“We buy houses” companies are flippers who purchase properties “as is” for cash and renovate them, generating a profit at resale. They are legitimate businesses, but there are some definite pros and cons to selling to them. Here’s what you should know before calling the number on that billboard.
What are the types of cash house buyers?
“We buy houses” operations are cash buyers or house buying companies that purchase homes directly from homeowners. There are three primary types of cash buyers: iBuyers, buy-and-hold investors, and fix-and-flip investors.
- iBuyers, or “instant buyers,” are property tech companies who run large scale cash offer businesses, including Redfin Now, and Knock. These companies use automated valuation models (AVM) and web platforms to provide an efficient and simplified process for sellers whose homes are typically in sellable condition.
- Buy-and-hold investors are individuals who offer competitive prices for market-ready homes. Often, they look for homes that they can turn into rental properties.
- Fix-and-flip investors, or house flippers, include the companies responsible for the yellow “we buy houses” signs and individual investors who have the resources and penchant for remodeling. Unlike iBuyers and buy-and-hold investors, fix-and-flippers buy homes in poor condition for considerably less than market value.
How do ‘we buy houses’ companies work?
These investors purchase a house in poor condition “as is” for less than market value (generally between 50% to 70%). After renovating the house, the company sells it at a significantly higher price — sometimes in a matter of weeks!
Michael Ramos is an experienced agent in San Jose, California, who sells homes 61% faster than average agents in his area. He says that these companies buy homes, “at a very discounted rate because they’re going to resell them or flip them for a profit. They offer a very low amount for the home.”
They need to buy low to sell high — and they do. According to ATTOM Data, flippers received a 32.3% return on investment in the third quarter of 2021. To get that return, they didn’t put much money into buying the home in the first place.
Most people have seen a billboard or ad for one of the big wigs in the house flipping industry, We Buy Ugly Houses, owned by HomeVestors. According to their website, We Buy Ugly Houses buys homes regardless of their condition. Not only do they guarantee a cash sale, but they also extend a no-obligation offer and will close on the sale within 30 days. The We Buy Ugly Houses franchise model became available in 1996.
Another big name in the industry uses the common three-word phrase in their brand, “We Buy Houses.” Founded in 1996, We Buy Houses is not a franchise, rather it’s a marketing program. Buyers purchase their branding and marketing system, as well as exclusive rights to a territory. Because of this fragmented nature, it’s hard to tell how much the corporate office oversees their marketers, and experiences between one state or geographic area could vary widely.
A quick sale is a big plus to working with these buyers, but that sale could cost you in the long run. Let’s investigate both the pros and cons of working with a “we buy houses” company.
Pros of selling to a ‘we buy houses’ operation
What are the benefits to selling to a “we buy houses” company? Selling your home for cash to a “we buy houses” operation is tempting for a good reason. It’s quick, hassle-free, and a sure bet.
You’ll get a cash offer
There are times in life when you need cash in your bank account, not in a home’s equity. If an elderly relative needs to move into assisted living, selling to a “we buy houses” company could get them moved safely and quickly. The cash could pay for their new living situation.
Cash is king, and if you need it, these companies can help.
You’ll sell your house fast
Need a quick sale? It’s the most appealing aspect of a “we buy houses” operation. According to top real estate agent Thomas Taranto, who represents real estate clients and investor pools, a traditional home sale transaction takes around 60 days, while a cash offer generally only takes 10 to 14 days.
The home offer is guaranteed
A cash offer from a fix-and-flip investor typically is more guaranteed to close. An offer from a traditional buyer will have contingencies — specific requirements that must be met for the sale to close — which could delay or put the kibosh on a sale.
These are some common contingencies in a traditional offer:
- Financing contingency: The buyer can leave the deal if they can’t obtain financing.
- Appraisal contingency: The buyer can back out if the home appraisal comes in lower than the offer amount (an appraisal lower than offer can also cause financing to fall through).
- Home sale contingency: The buyer’s existing home has to sell before they will purchase the home.
When you sell to a “we buy houses” company, you won’t deal with the uncertainty of contingencies.
No need to stage, show, repair or remodel
Since a sale to a “we buy houses” group is typically “as is,” you can skip the elaborate pre-listing home preparations and touch-ups. For a traditional sale, you might have to paint, replace old carpet, take care of minor repairs, and maybe spruce up landscaping and curb appeal. When you have showings or open houses scheduled, you’ll have to deep clean and keep the place tidy.
If you’ve got kids or pets, keeping the home “showing-ready” can start to feel like a full-time job!
Easy, smooth process
With a traditional home sale it can take months to list, sell, and close. The process involves multiple professionals — agents, stagers, photographers, home inspectors, appraisers, and possibly contractors or a handyman. There are a lot of moving pieces and managing it all can become overwhelming if you’re also dealing with a major life change.
If you’re in the midst of moving an elderly relative into a different living situation, trying to avoid foreclosure, or wrapping up an estate, you simply may not have the time for a traditional sale. A “we buy houses” sale makes it easy and smooth to sell in as little as a month. It’s an option for those in desperation mode who need to get out from under the responsibility of a home.
Only one major decision to make
When selling on the market, you face a ton of decisions. Which repairs and cosmetic improvements to make before listing, what list price to choose, if you want to hire a stager. And that’s before you have to start weighing the pros and cons of offers!
With a “we buy houses” offer you only face one decision — whether to accept it or not.
A lot of people are worried about COVID, and they don’t want a whole bunch of people coming in and out of their house. So, an instant offer from one party would minimize this.
Contactless transaction (pandemic benefit)
During the COVID-19 pandemic and the variants that have prolonged it, many homeowners have sought to reduce physical contact when selling their home. Taranto shares:
“A lot of people are worried about COVID, and they don’t want a whole bunch of people coming in and out of their house. So, an instant offer from one party would minimize this.”
Even in post-COVID times, the notion of fewer people coming in and out is enticing for some homeowners.
It’s an option in a foreclosure situation
If your home is in foreclosure, selling to a “we buy houses” company could help you get out of the situation. If the sale closes before your mortgage company finalizes the foreclosure, it won’t hit your credit report. These companies specialize in buying distressed properties.
No need to find a real estate agent and pay their commissions
Finding a qualified real estate agent takes work — you need to research their past sales and successes, interview them to see if they’re a good fit, and request references. Alternatively, you could try HomeLight’s Agent Match tool, which analyzes over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.
After you find an agent, you’ll have to pay their commission. Realtor® commissions range from 5% to 6%, which can eat into your net profit from the sale.
Eliminates time and trouble of a FSBO sale
Another way some sellers try to save on Realtor® commissions is by selling their home themselves. But a “for sale by owner” or FSBO sale can be a lot of work. From researching a list price to marketing your home to negotiating with the buyer, it’s a time consuming process.
And, depending on the buyer’s agreement, you still might have to pay their agent’s 3% commission. With ‘we buy houses,’ you avoid the hard work and the commissions.
Cons of selling to a ‘we buy houses’ operation
With the benefits of selling to a “we buy houses” company come some significant disadvantages. Convenience comes with a price tag, after all.
You’ll net less money than you would selling with an agent
If you sell to a “we buy houses” operation, you’ll make a lot less money than if you sold with a real estate agent. Flippers typically offer between 50% to 70% of the home’s actual market value. The lower the purchase price, the more profit the company can make when they flip the house.
When you sell with a real estate agent, they work to sell your home for the most money possible. They’ll give you advice on repairs that could add value to your home, recommend staging companies, and market your home to attract more buyers. Ultimately, you’ll receive higher offers and multiple offers could even spark a bidding war, driving the price higher.
If you partner with a top-rated agent, you can expect even higher profits from your home sale. Our data shows that the top 5% of real estate agents across the U.S. sell homes for as much as 10% more than the average real estate agent. On a $400,000 home, using a top agent could mean the difference of $40,000 more in your pocket.
No option to improve the property and increase the selling price
Sometimes, a few cosmetic improvements could increase your selling price, but a “we buy houses” buyer won’t point this out.
A few years ago, a seller approached Ramos for help with a home in probate. The house was in bad shape and the son had spoken to several cash buyers. They had told him that the house had to be scrapped, and they’d only offered between $300,000 to $350,000. Ramos provided him with a market analysis of comparable sales, pointed out areas to spruce it up, and eventually sold the home for $500,000.
“We didn’t do too much to the house,” he says. “If they had sold to the cash buyers, they would have left about $150,00 to $200,000 on the table.”
You give up control to the ‘we buy houses’ company
Once you sign their contract, the home sale proceeds on the company’s timeline. Unlike a normal buyer, they won’t negotiate closing dates, offer a rent back period, or make other concessions. The sale proceeds on their timeline, with their standard contracts and processes.
Cash buyers may have hidden fees
Some cash buyers rope sellers in with an attractive offer only to tack on fees that ultimately lower the final sale price. Though Taranto shares that iBuyers are more likely to have hidden fees than “we buy houses” operations; iBuyer service fees are usually 6% to 15% of the purchase price.
The bottom line is, always read the fine print when you receive a cash offer.
Some ‘we buy’ operations don’t have the seller’s best interests in mind
These companies want to buy houses — but they don’t want to pay market value for them. They’re not scouring the multiple listing service (MLS) and buying on the traditional market because they wouldn’t make money when they turned around and sold those homes.
“Investors want to buy homes at no more than 70% of after rehab value,” Ramos says. “They’re going to super low-ball the value.” They have no legal obligation to offer you a fair price, or to look out for your best interests.
‘We buy houses’ scams exist
Unlike real estate agents, real estate investors do not need a license. There is little regulatory oversight of their actions, nor are they held to a code of ethics like a licensed Realtor®. While there are many legitimate “we buy houses” operations it is still essential to research a company to verify that they are legitimate.
Here are red flags that a “we buy houses” company is a scam:
The third red flag could be an equity skimming scheme, one of the most detrimental scams in real estate. The “cash buyer” offers to either pay the homeowner a large sum of money when the property is sold or to take over their mortgage payments while the homeowner continues to live in the house.
When the homeowner transfers the title of the property to the buyer, an unscrupulous buyer collects monthly rent payments from the homeowner and pockets the money instead of paying the mortgage. Eventually, the mortgage lender forecloses on the home, and the scam artist disappears, leaving the homeowner with no home and a significant financial loss.
Buyers also beware
Buyers considering purchasing a quick-flipped home may also want to look deeper.
Most flippers are focused solely on profit — they view a house as an investment. Ramos points out that “there’s two things that will dictate their profit — how cheap and how fast they can do the job.” According to him, this means they may not get permits because that will take time, which eats away at their profits, or will use products of lower quality to increase their profit.
A flipping company could cut corners on repairs, or use lower quality materials. They may not closely supervise subcontractors or the work being down, leading to shoddy and possibly unsafe work. If they’re new to the area, they could use unlicensed or inexperienced contractors.
While there are some excellent, professional groups and home flippers out there, there are also those that take advantage of unsuspecting buyers and have questionable business practices. If you suspect that you’re buying a flipped house, don’t skip the home inspection!
Questions and answers — ‘we buy houses’ companies
Need some quick answers? Here are some of the most common questions about “we buy houses” companies.
What companies can I trust that buy houses for cash?
There are many legitimate companies that will pay cash for your home. Look for how long they’ve been in business and if they’re licensed. Ramos points out that, with the fly-by-night operations, “most of them don’t even have a business license, and it’s hard to trust that.”
Some of the companies with a good reputation include:
We Buy Ugly Houses, We Buy Houses, New Western Acquisitions, Expert Home Offers, Quick Home Offers (in California), House Heroes (in Florida), Fast Home Offer, Express Homebuyers, Opendoor, Offerpad.
What are telltale signs that I should not do business with a company?
While you can check business licenses, read online reviews, and see how long they’ve been in business, also pay attention to how the company behaves. Ramos thinks that “Pushiness and a disregard for your feelings and what you need,” are warning signs. If you need six months to move but they’re just pushing to get the house under contract, be wary. If the company has a phone number with no name or address and you can’t meet someone in person, it’s another warning sign.
Are We Buy Houses and We Buy Ugly Houses legitimate?
They are registered businesses that do buy houses, but under market value. If you’re expecting an offer at market value, you may think they’re a rip off. But their offer reflects their risk in buying a distressed property without a home inspection or other contingencies.
How much do investor companies offer for houses compared to a normal market sale?
It’s hard to find concrete data but the general consensus in the real estate industry is that they offer 50% to 70% of the home’s value.
Do “we buy houses” companies also buy rental properties?
Yes, these companies buy almost any type of property as long as they can resell it. They’ll buy a single-family house, condo, or townhome.
Compare reputable cash buyers before you make a deal
Even if you’re in a hurry, and need a quick sale, you have options. Taking a few minutes to compare reputable cash buyers could make you some extra money. Try inputting your address into the HomeLight’s Simple Sale to get a fair, all-cash offer.
A top real estate agent can give sellers even more options. They can educate you about your home’s true value, even if it’s in poor shape. You might be surprised at how little needs to be done to sell it for a higher price than you’d receive from a cash buyer. According to Ramos, “A house that needs work will sell for less than a turnkey home, but not a fire sale price. If you have an agent to market the house, build anticipation, and try to get value up, you can get more [than with cash buyers].”
Use HomeLight’s Agent Match tool to find a top agent in your area today.