Over lunch the other day, a friend told me how a company promising an expedited purchase of his home had seriously mishandled the transaction, resulting in financial loss to his ex-wife. I decided to find how homeowners can protect themselves in these transactions. Here is what I found.
There is a small but interesting industry of companies which buy homes from owners who are in need of a quick deal and are willing to accept a discounted price in return. There can be any number of reasons for the need of a quick deal — a sudden relocation, a divorce, an estate sale, a loss of job leading to inability to pay the mortgage, an accident or illness which leaves a family member in need of special facilities, and many others. In such circumstances, the sight of a buyer who will close the sale for cash in a few days seems like a godsend.
But, are these buyers truly good neighbors or are they really predators profiting from the distress of others? Or, are they both — good neighbors who are committing an act of kindness but also making an honest profit so they can continue this mission?
There are indeed some companies which fulfill the second description — a good neighbor who has made this process into a successful business. There are also, unfortunately, many others who are unscrupulous predators. So, how do we tell the difference?
There are certain guidelines which the seller in this situation should follow for self-protection. The most common trick is the buyer who signs a contract to buy the house for a certain of amount of money, and then flips the property to another buyer for a profit at settlement. He then uses some of the money from the new buyer to conclude the original transaction.
The problem with this arrangement is when the quick cash buyer who is relying on flipping the property in order to pay the owner cannot find a new buyer in time. In that case, he comes to the scheduled closing and reneges on the deal because he doesn’t have the funds to close. The homeowner has just lost a week or a month.
A variation is when the buyer comes to the closing and offers a lower price — take it or leave it. If the homeowner feels compelled to take the lower offer because of plans or commitments already made, he or she stands to lose perhaps thousands of dollars.
So, the first lesson is to make the quick cash buyer place at least 5 percent of the purchase price — a non-refundable “earnest money deposit” — in escrow when the contract is signed. To ensure that all goes well, it is advisable to have the participation of a reputable attorney
But caution should begin considerably prior to the agreement with the quick cash buyer. If you are intending to embark on this type of transaction, you should exercise some due diligence. Lawyers who work in this arena usually know which are the trustworthy and reputable companies in this business. It is a good idea to seek advice and referrals from these lawyers. Ask a reputable real estate office for referrals to real estate attorneys whom they respect.
Most attorneys offer a free consultation. You will need an hour or so of an attorney’s time to review the final offer, so this consultation should yield the names of some reputable firms, with the agreement to hire the attorney of choice when the time comes.
With list in hand, it would be prudent to spend another few minutes checking with the local Better Business Bureau to see if there have been any unresolved complaints against these firms. A negative report does not guarantee anything, but a positive report indicates caution or more, depending on the outcome of the complaint.
The next step is to seek offers from at least two firms, letting both know of the competition. An added benchmark would be to get a real estate broker’s opinion of the value of the property “as is” before the offers are even solicited. If you can’t afford to pay for a broker’s opinion and don’t have a friend in the business, you can always go to Zillow on the Internet and get the prices of recent sales in your locality to give you a starting point for your negotiation with the quick cash buyer.
Most firms can deliver an estimate quickly. But now is the time to carry your due diligence to the next step. Find out where the company is located, and make an appointment to visit them in their office before you invite them to your home. If they do not have a real office, or are not willing to invite you to visit, consider this a major negative. Established firms have offices and staffs. The lack of either suggests an underfunded company or worse, a scam artist.
Next, take the best offer in writing and have your attorney review it before you sign. The typical offer from a reputable company will include a 20 percent-25 percent discount on their estimate of the current value of the property “as is”.
This discount takes into account the sale price of comparable properties in your neighborhood, the anticipated cost of the renovations which will be needed to bring the property condition up to the standard of the neighborhood, and therefore the anticipated sale price of the renovated home.
Also priced into the calculation is the amount of risk the buyer anticipates in pricing the sale of the property in a condition which is not yet in evidence. Such risks might be that the market would turn down before the property is ready for resale, there might be some unknown or undisclosed expense in renovation, such as lead pipes or toxic insulation, or simply that the property doesn’t sell for some unexpected reason.
Make sure the agreement contains a requirement to escrow with the attorney or an escrow agent the non-refundable deposit in cash pending the closing. This prohibits the “bait and switch” scam, whether through intent or accident. The agreement should also disclose who is responsible for closing costs and the time you have to vacate before the buyer takes possession. The attorney will know the standard procedures for your locality.
With these safeguards, the quick cash sale should go smoothly. As Brad Chandler, president of Express Home Buyers, a well-regarded firm in the Washington D.C./Baltimore, Maryland area, says, “A well-executed quick sale allows you to start fresh and get on with your life without the hassles or delays of a conventional sale.”
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