Anyone who’s seriously thought about selling their home is certainly aware of the latest “innovation” in the real estate industry: companies that buy houses for cash.
You see ads for so-called iBuyer services when you visit an online real estate marketplace like Zillow, which pushes its “Zillow Offers” service. The same happens if you visit national real estate brokerage websites like Redfin, which also buys houses through its “Redfin Now” operation.
And when you’re driving to the store or to work, you probably see roadside signs promising “We Pay Cash For Your House!” or “We Buy Ugly Houses!”
You might guess that those huge real estate companies are looking for desperate sellers who will take any lowball offer they can find. You might also guess that the roadside signs were posted by people who were inspired by all of the home-flipping shows on TV, and figured “I could do that too!”
You wouldn’t be 100% correct – but you wouldn’t be completely wrong, either.
Here’s the real scoop on all of those companies that buy houses for cash.
Selling a House for Cash Can Sound Awfully Good
Selling your home can be an enormous pain.
In addition to the whole packing-and-moving thing, you have to deal with finding a reputable real estate agent – or even worse, negotiate the minefield that is the FSBO (For Sale by Owner) process. And that’s not all.
- You have to leave your house every time it’s being shown
- You have to work with your agent to negotiate with potential buyers who want to nickel-and-dime you.
- You have to deal with all the paperwork.
- You have to make repairs in order to satisfy the buyer.
- You have to live in limbo during the lengthy sales process, while you’re probably also looking for somewhere new to live.
- You have to pay commissions for your agent and for the buyer’s agent – that’s just the way the real estate industry works.
- And perhaps worst of all, you have to go through weeks of psychic anguish wondering if anyone will buy the house, how much they’ll pay, and whether the deal will fall through.
But imagine if someone showed up and said “Forget all that. Here’s cash for your house – and we can close the deal in a week or two.”
What could be better than that?
Bottom Line: There are definite advantages to selling your home for immediate cash. However, it’s important to balance those advantages against potential and very real disadvantages.
Cash Buyers Aren’t All the Same
Every home seller using a conventional listing agent has the same dream. A white knight swoops in to tour their house, proclaims “I love it!”, and makes an all-cash offer to buy the property for the full asking price. (Or even better, their offer is above the asking price, to ensure no one outbids them).
That might happen in a red-hot market, but it’s still extremely rare. (Your naïve writer actually had it happen once, but it turned out the prospective buyer was just “freezing” a number of homes on the market until he decided which one he really wanted. He withdrew his offer within a couple of days.)
Back to the real world.
The companies that pay cash for houses don’t “need” your home. Statista reports that more that 6.5 million homes were sold in the U.S. in 2020, and that number will increase to more than seven million in 2021.
Unlike our fictional white knight buyer, these companies aren’t looking for a dream house. They’re simply looking to make money, and the offers they put on the table are designed to let them turn a profit on your home.
However, there are several different types of home-buying operations that pay cash, and they operate with very different business models – meaning that some offer better deals than others.
Let’s sort them all out.
Bottom Line: Very few cash buyers are desperate to purchase your home. Most buyers are large companies that need to make a profit, and many of the deals they offer aren’t great for the home seller.
House Flippers
Yes, there are individuals who imagine that they can become the next Tarek El Moussa, who became a star in the home flipping world with his HGTV show Flip or Flop. (In reality, El Moussa isn’t a simple home flipper; he owns a huge, multi-state real estate business.) But individual flippers don’t buy houses on the scale of the companies we’re discussing.
Large home-flipping companies operate in most cities and decent-sized counties across America. The best-known (but far from the only one) is a franchise operation called HomeVestors, whose franchisees advertise under the brand name “We Buy Ugly Houses.” They’re responsible for a large number of those signs you see posted on utility poles and on the side of the road.
The business model is simple: buy houses on the cheap, fix them up, sell and profit. Rinse and repeat. A less-common variation on this model is to keep the houses and rent them out after they’ve been renovated. Either way, the company does an in-person inspection and makes a usually non-negotiable cash offer within 24-48 hours. If the seller accepts, the sale closes in 14-30 days, payment is in cash, and there are no fees or commissions to be paid.
Flippers, whether they’re individuals or big companies, focus on homes that are in poor shape. The reason is simple: desirable homes can usually be sold for their true market value through realtors (or even as FSBOs). But distressed properties, as they’re known in the industry, aren’t going to bring anywhere near full price until they’re repaired or renovated. If sold as-is, they’ll sell for well under market levels.
That means there are potential bargains to be found.
Flippers look for certain types of owners: those who don’t want to (or can’t afford to) renovate or remodel; those with financial problems who need immediate cash; and those who have to move in a hurry and don’t have the time needed to repair, market and sell their house through an agent.
Companies that buy and flip houses make offers that seem outrageously low at first. In truth, most flippers use well-established practices to determine the price that the house is worth to them.
The most common approach involves something called the “70% rule.” In essence, they take the market price a home could fetch if it was in perfect condition, and then offer 70% of that amount after deducting what they’ll have to spend on repairs. That ensures they’ll make a 20-30% profit on the transaction.
The offer may be financially sound, but most homeowners who contact a flipping company are still shocked when they’re only offered 60-70% of what they think their home is worth. Some less-reputable companies offer even less, hoping the owner will take a lowball offer.
The sellers may calm down a little, though, once they crunch the numbers. They’ll be saving $5,000, $10,000 or $20,000 in realtor commissions and closing costs, and thousands more in repair costs that they won’t have to pay. So the offer that seems “embarrassingly low” at first will usually turn out to be just “low.”
Even so, selling a house to flippers for cash isn’t a good deal for most sellers; they can make more by fixing up their home and selling it through traditional methods. It can be worth it, however, for desperate sellers who are trying to get rid of distressed properties.
Bottom Line: House flippers look for distressed properties, and are likely to make offers 30-40% below the price a home would fetch once it’s been repaired or renovated. That can be an acceptable deal for someone who simply has to “get out of their house,” but will be well below what a homeowner could receive by fixing up and selling their home with a realtor.
iBuyers
iBuyers (short for instant buyers) don’t want “ugly houses.” They pay cash for homes in good condition that they can immediately resell to individual home buyers. In short, it’s a low-margin business based on volume.
We’ve mentioned Zillow Offers and Redfin Now, but there are lots of other big companies like Opendoor and Offerpad that have jumped into the iBuyer industry. They all operate essentially the same way, most often in big or mid-sized cities and focusing on homes in the median price range of $100,000-$500,000.
A potential seller contacts the company online, submits information about their home’s features and condition, and asks for an offer. The iBuyer then uses something called “automated valuation models” (AVMs) to evaluate the home, neighborhood and comparable market values – and a day or two later, makes a cash offer to buy the property. The seller has about a week to accept or reject the offer. If a subsequent inspection shows that repairs are needed, the cost (often with a markup) is deducted from the final cash payment.
Some iBuyers may increase their offer if the seller can present evidence that the iBuyer “missed something,” but that doesn’t happen often. No one representing the iBuyer actually visits the house during the process, or personally evaluates the property and its desirability.
Offers from iBuyers are typically much higher than those from flippers. That’s because they don’t figure in renovation or repair costs, and most of their profit comes from high volume and fast turnover. In fact, one study by real estate tech consultant Mike DelPrete found that the typical offer from iBuyers like Zillow and Opendoor is only 1-2% lower than the home’s fair market value.
Immediate cash, no realtor commissions, a realistic price? Sounds like a great deal, right?
Not so fast.
There’s one huge catch when you sell your home to an iBuyer. They charge big fees for the transaction, usually around 5-7% of the offer price.
The fees aren’t really unfair, since they’re meant to cover the administrative costs of running the company, buying your house, and marketing it to another homebuyer. But if you think a big advantage of working with an iBuyer is saving the 5-6% you’d otherwise pay in realtor commissions, think again. The transaction fees are usually higher.
That doesn’t make selling a home to an iBuyer a bad idea. It just means those who own desirable homes and don’t mind going through the traditional sales process will probably end up getting less for their home if they sell to an iBuyer.
Bottom Line: iBuyers make less on each home than home flippers, and they don’t purchase houses in bad condition. That means their cash offers will usually be dramatically higher, but still not at full market level. They also charge high fees in lieu of realtor commissions.
The Best of Both Worlds: “New Age” Cash Buyers
A few companies like SellYourHome.com are breaking new ground, combining most of the best features of cash offers from iBuyers and home flipping companies.
They make immediate cash offers for homes, usually within 24 hours. They can close within a few days (or up to 90 days later if that’s better for the seller), and they eliminate all of the hassle (and most of the costs) normally associated with a traditional real estate sale.
Here’s how they’re different.
- Unlike flippers (who want distressed properties) or iBuyers (who want homes in good condition), these companies buy homes in any condition. They’ll purchase pristine homes, fixer-uppers, and anything in between.
- Unlike other companies that buy houses for cash, they operate in all cities and all markets. They resell the homes to an existing, large network of buyers who are looking for a wide variety of properties.
- Unlike flippers and iBuyers, these companies combine automated valuation models with on-the-ground property evaluations. That lets them come closest to a realistic value for each home they purchase; automated number-crunching is then adjusted by humans for important factors like school districts, neighborhood quality and the home’s condition.
- If agreed-upon repairs are needed, the company handles the work and doesn’t charge any commissions or markups for it.
- Most importantly, there are no negotiations, realtor commissions or extra fees. The company’s offer is a real cash offer, without thousands of dollars having to be deducted for the “privilege” of selling a home.
Will you walk away from the deal with the same amount of cash you’d get by selling through traditional real estate channels? Probably not, but it should be close to the same amount – and you’ll be avoiding all of the hassles, delays, complications and anguish that accompany the sale of your home on the open market.
Bottom Line: “New age” companies that buy houses for cash provide most of the benefits offered by home flippers and iBuyers, but for more realistic, immediate payouts without additional fees.
Companies That Buy Houses for Cash: FAQ
Q: Should I sell my house for cash?
A: Probably not, if you have the time, patience and financial resources to go through a traditional home sale (and have a good real estate agent). Selling for cash usually results in a lower final payout. On the other hand, those who need to sell quickly can come relatively close to their home’s true market value by choosing the right company that buys homes for quick cash – and those with houses in bad shape may find that selling for cash is their best option.
Q: How much will I “lose” by selling for cash?
A: It really depends on the type of buyer you choose. A flipper will usually pay 60-70% of the market value of comparable homes in good condition. iBuyers and “new age” buyers will ordinarily be lower, but much closer, to the true market value.
Q: Are there hidden fees when you sell your house for cash?
A: Sometimes. iBuyers charge transaction fees of 5-7%, basically wiping out the savings you’d realize by not using a realtor. Flippers may include hidden markups on the cost of repairing your home, before making you an offer to purchase. “New age” buyers don’t do either. No matter who you choose, though, you’ll still have to pay some relatively-small closing costs like fees for the title search and insurance, and possibly transfer taxes.
Q: How do I choose the right type of cash buyer?
A: There’s no penalty for shopping around. All companies that buy houses for cash will make an offer within a couple of days, so you can make a quick decision on which one is best for you. Generally speaking, a home flipper might be the right choice if you just want to quickly dump a broken-down house (perhaps one that you inherited in another city). iBuyers could be worth considering if you live in a city where they operate, but “new age” buyers are likely to be easier to work with and pay somewhat more for your home.