What's the Deal With All Those Shady 'We Buy Houses' Signs?
You’ve probably spotted the signs around your neighborhood: “We buy houses,” “Cash for homes,” or "Sell us your home as/is!” You may have even groaned at how pervasive they’ve become.
If so, you're not alone. These signs, which come from real estate investment groups that scoop up houses across the country — often paying 10% or more below the market value — are becoming more and more common in today’s hot real estate market.
The goal? Flip each house into a more expensive property, or turn it into a rental unit.
Real estate investors are offering cash for homes in just about any neighborhood in any part of the U.S. these days, no matter the condition of the property, says Nick Bailey, chief customer officer at RE/MAX. In January 2021, median existing home prices jumped to $303,900 — 14.1% higher than last year, according to the National Association of Realtors (NAR). For investors, who strive to purchase homes below the market value and sell for the highest price possible, "are getting more attention ... because it’s easier to buy and flip when prices are going up,” Bailey says.
With home prices rising, homeowners might be tempted to sell their homes quickly, especially if they’ve lost their jobs or are under financial strain from COVID-19. And since most homeowners don’t realize how much their homes are worth, or that a few repairs could up its value for a relatively low cost, an information gap is adding fuel to the fire, according to Eric Sussman, an adjunct real estate professor at the University of California Los Angeles (UCLA).
Is selling your home to an investment group always a bad idea? Not necessarily, real estate experts say. But you need to proceed with caution.
How do "we buy houses" groups work?
Real estate investors usually buy homes sight unseen; often in various states of disrepair. That’s why they offer less than market value, says Jeremy Brandt, CEO of WeBuyHouses.com, which connects sellers with interested investors.
They base their offers on several factors, including the market value of a fully restored home in the neighborhood, the area’s comparable sales, the cost of repairing the home (including a buffer in case renovations are more than expected) and the expenses of holding the house until it’s re-sold.
If a homeowner accepts the offer, they use the money to pay off their mortgage (if they have one), and the rest comes to them in cash.
Selling a home with a traditional real estate agent isn't so cut-and-dried: Added costs include an average commission of about 6%, and depending on the state, closing costs that can run from 2% to 5% of the purchase price. Sellers have to pay for repairs, too, and while the home is on the market, they’re stuck paying the mortgage and other expenses.
Is selling a home for cash a good deal?
In 2020, 89% of home sellers worked with a real estate agent to sell their property, according to NAR. For most homeowners, this route is the best way to fetch top dollar for their home — especially in today's real estate market.
Simply put, there are fewer homes on the market right now, so competition is high and many sellers are raking in offers. In most cases, settling for a lower price from an investor just doesn’t make sense.
“If somebody has a house that's in great condition, and was built in the last 10 years, a real estate investor is certainly not going to be a good fit for them,” Brandt says. “They’re going to get the most value for their money by selling through a real estate agent.”
What if you need to sell quickly?
Expediency and convenience are the main advantages of selling to a real estate investor. Standard closings can take 30 to 45 days, after all. With an investor, it might take a week.
Homeowners who opt to sell to investors are typically in foreclosure or have homes that need repairs they can’t afford. Another common scenario is someone who inherits a home in a state they don't live in.
“When time is more important than your equity,” going through an investor may be the right choice, RE/MAX’s Bailey says.
Still, he adds, there are usually better alternatives.
Some cheap repairs, like a fresh coat or an upgraded backyard, can add thousands in additional equity. Even if that's not an option, lots of buyers are scooping up homes that aren't in tip-top shape in today's market.
How to spot a scam
Unlike real estate agents, investors don’t have to be licensed, so almost anyone can enter the space and start making offers on homes.
“There's a lot of seminar novice real estate investors jumping into the market because they see that it's so hot, and they think they’re going to get rich quick,” Brandt from WeBuyHouses.com says. (His company only works with established contract investors, he adds).
There are plenty of straight-up bad actors, too. Attorneys general in states like New Jersey and Pennsylvania have issued alerts about scammers who back out of promises to pay off a seller's mortgage after the deed is signed. Other nefarious investing groups threaten to back out of a sale last-minute unless a homeowner makes surprise repairs.
Homeowners need to do their homework if they plan to sell to an investor, UCLA’s Sussman says. Make sure they’re represented by a legitimate company: Check out their website, trace the phone number that’s listed on the sign and talk to local real estate agents to get their take.
“Information and education are power, as far as I’m concerned,” he says. “These buyers are obviously in the money-making business. As long as you’re OK with that and aware of their strategy, well, sell.”
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