The Myth of the All Cash Buyer
WHAT YOU NEED TO KNOW BEFORE YOU ACCEPT AN ALL CASH OFFER FOR YOUR HOME
If you are like most home owners, chances are that you’ve received the email, text, post card, letter, flyer or robocall from the “all cash” buyer who wants to buy your home. And that’s most often sight unseen which makes it even more confusing.
Or maybe an agent has even pitched an all cash “off market” sale to you. If you’ve listed your home and received multiple offers, possibly one of them offered cash as opposed to traditional financing.
When you see a cash offer, “Seller Beware” is often the best way to proceed. This article will discuss why as well as the pros and cons of these kind of transactions and what to watch out for.
There are two kinds of cash buyers in the market today. Think of one group as the “retail” cash buyer and the second as the institutional or “corporate” cash buyer. Let’s look at the retail buyers first.
THE RETAIL CASH BUYER
Typically an individual, family, or small firm, developer, LLC or brokerage. These include:
owner occupants who will live in the home
smaller flippers looking to turn a quick profit
developers who will knock down your house
investors who will assign the contract
You will most often encounter the retail cash buyer when your home is listed in the MLS and their offer comes in with other financed offers.
Not matter which kind of cash buyer you might encounter, the most important point to validate is whether they really have the cash to close on the deal - what is referred to in the business as “proof of funds” (POF).
To verify proof of funds, legitimate cash buyers should present written documentation that they have the cash in liquid, or easy to liquidate, accounts. That most usually means traditional bank savings and checking accounts but could also be stocks, bonds or even crypto currencies.
There are some retail parties taking advantage of certain programs that front the full purchase price from a lender who then refinances the asset later. Some of those entities are more trustworthy than others and you may have to make a decision about how solid you feel a cash offer is from a party who technically does not have the money in their name.
What doesn’t qualify a as a legitimate cash offer would be the presentation of non liquid funds. An example would be an offer that was contingent on the buyer first selling another asset - such as their current home, to buy your home for cash. That’s just a contingent offer.
WHAT TO WATCH FOR
Other than the buyer not actually having the cash, here’s two common cash offer scams:
THE BUYER IS REALLY GETTING FINANCING
In super competitive markets and situations (for homes listed on the MLS), you may receive a cash offer that is fully documented with liquid funds. But other parts of the contract don’t line up with the standard parameters of a cash sale. For example, there is an appraisal contingency. While a cash buyer would certainly be within their rights to get an independent appraisal, that is a contingency most often waived in retail cash transactions. Another would be an extended close of escrow (COE). Typically, when unencumbered by local requirements, cash sales close escrow in 10-15 days. A cash offer that comes in with a 30 day escrow is a red flag and might indicate that the buyer intends to get financing. This play got os hot a few years ago that sellers were actually denying entry to appraisers because they were misled about the buyer’s intentions.
THE BUYER WILL BE ASSIGNING THE CONTRACT
Real Estate contracts in California can be assigned under certain circumstances. In fact, it is even referenced in the current form of the purchase agreement commonly used. Without getting too far into legal terms and definitions, think of assignment as the buyer who you thought was buying your home hands off that contract to someone else to execute. If you do find yourself in a situation where the buyer is attempting to have a third party complete the transaction, you might consider consulting an attorney if it has not been previously disclosed and you are uncomfortable and don’t want to go along.
There is a place in the standard contract where a buyer can change the default days for assignment. The default is 17 days. If you see that increased, ask questions.
One question you might have right now is why would a buyer assign the purchase contract to someone else. There are some legitimate reasons such as a developer entered into a contract as their primary entity and now wants to transfer that into an LLC created specifically for that project.
But there are also situations where an unscrupulous buyer has gotten your home under contract knowing that they can sell it immediately for a higher price. They find that buyer and assign the contract. Yes, that really happens.
THE CORPORATE CASH BUYER
Corporate cash buyers are typically larger organizations including asset management firms. They buy upwards of a hundred properties a year, some even in the thousands, have layers of staff, a definite profit motive and operate within strict guidelines.
These buyers rarely, if ever, buy homes once they are listed in the MLS. In some regards they may be less sophisticated than some of the retail buyers (or not) and often operate within very strict algorithms (AVMs). Everything for the wholesale (aka industrial, professional) buyer is just a number. And speaking of numbers, there’s a few you should know:
While these companies do not charge commissions as real estate agents do, many of them charge what they euphemistically call “service fees”, And those typically are 5-6% of the sales price which is more or less on par with what agents charge.
Algorithms, which is the primary tool that many cash buyers use, can be off by as much as 5% (or more) in some markets.
Many of these companies only purchase below a certain price point. They typically would rather buy four $500,000 homes than one $2M property.
Benefits of selling to the Corporate Cash Buyer are:
Certainty. These buyers will close.
No repairs. You won’t be dealing with a worrisome “request for repairs” from your retail buyer. But, some of these buyer firms will deduct from the offer price they give you to make repairs. You just don’t have to do them.
No showings or Open Houses. Hundreds of people won’t be traipsing through your home, opening drawers and closets and asking nosy questions like why are you selling and where are you moving to.
No decluttering, staging, or prep work. These buyers don’t care what your home looks like.
You should sell your home to a corporate all cash buyer only under the following circumstances:
It is not possible to do showings. You may have tenants in place or someone in your home is ill and can not leave for showings, inspections, etc.
You need cash fast to avoid foreclosure, settle a tax bill, finalize a divorce, or other time sensitive pressing circumstances.
THE PROCESS
Each of the cash investors I work with has their own guidelines and rules. Here's a general outline of how things work.
Initial phone consultation: not every property and situation is a fit. For example, if you are trying to get a cash offer for a tenant occupied property with uncooperative occupants, that will not work. Or if your property is already listed for sale with an agent whether it is or is not in the MLS. This exploratory call is usually ten minutes or less but can go longer.
Site visit: even though most corporate buyers use an algorithm that dictates their offer price, most require pictures of the subject property and a quick visual review. The site visit can be arranged at your convenience and is usually completed in 30 minutes or less. You do not have to do any cleaning or other preparation.
Offer: if everything checks out, you will receive a written offer with 2 business days.There is usually a time limit on how long the offer is good for but you will have time to make a decision. If you decide to proceed, escrow is opened.
HERE'S WHAT ELSE YOU NEED TO KNOW
You get to choose how long or short the escrow period will be and when you will close. Many of these buyers can close within 10-14 days depending on what comes back in the title report.
You will not have to make any repairs but in some instances the cash buyer may deduct from your proceeds for certain repairs. This will be negotiated prior to closing.
These buyers are acquiring homes to make improvements to and resell. They have a profit motive and often do not pay as much as an owner occupant will.
Corporate cash buyers generally do not buy homes listed in the MLS unless they have negotiated with you pre-listing.
IS AN OFF MARKET CASH SALE THE BEST OPTION?
This is something only YOU can decide. In many situations a traditional listing through the MLS may bring you a higher sales price and greater net proceeds by going the traditional route.