your home is worth. Home prices in the area may be going up rapidly, creating opportunities for cash buyers to fix and flip them for a profit. Your contact information may have been scooped up by a company that sells leads to real estate investors.
It’s also possible that you’ve been identified as a so-called motivated seller: someone in a difficult situation who needs money soon. Our reporting shows that some real estate investors comb public records looking for signs of financial hardship, such as foreclosures, divorces or death notices. They scout neighborhoods for signs of disrepair, such as boarded-up windows or water shut-off notices. And they leverage personal connections — with other investors, lawyers, nursing home administrators and others — to locate distressed properties.
I am NOT interested in selling. How do I get them to stop advertising to me?
If you’re approached about selling your home and don’t want to, the easiest solution is simply to ignore the request: Hang up the phone, recycle the postcard, delete the text. If the solicitations keep coming, add your number to the Federal Trade Commission’s Do Not Call Registry.
Some cash home buyers will still find you. That’s why certain states and cities have added additional protections. In Philadelphia, for example, prospective real estate buyers who continue to pester residents after being told to stop can be fined. In Atlanta, a ban on “commercial harassment” prohibits investors from contacting homeowners for six months after their initial overtures are rejected.
In areas without these laws, homeowners have submitted complaints to their state attorney general’s office or real estate commission. If these officials receive repeated complaints about a particular person or company, they may investigate.
I might be interested in selling. What should I expect if I respond to an ad?
If you respond, there’s a good chance the investor or company behind the ad will promptly follow up. They may schedule a walkthrough of your home and ask questions about its condition and your circumstances. Afterward, they may present you with a purchase contract and encourage you to sign on the spot.
Experts caution homeowners against immediately jumping into a commitment. Before agreeing to sell, they say, it’s important to learn as much as possible about your home’s value.
“Don’t sign anything right away,” said Michael Froehlich, the managing attorney for Community Legal Services’ homeownership and consumer rights unit in Philadelphia. “If somebody wants you to sign something that day, that’s a huge red flag.”
How do I figure out how much my home is worth?
To get a ballpark value, search for your address on the online real estate marketplaces Zillow or Redfin. These prices are not always accurate, however: They may not take into consideration a home’s condition or recent improvements. Use Zillow or Redfin to look at the recent sales prices of similar houses in your neighborhood.
If you can afford it, a licensed appraiser can give a more precise estimate of the value of your home. That usually costs between $300 and $500, depending on your home’s size, and can take a few weeks to get scheduled.
You could also ask a real estate agent for a free market analysis, said Grant Cody, executive director of Oklahoma’s real estate commission, which regulates the industry there: In many cases, they “would bend over backwards and would love to come to your house — or email you instantly, right then and there.”
What’s the difference between a real estate agent and a cash home buyer?
A real estate agent markets your house to buyers and has a fiduciary responsibility to you; they’re required to try for the best deal possible. The agent is paid a percentage of the sales price of the house. And you are contractually bound to that person for a period, meaning if you sell your house by yourself during that time, you’d still have to pay the agent a percentage.
A cash home buyer purchases the house or “wholesales” it to another investor for a profit. Their pitch is largely about speed and convenience: They are able to quickly put money in your pocket, free you from burdensome paperwork and even clean up your home. In exchange, they get the property at a discount. They will most likely repair the house and flip it for a profit or hold it as a rental property; or they may enter a “contract assignment,” in which the deal itself is delivered to another party for a fee.
What are the risks of going with a cash buyer instead of a real estate agent?
“Irrespective of jurisdiction, real estate licensees have an obligation to act in the best interest of their client,” said Nick Rhoad, CEO of the Association of Real Estate License Law Officials. Real estate agents are bound by a code of ethics requiring them to make things as clear as possible, not misrepresent pertinent facts and more.
That standard does not apply to cash buyers, who do not always have to be licensed. While the cash-buying industry does have a code of ethics, enforcement is spotty. Laws governing unlicensed real estate transactions are generally newer and less developed than those designed for licensed activity.
Our reporting shows that some real estate investors have been accused of deceptive and exploitative behavior. (When real estate agents are accused of unethical behavior, a licensing board polices it.) Wholesaling, in particular, has left many sellers feeling dismayed: Properties they signed away for one price ended up being resold, with few or no improvements, for much more.
What if I need money but don’t want to sell my home?
Don’t be discouraged. Homeowners facing personal or financial distress have a variety of possibilities to explore.
Options vary by state, but here’s where experts say to start:
- Get help from the federal government. The National Council of State Housing Agency’s Homeowner Assistance Fund, overseen by the U.S. Treasury Department, has allotted roughly $10 billion to help homeowners enduring financial hardships due to the COVID-19 pandemic. The NCSHA website summarizes the program and maps where the assistance fund is open (44 states, as of this writing). It also has a directory of state resources.
- Find a local adviser. The U.S. Department of Housing and Urban Development sponsors housing counseling agencies across the country. These agencies provide free advice about foreclosure prevention and homelessness counseling. They may charge a small fee for additional services. To find resources near you, go toHUD’s website. You can also call 888-995-4673, or download the agency’s resource locator app for help in several languages.
- Consult a legal aid office. A good place to start is Legal Services Corporation’s directory of local offices. Once you reach someone, it’s important to be patient, said Lisa Sitkin, a senior staff attorney at the National Housing Law Project. Legal aid offices are usually busy, and the intake process can move slowly. Once an attorney reaches out, they will ask you for information to diagnose the situation. It’s important to have “somebody who can look at your situation holistically and give you sort of realistic advice about what steps you can take,” Sitkin said.
A cash home buyer gave me a sales contract. How do I make sense of it?
What appears — and doesn’t appear — on a sales contract varies widely, depending on state laws and the preferences of the prospective buyer. But there are a few important components to understand.
1. Disclosures: Although laws vary across states, many investors agree it’s necessary to disclose that they intend to turn a profit by buying your house for below fair market value. If the contract says the buyer is paying “below market prices for a profit,” or if it says the buyer has the “option to market this property, and assign this agreement prior to closing,” that means it’s possible there’s a higher bidder out there.
2. A “clear title” requirement: Any debts you owe, including mortgage liens, overdue water bills, property tax delinquencies and more, can be subtracted from the final price. So if the offer is $100,000, but you’re behind $25,000 in bills and back taxes, you’ll only get $75,000.
A title report costs $50 to $250 and can give you a clearer picture of what hidden debts could be deducted in a sale.
3. Cancellation provisions: In many wholesale contracts, the buyer reserves the sole right to cancel the contract. Pay attention to what rights the buyer is asking for — and which ones you’re giving up.
4. Other unexpected costs: Even if you’ve agreed to a price that seems fair, it’s important to review the contract for fine print about other charges that could affect your bottom line. Closing costs or transfer taxes are sometimes deducted from the sale price you see on the page.
5. Earnest money deposit: In traditional real estate deals, an earnest money deposit shows how serious the buyer is about the purchase. If the buyer backs out, the seller gets to keep the deposit. A broad rule of thumb is the deposit should equal 1% of the purchase price. Investors try to put down as little as possible in earnest money. Contracts reviewed by ProPublica included deposits as low as $100 on a $157,000 deal. In such cases, the buyer can bail with minimal consequences.
6. Clouding your title: Look for language that authorizes a buyer to cloud your title and make it more difficult to sell the property to another buyer if your deal falls through. Investors will often record a “memorandum of sale” on the property as a means of locking you into a contract.
I signed a contract, but I’m having second thoughts. What are my options?
Our reporting demonstrates how difficult it can be for sellers to back out of a contract that they later decide is unfair. As mentioned, real estate investors sometimes file memorandums of contract that cloud a homeowner’s title and pressure them to close the deal — even if they’ve found a much higher bidder.
This behavior is predatory, according to four housing experts we interviewed, as well as Charles Tassell, the chief operating officer of the National Association of Real Estate Investors. But, barring proof of fraud or elder abuse, it’s legal. If you suspect what happened may have broken a law related to one of those practices, follow the instructions above to get legal aid.
The bottom line, according to Grant Cody of Oklahoma’s real estate commission: Cash buyers “aren’t in a position to do what’s best for the consumer. They’re in a position to do what’s best for them.”
Sometimes what’s best for them is also best for you. But not always.
This story was originally published by ProPublica and republished here with permission.
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