The Truth About 'Cash-for-Homes' Offers

Cash-for-homes offers are neither good nor bad. It all depends on what you need.

There are many reasons for wanting to sell a home "as is." Maybe you know your house needs repairs and don't have the time or money to make those repairs. Perhaps you inherited a property and don't want the job of preparing it for the market. Whatever the reason, there are plenty of companies that offer to pay cash.

What about those companies? Are they legit? Can you get what your house is worth? Here's what you need to know.

They're in business to make money

Like every business on the planet, cash-for-homes companies are designed to make money. The formula is simple: Buy low, sell high. They are investors. No cash-for-homes companies we know of are willing to pay what your house is worth on the open market -- particularly now. If they pay you what it's worth, they're less likely to make a profit when they flip it or convert it to rental property.

Cash buyers

What many house-buying companies have going for them is cash. They don't need financing, so they can speed you through the process. There is no house prep on your part, no need to stage the house, keep it clean, or in any way exhaust yourself. And because they don't depend on mortgage lenders, cash-for-homes companies can also work with you to arrange a closing date that works with your schedule.

Different types

There are at least three different types of investors, each with a different business model:

House flippers

The number of homes sold in the U.S. in 2019 as the result of a flip was 6.2%. A "flip" is when a company offers you a low price for your home, makes repairs or upgrades to the property, and sells it for a profit. Sometimes the changes they make are structural, and sometimes they are only cosmetic. The bottom line is this: House flipping is about making a profit. Anyone who offers you cash for a house they want to flip wants to pay as little as possible.

Buy-and-hold

A buy-and-hold investor purchases your home and uses it as a rental property. They may either be an institutional investor (purchasing many rental properties a year) or an individual investor.

Because buy-and-hold investors plan to keep and use your property, they are likely to pay more than a flipper. Still, there's a fair chance that you would get more on the open market.

iBuyers

iBuyer is short for "instant buyer." These buyers use automated valuation models (AVMs) to determine how much a competitive offer would be. They typically consider homes in good condition that won't require much in the way of repairs.

Big names in iBuyers are:

• Zillow Offers
• Opendoor
• RedfinNow
• Orchard

According to HomeLight, these companies offer up to 98% of fair market value and charge the seller a 7% to 10% fee. The cost of necessary repairs also comes out of the seller's pocket. Let's say your home has a market value of $300,000. Here's how selling to an iBuyer would work:

• Best case scenario, they offer you 98% of market value, or $294,000
• Depending on the company, they charge you a seller's fee of 7% to 10%, or $20,580 to $29,400.
• Say your house is in perfect shape, other than a broken garage door. They charge you around $1,200 for a new door.

In this particular scenario, the sale would cost you a total of $27,780 to $36,600 -- depending on the iBuyer you go with -- and you would end up with somewhere between $263,400 to $272,220 before paying off your existing mortgage.

If you were to sell the same home through a real estate agent, it is likely you would end up with a higher sales price and, depending on contingencies, be able to skip paying for the new garage door. You would still be responsible for paying real estate agent fees of 5% to 7% (depending on the company) and 2% to 4% of the sales price in closing costs.

Bottom line: It is important to compare the total cost of selling before deciding how you want to sell your home.

Selling a house is a big decision, and if you're looking to get out from under fast, you may be tempted to call a cash-for-homes company. Before you do, though, be clear about what you need to know to make the best decision. Here are some questions you should ask:

• What percentage of fair market value do you usually offer?
• How much are your seller's fees?
• How flexible are your closing dates?
• What kinds of home repairs am I expected to pay for (Example: Do they want you to pay for carpeting or old appliances to be replaced)?

There is nothing intrinsically good or bad about a cash-for-homes deal, as long as you get what you need. That said, today's market is red hot, and there may never be a better time to sell your home on the open market with a real estate agent working on your behalf.