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Cash Buyers for Homes - Pros and Cons of This Type of Sale

February 4, 2020

Pros and Cons of an All Cash Offer on a Houseblank

If you are selling your home, the good news is that you have more options today than ever before. With the advent of concepts like cash buyers for homes, iBuyers, and other internet-based options that facilitate your home sale combined with traditional “For Sale by Owner” or “For Sale by REALTOR,” the problem is which method to choose.

The answer, of course, boils down to your particular situation. Factors like job, school, timeline, and amount of equity in your home will all contribute to your choice. People that need to move quickly and don’t have the time or resources to go through a traditional home sale, might be ideal candidates for a cash buyer for homes scenario.

And who wouldn’t want an all-cash sale? While the prospects of an all-cash sale may sound appealing, there are some drawbacks. Let’s take a look at the pros and cons of an all-cash sale of your home.

Cash Buyers for Homes Options

From handwritten bandit signs to sophisticated websites, there are a number of variations on the all-cash concept. Let’s start by taking a look at who the players are in the all-cash home sale marketplace.

Wholesale Real Estate

These are the modern-day version of the old Glengarry Glen Ross characters. Working the phones, hammering in the handwritten bandit signs (Will Pay Cash For Your House), even knocking on doors. These are investors out looking for deals to either flip or hold in their own portfolio. Here is a more in-depth look at how Wholesale Real Estate works.

Another version of the independent wholesale buyer model is the "We Buy Houses" Company. These companies are positioned between the individual investor and the iBuyer. These companies have a wider marketing reach than the private investor does but don't necessarily have the financial backing of the big institutional buyers. Here's a great article that sheds more light on how these companies work and answers the question, Should You Sell Your Home To A “We Buy Houses For Cash” Company?

Realtors That Promise to Buy Your House

This is a variation on the wholesale method. In this scenario, a Realtor will offer to buy your home if they can’t get it sold with the traditional For Sale by Realtor model. Of course the price they are willing to buy the home for is much closer to the wholesaler’s price. The difference is that you will have wasted time going the traditional sale route, maybe even making a couple of additional payments waiting for the home to sell.

iBuyers

Another option that is relatively new but is slowly taking the center stage in real estate transactions is direct home buying through online real estate companies, these are called “Institutional Buyers” or “iBuyers”. There are a growing number of companies in this space. These are companies like Open Door, Zillow, Redfin, etc… These companies buy houses directly from the owners, this makes the entire process faster and smoother than a traditional real estate transaction.

Of course, there is a price for the convenience of selling to an iBuyer but depending on your situation, it might be worth it. Let’s dig into the nitty-gritty of these types of sales.

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Pros of Cash Buyers for Homes

  • It’s the fastest way of selling your house.

If you take the traditional route of using a real estate agent, you will most likely need to do some staging, decluttering, and make some repairs prior to putting your home on the market.

Once the home is ready the Realtor should have photos taken, virtual tours produced, descriptions written and put the property into the multiple listing Service. This all takes time and is done in an effort to fetch the highest possible retail price.

In contrast, the all-cash buyer will calculate the wholesale value of your home, adjust for location, condition and any inspection or maintenance issues they discover. Once they establish their price they make an offer, if you accept, that’s it, start packing.

According to data from realtor.com, once a property is listed it takes on average, 65 days to sell. This can, of course, vary based on the location and the area your house is located in. Once you receive an offer and sign the contract the transaction can take anywhere between 30 and 60 days or even longer to close, this assumes that everything goes smoothly.

While most under contract property’s end up closing, the percentage that ultimately fall-out has risen considerably in the last few years. As such a traditional real estate transaction can become problematic, especially if the seller is time-crunched. Conversely, many iBuyers and investors can have a preliminary offer in your hands within 24 hours.

  • Repairs, Inspections, and Disclosure.

Time crunched home sellers have little time for the hassles related to making repairs to the property before putting it on the market or those related to the property inspection. Cash can be another issue when it comes to repairs when a seller has their equity tied up in the property, it can be a hassle trying to get repairs paid for without those equity dollars.

In an all-cash deal, the buyer is ultimately responsible for those repairs, even though the offer will most likely reflect the cost of those repairs. Once again, the seller pays for this convenience.

It’s important to note that the buyer’s acceptance of responsibility for repairs does not release the seller from the responsibility of disclosing any issues or problems related to the property. This type of disclosure is a potential area where problems might occur in an all-cash transaction.

  • Contingencies

When you go through a traditional transaction, the sale of the house is usually contingent upon a number of items. These items include things like inspection, finance, title and most importantly appraisal.

Additionally, some buyers may also ask for a contingency based on the sale of their home as well. All of these contingencies may also delay the sale of your home indefinitely and in some cases just stop the process altogether.

Convenience is the primary reason to sell your home to an all-cash buyer. Whether it’s a private wholesale investor, Realtor or Institutional buyer, an all-cash transaction gives you the opportunity to avoid the road bumps and pitfalls associated with a traditional real estate transaction. An all-cash transaction also compresses the timeline and streamlines the path to the closing table. Of course, all of this speed and convenience comes at a price. For some, the price is worth it, for others the price is too high. So, now that we’ve looked at the case for all-cash sales, let’s take a look at the negative aspects of this kind of sale.

Cons of Cash Buyers for Homes

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  • You may end up losing money

The obvious downside of an all-cash sale is the loss of your equity. Convenience comes at a cost and for some, that’s ok. Sometimes the urgency of the sale is more important than the net proceeds to you the seller. Because of this, it’s important to weigh the potential for loss against the benefits of a quick sale before you agree to participate in an all-cash sale.

Having said that, if you factor in the costs related to repairs as well as commissions and closing costs, your price from the traditional sale may end up closer to the all-cash alternative, especially in a "seller's market". This is a question only you can truly answer.

  • Potential for an Unethical Buyer

Although it’s rare, the potential for an unethical buyer does exist. Institutional Buyers are the safest option when looking at offers but may not be as lucrative or flexible as a private investor. A private investor may actually commit to purchase your home and then proceed to look for a buyer or another investor to buy the property before they actually own the property. They look for someone that is willing to pay more than they did for your property, this could be $5,000, $10,000 or more. These investors will use their own money to buy your property and then turn around and re-sell your home at a profit an hour later. While this feels a little unfair, it’s what you sign up for when you choose to sell to a wholesale investor.

  • Customer Service

While an individual investor may provide a personalized, friendly, level of customer service, this is the exception, not the rule. Remember, the all-cash buyer or institutional buyers is not trying to provide you with a service, they just want your house at a price below market value.

Reviews of iBuyers or cash buyers for homes often focus on rude interactions and uncaring service people. This happens because for these all-cash buyers this is simply a numbers game. Zillow Offers estimates their offers iBuyer program generates a homeowner’s request for an offer approximately every 1.25 seconds. This is based on their current 19 U.S. markets as they expand this service, you can only imagine the number of requests they will receive. With this kind of volume, the representatives don’t have time to hold the seller’s hand through the process. If you are not comfortable with this kind of interaction, an all-cash sale may not be for you.

Conclusion

It's important to note that the all-cash offer is not the end of the game for traditional investors that use 3rd. party financing to purchase properties. The Real Estate Investment Gurus over at SparkRentals has some great advice on Competing with Cash Buyers: Persuasive Real Estate Offers to Purchase.

Investors and all-cash buyers have been around for a long time. What has changed in recent years is the addition of big institutional investors into the residential real estate market, they are changing the game. The process of the all-cash transaction will most likely continue to evolve and improve. For the time being it’s just another alternative for Home Sellers. If you need to make a quick sale, an all-cash transaction a great fit for you. On the other hand, if you have time and maximizing your equity from the sale of your home as a priority, you’re a good candidate for a traditional sale.

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