Published February 11, 2019
3 Ways to Avoid Home Buying Scams
With We Buy Houses
signs at seemingly every intersection, motivated sellers needing to sell their house fast for cash have many options. The We Buy Houses
industry attracts many scams and imposters. Reality shows and free weekend seminars promise quick riches in flipping houses.
Theoretically, investors are trained to buy houses from motivated sellers, add value through a remodel, and sell for a profit. Easy, right? In reality, remodeling is both expensive and difficult. If you’ve ever remodeled anything as simple as a bathroom you know how many moving pieces there are to manage. It’s difficult, and most aspiring flippers fresh out of the weekend seminars find flipping houses is not easy. They need significant capital, an efficient construction network, and excellent systems to flip a house. Even then, the margins aren’t what they are cracked up to be on TV because the quiet costs eat away at slim profit margins.
So why are there so many people claiming to buy houses fast with cash? You might be surprised that most of the people behind the We Buy Houses advertisements don’t actually flip houses. Instead, they flip contracts. They find motivated sellers, tie the house up under contract, and find a real house flipper to pay an assignment fee for the contract. They aren’t actually flipping houses. When you sell to such a middleman or a wholesaler, you are unnecessarily giving up your equity. Find a real estate investor who will actually flip your house, eliminating middlemen wholesalers who pose as real investors.
Here are three ways to avoid being scammed out of your equity:
Ask the Right Questions
On the first call, ask the cash buyer what he plans to do when he buys your house. Don’t settle for vague answers. When he says, “we will flip it”, ask who is “we”? How many houses have you flipped in this town, and what’s the last one you finished?
It won’t take long to find out if they are actually adding value to the house or simply selling your contract to an actual real estate investor who will rehab it. If you suspect the buyer is just a wholesaler, keep looking for a business that can buy the house directly from you and put the most money back in your pocket.
Add a No Assignment, No Contingency Clause to the Real Estate Sales Contract
Once you sign a contract with a cash buyer, you give up most control of the transaction. Once the buyer has the house tied up with a contract, he can take the maximum time to conduct inspections and lower the offer based on those inspections. Often, the cash offer was really just a bait and switch to get the contract. In reality, the seller never had any intention of paying that amount.
Once the house is under contract, the wholesaler will begin looking for an actual cash buyer to buy the contract. The wholesaler will often use the inspection period to find a buyer. If he doesn’t find a buyer to purchase the contract, what happens? He cancels the contract due to an inspection clause, gets the earnest money back, and you are left holding a useless contract.
How does a seller avoid all this lost time and stress?
Before signing a contract, add a clause that gives you control of the process and requires the buyer to be fully committed. On the contract, simply state that the contract may not be assigned. Also, you should state that the house is being sold as-is with no contingencies.
If the seller has a problem with this, ask him to do his inspections before signing the contract. This way you avoid having the house tied up in a contract. If a buyer signs a no contingency contract that can’t be assigned, you’ll know the buyer is both serious and committed.
Require a Significant Earnest Deposit
Wholesalers are trained to write in an earnest amount into the contract for between $10 - $100. Earnest funds are typically held by a closing agency and are forfeited if the buyers fail to follow through on the terms of the contract. If the earnest amount is insignificant, it allows the buyer to get out of the contract if he can’t find a cash buyer. It effectively removes much of the risk for the buyer and puts it on the seller.
Require an earnest deposit of at least $500 (or preferably more) be held by the closing agent. If the buyer is actually a cash buyer, this shouldn’t matter. Understand that an earnest deposit isn’t that useful if there are contingencies such as inspection periods or financing contingencies. A buyer can get the earnest amount back by canceling the contract due to anything found in an inspection. Be a smart seller and require a substantial earnest deposit with no contingencies.
Are all wholesalers running a scam? No. There are very professional wholesalers who add some value by connecting sellers with buyers. Do you need a wholesaler? Probably not. If you’ll spend some time online, you can find local cash buyers who will add real value to the property and sell it for an honest profit.