We Buy Houses – Too Good to Be True?

February 8, 2021

The letter arrived at just the right time. A week after her mother died in mid-2019, Suzanne was thinking about selling the family home her parents had owned since the early 1990s in the Sacramento foothills of California. A letter from a real estate investor offered close to $300,000 in cash to buy the home. For Suzanne, who lives in Washington State, the offer was appealing even though it was about $50,000 less than similarly renovated homes in the area.

“I figured that by the time you slap on some new countertops, new flooring, and new cabinets, that’s what we would be walking away with anyway,” she said. “I told my siblings, ‘This makes sense, we should do it.’”

But after an initial inspection about two weeks later, the once seemingly fair offer fell to $260,000. The investor insisted that the market had softened since their initial offer. And there was another catch: the investor would only present a final offer once the property was vacant. The home had been rented for several years and the tenant’s lease ran through the end of the year.

“I got a bad feeling,” Suzanne said. “It just seemed like they would offer less after that inspection, and then I’d be left without tenants. It didn’t feel right.”

Given the timing, right after her mom’s death, Suzanne suspected it was her mother who was the real target of the offer. “I know that if it had been my parents dealing with this, they would have been disappointed by the offer. But they probably would have thought, ‘We’ve come this far, we might as well go all the way.’”

Suzanne and her siblings walked away from the potential sale. They decided to take their chances putting the home on the market with a real estate broker or perhaps selling it to one of their tenants at the beginning of 2021, once the lease expires.

Buying homes on the cheap

Companies like the investor described above are known as wholesalers. You’ve probably seen their highway signs proclaiming, “We Buy Ugly Homes” or “Cash for Your House.” Other times, companies make unsolicited offers for specific homes through the mail.

Wholesalers purchase homes cheaply, usually paying 30-50% below market value. They then turn around — sometimes the same day — and sell the homes to other investors who do the actual renovations in order to flip them.

“There needs to be enough of a discount so that the wholesaler and the buyer make a profit,” explained Shymane Robinson, a Chicago-based real estate attorney.

In exchange, buyers receive cash quickly without paying any closing costs.

“Once you sign the contract, you can close between seven and ten days,” Robinson added, though some transactions may take longer.

Robinson noted that even with the coronavirus-induced recession, the supply of real estate remains tight, particularly in desirable neighborhoods. Therefore, wholesalers are increasingly on the prowl for properties and will try whatever angle might lure prospective sellers.

Targeting seniors

Homes owned by seniors are particularly attractive since many may need repairs or are owned by people ready to downsize. Given the economic uncertainty caused by the COVID-19 pandemic, some homeowners might be tempted to offload their homes this way.

“It’s not that an older person is targeted,” Robinson explained. “It’s about equity. A 30-year-old isn’t going to have a lot of equity because they just purchased their home. So, if they can’t afford to keep their home, they’re going to look at foreclosure [instead of selling].”

In addition to seniors, wholesalers also target homeowners going through a divorce or those who are delinquent on their property taxes.

In fact, the topic of senior homeowners comes up a lot on online wholesale discussion forums with members encouraging one another to obtain lists of senior homeowners with at least 15 years of ownership in their homes.

Keep your guard up

There is nothing illegal about wholesalers. Some of their practices, however, have earned their industry a negative reputation.

For example, according to the Atlanta Journal-Constitution, wholesalers have reported code violations on homes they’re interested in buying, hoping to pressure homeowners into selling if they can’t afford to make the necessary repairs.

What’s more, wholesalers generally aren’t regulated, so there isn’t a governing body watching out for potential abuses. That’s starting to change. Illinois, for example, recently began requiring anyone who does more than one wholesale deal a year to register as a licensed broker. Robinson, the attorney, believes that other states will follow suit.

The biggest problem with selling to a wholesaler is that deals are so rushed, sellers may not have enough time to fully understand the contracts they are signing. Working with an attorney to review the contract can help ensure the seller is comfortable with all the terms.

Better ways to deal with real estate issues

Depending on why you’re interested in selling to wholesalers, there may be better — and less expensive — ways to achieve the same end.

Consider these other options instead:

Contact a licensed real estate agent about selling your home. You might be surprised to find out how much your home is worth and how quickly you might be able to sell it, especially if you live in a desirable area.

  • Contact a licensed real estate agent about selling your home. You might be surprised to find out how much your home is worth and how quickly you might be able to sell it, especially if you live in a desirable area.
  • If your property needs sprucing up, it might be possible to do a cash-out refinance if your credit score is high enough. Some agents, like twin sisters Lyndsay Lamb and Leslie Davis, who are featured on HGTV’s “Unsellable Houses,” might even put up the money to pay for the repairs and split any sales proceeds that come in over the asking price.
  • If you’re behind on your property taxes, contact your local taxing authority to work out a repayment schedule. And note that many municipalities offer breaks on property taxes for seniors, so make sure you’re taking advantage of them.
  • If you are 62 years or older and will be living in the home as your primary residence, another option worth exploring is a reverse mortgage loan. It will first pay off your current mortgage, if you still have one, with any remaining equity paid out to you as tax-free cash to use almost any way you wish. Pay off expenses, fix up your home, or cover your medical expenses with the money. Although you won’t have monthly mortgage payments, you are still responsible for maintaining your home and paying property taxes and homeowners insurance.
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To obtain the extra cash you’re seeking, you have lots of options. If during your search, one of those ubiquitous “We Buy Ugly Homes” or “Cash for Your House” signs happens to catch your eye, remember what they’re selling and what their angle is. You just might want to drive by and find a better deal for your situation.

To find out if a reverse mortgage loan is right for you, click here.

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