Exactly what’s classified as a cash offer on a house?
Amidst a world of credit cards and electronic currency, you may ask yourself this question. Essentially, a cash offer creates a direct line of negotiation between you and the buyer. Specifically, a buyer who comes in with a cash offer is not reliant on a mortgage to buy your home. Thus, neither of you is dependent on the approval of a bank. This can foster easy communication and increase the chance that the sale closes successfully. A cash offer can make selling your house a seamless process. Furthermore, a cash offer can make the process quick and free of excessive conditions. For example, some buyers can make a cash offer in as little as 24 hours.
Does a cash offer literally mean cash?
No, receiving a cash offer does not necessarily mean a buyer rolling up to your house with a briefcase full of cash. It does mean, however, that the individual has the money readily available. Of course, many of us can’t afford to buy a house with all of the money up-front. Thus, the majority rely on a mortgage from the bank to purchase a home. In 2018, it was estimated that approximately 78% of home buyers had mortgages. While mortgages give many of us the opportunity to get a home when we would otherwise be unable to, mortgages can also slow the selling/purchasing process down. This makes sense because the bank has its own financial interests to look after. Therefore, a buyer who needs a mortgage has to rely on the approval of the bank.
How is an offer based on a mortgage different?
There are a number of ways that a mortgage differs from a cash offer, as listed below.
- It generally takes anywhere from 30-60 days to sell your house to a buyer who needs a mortgage. On the other hand, a cash offer may allow you to close sales in 7-30 days.
- Mortgages require a bank’s approval, whereas a cash offer is dependent on the buyer’s liquid assets.
- Many mortgage lenders get a commission fee which may affect a buyer’s offer, whereas a cash offer only involves the buyer.
- The bank determines the eligibility of the buyer who needs a mortgage, a buyer making a cash offer has to prove their eligibility to you.
- The majority of buyers need a mortgage so cash offers may be few and far between.
- Mortgages generally have closing costs.
Who makes cash offers?
Individuals who have recently sold their own home at a profit may be able to make a cash offer on your home. While cash offers may be made by individuals looking for a permanent home, cash offers are frequently made by investors. Many have questions about what exactly an investor does and how their cash offers work. Investors generally are ready to buy your house as-is and with cash because they want to renovate and eventually resell. Thus, investors may be interested in your home if it is in need of repairs and updates that you are unable to complete. If you think your house might be a good candidate for an investor you can reach out to them too rather than waiting for them to come to you. Both buyers present different advantages depending on the seller’s needs. Determining which buyer fits your needs is up to you.
Are there downsides to a cash offer?
As with most things in life, a cash offer is not completely free of shortcomings. Fortunately, if you are the seller, these downfalls affect the buyer more than you. For example, if a cash buyer is purchasing the home for themselves, they have to consider if they want to put all their eggs in one basket. Should they pour a great deal of their savings into purchasing a home or should they set that money aside for future needs? If they invest a large amount of money into a home purchase and then later have a great financial need that they may struggle to meet. Lastly, more responsibility falls on the buyer to prove their eligibility for purchasing your home. While these are particularly true for cash buyers purchasing a home for personal use, it is important to consider that many cash buyers are real estate investors. This means they purchase properties that they can see potential in and are likely to have the connections and resources to follow through on an offer. Therefore, many cash buyers have to determine if they want to invest in your property. For the purpose of this article, we will focus on cash buyers that purchase homes for business rather than personal use.
Luckily, as a seller, you have a lot less to worry about for cash offers. One major concern is making sure the cash buyer can legitimately afford the offer they put on your house. Thus, you want to make sure everything checks out financially, this is where a title company comes in which is discussed later in this article. In addition, since a cash offer is solely based on what the cash buyer can give right now, they may make an offer lower than those with a mortgage might. On a related note, most cash offers made by investors are for houses that need a lot of work.
Should I accept a cash offer?
Naturally, this decision is ultimately up to you.
One key component to consider is how quickly you want the process to be completed. A buyer who needs a mortgage will likely take much longer to close the deal than one who is making a cash offer. Furthermore, because the timeline is longer and a bank is involved, a buyer needing a mortgage may be more likely to have to back out.
A buyer who is making a cash offer may also back out, but it is less likely. This is because those making a cash offer need to do the research on the front end before making an offer. Those who require a mortgage may be less certain about what they can and cannot afford when you begin negotiations. Another factor to consider is that cash offers may be less. This, of course, is not a rule but a possibility. As a seller, these are important to weigh as you decide if you want to accept a cash offer.
Another point to consider is the amount you receive. It is likely that you will receive less money through a cash offer than with a mortgage. Yet, a cash offer is generally a much quicker process. This is probably the biggest factor to consider, do you need to sell quickly or for more money? You may be able to win on both ends, but it’s not guaranteed.
When is a cash offer not legitimate?
Many are wary of cash offers and not without reason. While having a surplus of information is constantly within reach is generally great, sometimes information gets into the wrong hands. Have you ever received a call from an unfamiliar number telling you your social security number has been canceled? Perhaps you have been told your warranty is expiring. You may devote time to diligently block numbers and yet such scammers always seem to find a way to contact you. The sight of “Scam Likely” begins to feel like an invasion of privacy and a parasite to your time.
In the light of such scams, it is understandable that many would be afraid to trust someone who contacts them out of the blue about their home. While this is a legitimate concern, ignoring all cash offers could cause you to miss out on the perfect buyer.
Here are a few red flags that someone may be trying to scam you:
1. The cash buyer does not use a title company.
The use of a title company is one of the most important indicators of a trustworthy cash buyer. First, we should define what a title company is. A title company acts as a sort of neutral third party between a buyer and seller. The purpose of a title company is to ensure that both parties have the appropriate rights to back up the proposed deal. Similar to a car title, a house title is the proof of ownership of the house. As described by Legal Match, there are four types of real estate titles:
- Fee Simple– this is where the title to a property is completely owned by one individual. They own all the rights to the property.
- Joint Tenancy– in this scenario, two or more people own the rights to the property. Often, in such cases, if one person dies the full ownership may go to the other person(s). This is called right of survivorship.
- Tenancy in Common– here two or more people own the rights to the property but do not have the right of survivorship.
- Tenancy in the Entirety– this is where a title is shared through marriage.
Understanding the different types of titles is essential when selling your home. Sometimes, individuals want to sell a property without realizing they do not solely possess the right to do so. An example of this is a property that is inherited by the daughter of an individual who has passed. If the daughter has a joint tenancy title with her sister then she cannot sell it on her own. Instead, she will need to first come to an agreement with her sister and they will have to accept the offer together. Thus, any real cash buyer will need to use a title company for a title search to verify the seller has the full right to sell.
In other cases, a seller may inherit debt on a house and try to sell for less than a lien on the house. In this case, it is the cash buyer that is in danger of being scammed. If a cash buyer goes through with the deal, without doing a title search, the debt could be passed onto them. These are a couple of the reasons why a cash buyer must do a title search.
You might be thinking it makes sense that a cash buyer needs to do a title search but you may wonder how does it protect you? The title company provides title insurance to you and should be paid for by the cash buyer. By doing a title search, a title company may reveal information that you were previously unaware of about your house. For example, if you were unaware that you don’t have full control over the title of the house.
A title company also verifies the cash buyer by only accepting cashier’s checks or wire transfers. A title company will never accept cold hard cash because they cannot trace the legitimacy of cash. Here is what the process looks like:
- The cash buyer pays for the title company to do a title search.
- The title company verifies that the seller has the right to sell the house and that the previous chain of title (ownership) has been legitimate.
- The title company draws up the new deed for the house and prepares the documentation for county records.
- The title company waits for a wire transfer or cashier’s check from the buyer.
- Once the money has been received it is given to the seller and the deed is signed over to the cash buyer.
If you receive an offer from a cash buyer who does not use a title company, they may be hoping they can get control of your property without payment. Furthermore, a title company also protects the investor by making sure the owner of the house is not falsely representing the equity they have in the house.
Without a title company, a cash offer is placed more in good faith than in financial legitimacy. A title company protects both the buyer and the seller and can also provide title insurance. If you find yourself working with someone who will not be using a title company, it’s probably a good idea to run in the other direction.
Sometimes sellers try to use a quitclaim deed. Opposed to a warranty deed, which uses a title company, a quitclaim deed surpasses the title search process. In this case, the risk is much higher because there is no guarantee that the seller has full ownership of the title. Thus, a real cash buyer will not want to use the quitclaim deed. If a cash buyer suggests this route, you may need to ask more questions. It is in both your interests to use a warranty deed, thus this is the preferred and safer method.
If a cash buyer is willing to buy your house without knowing the details, it’s likely shady. A legitimate cash buyer will want to know the condition of the roof, electrical, HVAC, plumbing, square footage, number of bedrooms and bathrooms, and how old the house is. While some of this information may be found online, particularly if the house has been listed in the past, a real cash buyer will still need more information from you. If they try to buy it without seeing your home or knowing any of these details your inner alarm should be ringing loudly. This is particularly true if they seem to be rushing through the process.
3. The cash buyer does not have the house inspected.
Related to the point above, a real cash buyer needs to know that your house is worth buying. Often, the homes that are bought for cash need a lot of work and this is why they aren’t listed with a realtor. While a cash buyer knows this going in, they will need to know the entire condition of the house before they can buy.
Here are a few things house inspectors assess the condition of:
- The foundation
- The roof and walls
- The heating and cooling systems
- The floors, ceilings, and windows
- The plumbing
- The electrical and wiring
Each of these components is essential to determining the worth of your house which is why a legitimate cash buyer will go through an inspection. An inspection can take two to three hours. This is an important step for the seller too because you can be present with the inspector during the process. This allows you to see what the inspection results are and how the inspector got them. Someone who is trying to pull a fast one on you is not going to want to dish out money for an inspection.
You may be thinking “Well if the cash buyer asked me about all of these things already why do they need an inspection?” This is the way the cash buyer knows that the information you present is reliable. While people may have some issues with their house that they are unaware of, such as structural or electrical issues, some may try to purposely leave out important details.
Perhaps you have noticed a theme here in our list. A real cash buyer is going to take a number of steps to make sure the deal is a viable option for both you and them. This is seen in the use of a title company and inspector. If a cash buyer seems to be working without such screenings, then they may not be the most trustworthy. Or, at the very least, they may not be taking the necessary steps to ensure that you and they both are protected in the deal.
4. The cash buyer withholds information.
A legitimate buyer will be fully open with you during the process about their procedures and end goal. They should communicate with you throughout and always be willing to answer your questions. If a cash buyer seems to be beating around the bush or simply glazes over things, this may be a red flag. The cash buyer should also be open to talking about their business and past work. If the buyer is nowhere to be found online, then it is less likely they are legitimate.
5. The cash buyer has no references.
When you ask about other deals they’ve made and where you can find reviews and they fall silent or change the subject, something is probably not right. Either they do have previous clients and the reviews are poor or they do not have any real references.
6. The cash buyer asks you to pay for closing costs.
1. Title Search
2. Title Insurance
3. Appraisal Fees
4. Survey Fee
It is estimated that the average closing cost in the U.S. is $5,749. This is no small amount, so discuss closing fees early on so there are no surprises.
What does not automatically qualify as a scam?
Now that you know the warning signs, here are some things that do NOT necessarily indicate the person/business is trying to scam you:
1. They send you a text or call you when you haven’t reached out to them.
This is called cold-calling and it is a commonly used marketing strategy. The purpose of cold-calling is to find leads for potential deals instead of waiting for people to find you. Many of us have been conditioned to be suspicious of any unknown number so many people when receiving such a call or text assume it is a scam. As we have seen above, that may often be true.
However, many legitimate businesses cold-call and may actually be there to provide you with the deal that you need. It is better to find out a little bit more from the person than to simply assume they are a scam if they are contacting you about something you may have interest in otherwise. That being said, personal information such as social security numbers and bank account information should never be shared without knowing if the business is trustworthy.
2. They ask you about your house when you don’t have it on the market.
This may feel suspicious if you have not listed your house. However, investors look for homes that may be abandoned or vacant and try to get in touch with the owners. Investors actually do not generally have interest in houses on the Multiple Listing Service. This is because these are houses that will sell best with realtors. Investors are most likely to contact you in the following situations:
1. You have a vacant or abandoned property that you don’t know what to do with and so it just sits. Investors keep their eye out for these properties because they are perfect candidates for wholesale.
2. You have a home that you started renovations on and cannot afford to finish the job. An investor has connections with people who do fix and flips, and so this is the perfect match.
3. You recently inherited a home that needs work and no one is living in it.
Many people end up holding onto properties because they do not know what else to do with them. This is especially true when a house is in poor condition and is unlikely to be appealing to a realtor.
For an investor, this kind of property can be the perfect candidate for what they do. Again, if you receive such contact about your property and you have no interest in selling then simply tell them no.
3. The cash buyer does wholesales.
If you do a Google search many try to claim that all wholesalers are scammers. This is simply not true. As explained above, wholesaling is essentially where the cash buyer finds the house, does the inspection and title search, and gets the contract. Then, they sell it to a buyer who wants to do the renovations. This may get your house sold much quicker than waiting for someone who can renovate. An investor likely has the contacts needed to make a deal that benefits you both. Now, if you want to sell directly to the person who wants to renovate then you should go for it so you can get a bigger profit. This could be a viable option if you have good contacts and adequate time to find the right buyer.
The bottom line is that you should only do business with someone you trust. If you don’t trust them it means that even if they are legitimate you will feel anxious throughout the process. However, keep in mind that the situations above do not equal a scam and do not in themselves warrant distrust. Many of us are most familiar with realtors. The real estate businesses that do not fall under this umbrella can feel like very new and unfamiliar territory. It’s completely understandable that you may feel wary. However, if you need to sell your house as-is, it may be your best option to go with a cash buyer.
Credit: Joshua Hoehne
Not all cash buyers are created equal.
As with most things in life, cash buyers are not all the same. The legitimacy of cash buyers exists on a spectrum rather than a yes or no. Some cash buyers may be able to hold up their end of a deal but can have unsavory business tactics. Others may be complete scammers that have no intention of following through on their part. The best cash buyers are those who are transparent throughout the process, are well-established, and follow through on their end.
Ideally, a good cash buyer should want to do deals that are mutually beneficial. If it is a one-sided situation, such as the cash buyer gets all the benefits then definitely go a different route.
The cash buyer should also never try to trap or trick you. They should be honest, flexible, and concerned about your needs as much as they are concerned with their own. These qualities will be influenced by the personality of the cash buyer and reflected in the mission statement and methods of the business. Furthermore, a cash buyer should have integrity. If they know they are not your best option then they should let you know. This is what differentiates between the sharks in the water and the businesses that want the best for both parties. If a cash buyer waves off your concerns without adequately addressing them, then they may not have your best interests at heart.
Overall, individuals making cash offers versus those who need a mortgage can both be great potential buyers, depending on your needs. Realtors can help guide you through the process of selling your home and find you a lucrative deal. Cash buyers may be able to meet you where you are at and help you sell a home that may be otherwise difficult to sell. It is best to research your options, talk to different people, and come to an informed decision about what suits your needs. Here are a few situations where a cash offer maybe your best option:
1. You need to sell quickly.
2. You need to sell as-is.
3. You have a vacant or abandoned property.
4. It is more important for you to sell quickly and efficiently than to make a big profit.
A cash offer may not be the best if:
1. Your house is already in great condition.
2. Profit is more important than the time it takes to sell.
3. You want to sell for a high price.
For a deeper look at your options for selling your house refer to 3 Ways to Sell Your House. You should never feel pressured or as if you are being forced into a deal. Remember the best deal is where everyone wins. It’s up to you to decide who is best for you. Happy house selling!