9 Things To Know Before Selling A House Fast For Cash
Table of Contents
- 1) Why Mortgages Can Be Problematic for Sellers
- 2) Why You Should Avoid Contracts with Contingency Clauses
- 3) Closing Quickly Is Possible with Cash Buyers
- 4) Advantages of Selling As-Is
- 5) Buy & Hold Are Traditional Real Estate Investors
- 6) Should You Avoid Buyers Using Hard Money?
- 7) What About Selling to a House Flipper?
- 8) Are iBuyers a Scam?
- 9) Alternatives to Selling Fast for Cash
You’ve seen the signs around town encouraging you to, “Sell Your House for Cash!” You may have also seen for sale signs in your neighborhood for companies like Opendoor and Redfin—so-called “iBuyers” who use computer algorithms to assess your home’s value and make you a fast cash offer.
Selling your house fast for cash has several benefits and several drawbacks.
In the cash buyer real estate model, real estate companies and individual investors purchase houses— usually below market value—and resell them at a profit. iBuyers purchase homes directly from sellers just like cash buyers and can make instant offers through their websites.
Cash buyers and iBuyers want to close on your house quickly. They will make an offer on your home, usually within minutes of meeting you or after you submit your home and mortgage details online for processing.
No real estate brokers are involved in the sale, so no broker fees are paid by the seller. The risk to the deal is low since cash buyers are not awaiting approval for financing. Cash buyers will also offer to buy your home as-is, so no seller-financed repairs are required to meet the buyer or lender requirements.
While speed, no broker fees, no repair costs, and no waiting for buyer loan approvals are attractive aspects of selling a house for cash, there are downsides to selling a home for cash as well.
iBuyers typically charge a fee for their services. Both cash buyers and iBuyer companies will offer significantly less than market value for your property. There are also other financial and legal ramifications worth considering.
Selling for cash might be tempting due to adverse financial circumstances or disruptive life changes, but it can come at a high cost to your equity.
Here are 9 things to know and consider before selling a house for cash.
1) Why Mortgages Can Be Problematic for Sellers
Mortgages can be problematic for sellers depending on the type of mortgage a qualified buyer obtains.
Conventional loans are typically more difficult to obtain than an FHA loan. To qualify for a conventional loan, a borrower must have good credit, regular income, and a down payment. If borrowers have a down payment that is less than 20%, lenders usually require private mortgage insurance to reduce the risk of borrower default.
FHA loans, however, are government-insured loans that have a lower barrier to entry, as well as lower down payment and credit score terms. Also, including lower closing costs, FHA loans are a good solution for buyers who don’t qualify for conventional loans. These factors make FHA loans a smart choice for first-time homebuyers.
FHA loans can be potentially problematic for sellers because of the strict guidelines involved due to being government-insured. The first potential problem area is the appraised value of the home. If an appraisal comes back less than the price agreed upon by the buyer and seller, the seller must reduce their asking price to match the appraisal value. If the seller refuses to lower their asking price, the buyer can’t get the loan.
With a conventional loan, the buyer can negotiate the asking price if the appraisal value is less than the original asking price. With an FHA loan, the seller doesn’t have an option if they want to continue with the deal. Even if the seller decides to refuse a lower offer and list their home again, the appraisal remains with the property for 120 days.
Sellers also dislike FHA loans because of the repairs frequently required before closing the sale. Appraisers are required to report any defects that adversely affect habitability, health, safety, or security. If an appraiser finds any issues, the seller must complete repairs before closing.
Common problematic home defects for FHA include:
- Peeling or chipped paint
- Handrails installed for all open stairs
- Two or more years of use must remain for appliances, floor coverings, and roofs
- Repairs for cracks and tripping hazards on concrete surfaces
- Windows must be unbroken and functional
- Running water and functional heating and cooling systems are required (a regional-specific requirement)
It is for these reasons that sellers are sometimes wary of entering a contract with a buyer who needs financing.
Cash buyers and iBuyers don’t have appraisal value and defect repair requirements. Conventional and FHA loans often require weeks for a qualifying decision, whereas a cash buyer or iBuyer can give you an offer in minutes that requires no lender approvals.
Pre-approved loans may be one option for buyers who don’t want to take the hit on their equity. However, you must qualify and have sufficient down payment or be able to handle the cost of mortgage insurance.
2) Why You Should Avoid Contracts with Contingency Clauses
Sellers who are trying to move their homes quickly should avoid entering a contract on their house containing contingency clauses.
Contingency clauses in real estate contracts allow buyers and sellers to back out of the contract if either party isn’t meeting certain conditions. Contingency clauses generally skew toward the buyer.
The standard contingencies common to most real estate contracts include:
- Title – realtors run a title search on properties, which may expose property liens, ownership disputes, or so-called “title defects” that could potentially prevent resale of the home later on if not remedied.
- Inspection – buyers have the right to have the property inspected, review the results, and all required disclosures.
- Appraisal – typically, buyers who are financing their home purchase must obtain an appraisal of the property before their loan is approved.
- Mortgage – buyers financing their homes will usually have a mortgage contingency written into the contract, requiring they receive approval for a mortgage on the house.
- Homeowner’s insurance – lenders typically require buyers to purchase homeowner’s insurance for the property they are financing.
- Sale of another property – this is the contingency sellers want to avoid most, where selling the buyer’s property is required before they can purchase yours. If the buyer is unable to sell their home within an agreed-upon time frame, they can back out of the contract and recover their earnest money. Then a seller must attract another buyer.
- Kick-out clause – allows a seller to continue showing the home and accept another offer if the buyer with a contract and a contingency to sell their house can’t sell within the agreed-upon time frame.
It’s difficult to avoid having most of these contingencies written into your real estate contract in a traditional broker-managed real estate transaction.
Typically, the only way to avoid a contract with contingencies is to go with a cash buyer. Cash buyers usually purchase properties as-is, so there is no inspection or appraisal, no mortgage or loan, and no sale of another property impeding your home sale.
However, homeowners can lose a significant amount of their equity in a cash deal, as cash offers are often substantially less than the market value of your home to cover repair costs and to ensure the buyer can profit from the future sale of your home.
Homeowners must decide whether a quick cash deal outweighs the reduced equity they receive compared to customary real estate deals.
3) Closing Quickly Is Possible with Cash Buyers
Sellers often like going with a cash buyer over higher offers using conventional financing or FHA loans since a validated cash offer faces fewer hurdles and can close more quickly. A buyer’s situation can change from contract through qualifying for a loan for numerous reasons, triggering one or more contingencies in the contract and enabling the buyer to back out of the deal with their earnest money.
When a buyer backs out of a contract, sellers have to relist their homes and seek another buyer, delaying any plans they may have for disposing of their property quickly. However, with a cash buyer, there are no financing-related contingencies. Once an inspection or any other contingencies are satisfied, the closing can occur in as few as seven days.
As-is buyers are typically investors (along with iBuyers) and won’t require a home inspection. A cash buyer can make an offer on your home within 24 hours, and close within seven days as long as there are no title issues to resolve. It’s worth noting that a traditional mortgage-backed home sale requires about 30-45 days to close.
There are advantages for buyers who pay cash, too.
Buying with cash means no monthly mortgage payments or mortgage insurance. You have instant equity, which, in a seller’s market, is a great way to grow your investment.
Markets change and fluctuate, but a cash buyer retains 100% equity in their home regardless of the state of the market.
Cash buyers have no restrictions on transferring title due to loans, either.
4) Advantages of Selling As-Is
There are several advantages to selling your home as-is: faster closing, no real estate commission, and few closing costs.
If you’re working with an individual investor, you can still work with an agent and possibly negotiate something lower than the standard commission, split it with the buying agent (if there is one), or settle on a paid fee.
However, most of the real estate investment (equity purchase) companies who buy homes as-is don’t use agents and work directly with the seller.
Selling your home as-is enables you to complete the sale quickly without having to spend money on home repairs you either can’t afford or don’t have the time and energy to do yourself.
There is much less overall effort required to sell your home as-is than going the traditional route of using a broker and staging and updating your home for prospective buyers.
Often, people need to sell their homes quickly due to unforeseen life changes and circumstances. Job transfers or layoffs, divorce, or the illness or death of a loved one are all examples of life situations where people have to make the unfortunate decision of selling their home quickly.
Selling as-is gives you the flexibility to accept an offer on your home and avoid the cost of repairs and most of the closing costs.
Exterior renovations and staging the home to attract buyers are among the costliest expenses when preparing your home for sale. Ambitions homeowners can save some money by doing the repairs themselves, but then must put off listing their house until they complete the repairs. Also, doing repairs takes the time you frequently don’t have after work and family commitments.
You can also avoid the stress of dealing with an inherited home by selling it as-as. Those who inherit their loved one’s home can sell as-is and avoid the trouble of dividing property among siblings. They can sell the inherited property as-is, split the profits, and complete the process without expending the time and energy required for a conventional home sale.
If you sell as-is to a cash buyer, you don’t have to do the deep cleaning or even touch-up work like painting and carpet cleaning, that a conventional home sale would typically require. As-is cash buyers won’t be put off by damage, foreclosure, or other situations that make your home difficult to sell.
One thing to be wary of when selling your home as-is are buyers who claim they don’t need to see your home. These can be scam artists, so be cautious in dealing with prospective as-is buyers.
5) Buy & Hold Are Traditional Real Estate Investors
Buy-and-hold real estate is an investment vehicle for buyers who are looking for long-term holdings, typically five years or longer. Individual investors who are buy-and-hold property owners may intend to sell the home later but often rent the property to pay for the cost of financing their purchase. These are individual investors.
Buy-and-hold real estate companies pay cash for your property, often buying properties in quantity, and claim to close quickly. They also claim to get “rock bottom” prices on properties for their investors.
Properties sold to a buy-and-hold company go through a rehab, inspection, and curation phase where they are upgraded as rental properties and leased out.
A buy-and-hold real estate company takes the property from initial sale through remodeling and leasing all on the investor’s behalf. They can also provide property management services to investors who don’t have the time, desire, proximity, or ability to be the landlord for their investment property.
Sellers can quickly cut a deal with a buy-and-hold investor but will lose equity since the buyer is looking for the lowest possible price they can get for your home.
Some considerations may work against you with buy-and-hold investors, such as poor location, poor investment returns from surrounding properties, high cost of remodeling the home for renting, or high-maintenance properties (like student housing or vacation rentals).
Deciding whether to sell your home in a buy-and-hold transaction, like any of the non-conventional types of real estate sales discussed here, will depend on your circumstances. Frequently the location and condition of your home are major determining factors in whether investors are attracted to homes like yours.
If you decide to work with an individual buy-and-hold investor, you may have a little more room for negotiating your selling price and any repairs necessary to close the deal.
Bear in mind that most home sales to a buy-and-hold investor will have a higher threshold for desirable locations and curb appeal and may take longer to complete due to timing on the investor’s available financing.
Inspections, appraisals, and other potential contingencies are also possible when dealing with an individual buyer, so if a fast sale is something you need, then a buy-and-hold investment company may be a better option.
6) Should You Avoid Buyers Using Hard Money?
“Hard money” is a short-term loan secured by real estate and funded by private investors instead of conventional lenders like banks and credit unions.
Hard money loans are typically a 12-month loan with the option to extend, sometimes for two to five years. Payments are generally interest-only or interest plus some principal with a balloon payment at the end of the loan.
As noted, buyers use real estate to secure hard money loans. That could be property the buyer already owns or the property they’re acquiring — your property.
Buyers turn to hard money lenders when declined for conventional mortgages due to recent foreclosure or short sale of a property, or if they simply need to obtain financing quicker than conventional mortgages allow.
If the buyer has sufficient equity in their collateral property, or if your property has enough value, a hard money lender will approve the loan.
Hard money is an option for financing a home purchase when conventional financing is not an option for the buyer, or they only need a loan for a short time.
Hard money loans are ideal for fix and flips, buyers with credit issues, or real estate investors who need to act quickly.
Does selling to a buyer financing the sale with hard money present a dilemma to the seller? It depends. Bear in mind that an investor or anyone using hard money wants to purchase your home and likely sell it within one to five years at a profit. So, like other offers from investors, you are probably going to get less than full market value for your home when selling to a hard money buyer.
One final consideration is that hard money lenders may apply more conservative means of determining the value of the collateral properties. If your property is the collateral property in question, you may end up with an offer that is less than it may have been with another kind of cash sale.
Speed of the sale and the ability to sell your home as-is are the primary reasons a hard cash buyer works in favor of sellers. However, it would be best if you were wary of hard cash deals where you are getting offers substantially less than you might get using other fast-sale or investor brokered sales.
Also, be sure to verify the authenticity of all hard cash funding to avoid scams.
7) What About Selling to a House Flipper?
House flippers are real estate investors who purchase properties at a discount, improve the property, and then sell it at a higher price under favorable market conditions.
Real estate investment companies may use contractors for property updates, but individual house flippers may do the work themselves.
Corporations that flip houses tend to buy properties when the market is down and then sell when market conditions change.
Corporate real estate investors use big data to determine the markets in which they invest.
Individual real estate investors can be real estate agents, home inspectors, appraisers, contractors, or so-called mom-and-pop investors.
If you’re unwilling or unable to put effort into updating, listing, and staging your property for a conventional home sale and are willing to accept less than top dollar for your house, then a house flipper might be a useful option for you.
Housing situations change for many reasons: a job transfer or layoff, inheriting a property, your property won’t qualify for a conventional mortgage, the house is in foreclosure, or you have home damage and are unable to pay for repairs. For all these reasons, selling to a house flipper is worth considering.
The primary disadvantage of selling to a house flipper is loss of equity due to selling below fair market value and not having market exposure.
So how do you know whether to sell your house to a house flipper?
One way to determine whether selling to an investor is right for you is by identifying the best price you could expect for your home and the lowest price you could expect. Just knowing those two data points could tell you whether an investor offer is within a price range that you’re willing to accept.
Selling to a corporate investor gives you flexible options for receiving payment. You can opt to receive certified funds, cash payment, scheduled cash payments, or assumption of your current mortgage payments.
You can also often sell your home as-is to investors since a house flipper intends to remodel and resell the home in short order. Closings are generally faster going through an investor, and you don’t have to stage your home for listing and showing.
The things to watch out for with house flippers is that that they are seeking rock bottom prices for their investments and are some are possibly scam artists looking for an easy mark.
Make sure you are looking at all your options and do your homework on the buyer before deciding to sell your home to a house flipper.
8) Are iBuyers a Scam?
iBuyers are new real estate investment companies that buy homes directly from homeowners and offer up themselves as an innovative solution to the invasive and labor-intensive process of selling your home.
They allow sellers to enter their property and mortgage information on a website and can provide an offer in minutes. They pay cash and can close in less time than selling through a conventional real estate broker.
iBuyers use automated valuation models (AVMs) to determine a home’s value quickly. This automation enables iBuyers to quickly assess a home’s value and make a cash offer—all without anyone viewing your property.
iBuyers are legitimate companies. Opendoor, Zillow, and Redfin are among the iBuyer companies who have conducted thousands of valid home purchases.
However, scammers can pose as iBuyers as they do in any cash sale real estate market, so make sure you’re working with reputable companies before entering any contracts.
Not every homeowner will like working with an iBuyer, but there are some reasons why an iBuyer might be among your best options available.
- You have made a contingency offer on a new home and need to sell your old home quickly.
- You have accepted a job offer or transfer to another location and need to sell your home quickly and don’t want to deal with selling your home long distance.
- You are divorcing and need to sell your home quickly.
- You are unwilling to devote the time and energy required to make a conventional home sale.
- You inherited a home and want to sell it without going through a conventional home sale.
- You are trying to sell a rental property quickly.
iBuyers like Opendoor make their money from the service fees they charge buyers and sellers using their platform. Buyers will pay a nominal closing cost fee, while sellers pay a service charge between 6 and 13 percent. Opendoor claims they base their service charge on their estimate of the time it takes to resell your home.
Also, there are no real estate broker fees when using an iBuyer like Opendoor.
However, the speed and convenience come at the cost of your equity. iBuyer offers generally come in lower than average home sale prices in some metropolitan areas, and their fees can sometimes be higher than working with a discount brokerage.
If a speedy sale and selling as-is are your main drivers for selling your property, then iBuyers may be an option worth looking into further.
9) Alternatives to Selling Fast for Cash
If the prospect of selling your house for cash has you nervous, confused, or concerned for your home’s equity, that’s understandable.
In addition to having numerous options to consider, you also have to beware of possible scams and fraud in the homes for cash business.
People who sell their homes for cash frequently have a life event requiring the rapid sale of their home or other property. Events such as relocating for jobs, divorce, or bankruptcy require the quick sale of a home.
If you’re not in a situation where you need to sell your home or property quickly, what are some alternatives to selling your house for cash?
Traditional Real Estate Agents
A conventional home sale through a real estate broker is one option. With some minor repairs and staging your house for showings, you can get something closer to full market value for your property. However, conventional home sales aren’t an option for some sellers because of the high cost of the commission they charge.
Discount Real Estate Brokers
So the good news is that if you want to save money when selling your house, you don’t have to do it the traditional way.
It is entirely possible for you to potentially save thousands of dollars in commissions when selling your home or property by hiring a discount real estate broker.
With discount real estate brokers and agents becoming easier to find, some offering a la carte services and budget-friendly options, you now have a number of avenues to explore when deciding on how to sell your house.
Flat Fee MLS Companies
A flat fee MLS is like its name suggests, a flat fee service you pay to have your house listed in the databases that Realtors use to find properties for their clients. It’s a flat fee because you pay the company a specific amount you agree to and no more. However, this doesn’t mean that all companies that offer flat-fee MLS offer the same things. The offering can vary as much as the fees.
Want To Learn More About Flat Fee MLS Listings?
If you want to save at least 50% of the Realtor commissions, check out our article about 9 Things FSBO’s Need To Know About Flat Fee MLS Listings
Renting Your Home
If you’re having difficulty selling your home due to location, condition, or other factors, you might consider renting your property for enough to cover your mortgage. You could also offer your current tenant a lease-to-own option if you home is already a rental.
If you’re “underwater” with your mortgage, and you owe more than what your home is worth, you could sell your home in a short sale.
A real estate agent experienced with short sales negotiates with your lender for a price less than your mortgage balance. However, not every lender accepts short sales, and not every homeowner qualifies.
Also, there are some repercussions to pursuing a short sale, which affects the seller’s credit and may prevent you from buying another property for a while. Additionally, there are possible tax implications in a short sale, and you could potentially receive a 1099 from your lender for the amount of debt forgiven.
Employer Sponsored Guaranteed Purchase Programs
Your employer may offer a guaranteed purchase program for employees willing to relocate. The employer hires a relocation company that provides a buy-out to the employee.
Attract Multiple Offers
Finally, you could lower the asking price of your home to less than market value to attract the investment buyers, but you may also end up with multiple offers from other sources.
There are several angles to consider if you need to sell your home and are weighing whether to go with a cash buyer. There is no harm in speaking with a realtor or other property professional, but ensure whoever you contact—cash buyer, iBuyer, house flipper, or traditional broker—that you check their credentials and ensure you’re dealing with a reputable professional.
It’s easy to get caught up in a quick sale deal if you need the cash, so be cautious and double-check that all contracts are legitimate. You can also consult with a property attorney or real estate professional if you’re unsure about the best way to proceed.
About the Author: Kris Lippi is the owner of ISoldMyHouse.com and the broker of Get LISTED Realty. He actively writes about real estate related topics such as buying and selling homes, how-to guides for around the house and home product recommendations. He has been featured in Inman, Readers Digest, American Express, Fit Small Business, Policy Genius, Lending Tree, GoDaddy, Manta as well as other major websites. Read more about us here.