“We Buy Houses for Cash” Solution or Scam?

we buy houses for cash sign

We’ve all seen the ugly yellow signs on the telephone poles saying “We Buy Houses Quickly in 7 Days or Less”.

And you probably have the same questions we all did the first time we saw them.

• What’s the catch?

• Are they really offering cash for homes?

• Can I really sell a home in only 7 days?

• Are these just scam artists looking to take advantage of people in need?

We at The Mahtani Group decided to write this article to educate home sellers in New Jersey who might want to sell but for some reason, they are not looking to use a realtor even though they have a lot of equity in their home.

Who are These People?

There are mainly four types of people who put up these “yellow signs” on telephone poles or post listings on Craigslist saying “We Buy Houses in NJ Really Fast” :

1. Time Wasters:

These are people who have recently attended a 2-day real estate seminar at the local Holiday Inn and are going through the motions to try to become real estate investors.  They account for about 90% of the signs you will see.

2. Burglars:

There are smart burglars who use the We Buy Houses for Cash gimmick to be invited into homes and to figure out if this is a home they wish to rob at a later time.

Have you ever seen on the news about a home invasion where the robbers already knew what to take? This is one example.

3. Wholesalers:

These are the people whose part-time job is to find homeowners who are willing to sell their homes at a discount well below the actual retail value. They are not the ones who actually buy your homes even if they are offering you a written Purchase Agreement.

Generally, after they get a home under contract for a price that is extremely below retail value, they will then “assign” the purchase contract to an end buyer who is most probably a professional rehabber. As a “wholesaler”, they receive a small profit between $3,000 to 5,000 from the actual buyer as an “assignment” fee.

In short, they are basically selling the signed Purchase Agreement they have with a homeowner to somebody else for a quick buck.

4. Rehabbers:

These are the people who actually will buy your home at 35% below retail value from you. They will then fix it up & then flip (sell) the property at the full retail value using a realtor.

They normally make a profit of $75,000 or more by buying, fixing and flipping a property all within 3 months.

How much do these people offer and how do they calculate it?

They have a simple formula that they follow to calculate the MAO (Maximum Allowable Offer).

Step 1. First, they calculate the ARV (After Repaired Value).

ARV basically means the worth of the home if it was fixed up nicely and put on the market through a Realtor.

Whoever visits your home will be estimating out the repairs needed and will then contact their Realtor to find out how much comparable homes (comps) are selling for in your neighborhood.

Step 2. Next they multiple the ARV by 0.65

Seasoned rehabbers have a rule to never, ever under any circumstance pay more than 65% of the ARV.

Step 3. Finally, they subtract what they estimate to be the cost of repairs from the number calculated in step 2, and are left with the MAO.

Keep in mind, that two different rehabbers can have extremely different estimates of how much repairs will cost.

So the formula for Maximum Allowable Offer is written as the following:

(After Repair Value X .65) – Cost of Repairs = MAO

Let’s do an example with actual numbers:

Suppose you owned a home in Paramus and called a rehabber or wholesaler off one of the “We Buy Houses Fast for Cash” signs.

He comes by and writes down notes for repairs and talks with his realtor.

The numbers show him that your home could be worth $600,000 after it is fixed up nicely but it would require about $50,000 to make it worth that much.

So he calculates:

($600.000 X .65) – $50,000 = $340,000

And remember, $340,000 is the maximum he will offer you.

He could make you a cash offer even less than that, if he believes you are desperate to sell.

Rehabbers think purely about numbers and always like to make a profit when buying real estate so they don’t have to worry about it when they are selling the property a few months later.

Another thing to remember is that even if your house was in immaculate condition with the newest appliances, shiny new hardwood floors, and freshly painted walls, the most you will be offered is 65% of the retail value they have calculated.

So suppose you decided to fix up the home yourself and make it worth $600,000 but for some reason you still don’t use a Realtor and decide to call up the same rehabber.

He will still only offer you:

$600,000 x .65 = $390,000

Why only $390,000?

Again, because they like to make their profit when buying real estate so they don’t have to worry about it when selling.

Here is a calculator where you can enter what you believe is your ARV & cost of repairs to see what you most likely would be offered for your home:

So is it a Solution or a Scam to Sell to These Guys?

Now that you know the MAO formula they use to calculate offers and that their goal is on making a profit at the time they are actually buying a home, it is really up to you to decide.

Can I Really Sell My House Fast in 7 Days or Less?

Obviously, nobody wants to get stuck buying a property with mold, termites or foundation problems.

So these professional buyers always insert inspection contingencies into the purchase agreement so they can change their mind about purchasing anytime they want without losing a penny.

However, if they can get you to sell at a price that is 20% or more below the MAO, they will do whatever it takes to buy your home quickly before you change your mind.

If they believe their profit is large enough, they will take the risk of getting stuck with unforeseen problems and buy the property with cash in 7 days.

Who Usually Sells to These People?

I have personally talked to professional rehabbers in Bergen, Hudson, Essex & Union Counties and asked them what is the motivation of a homeowner who will give up $20k to $100k equity in their home for a quick sale and the following are the most common reasons:

• Bitter Divorce:

The couple just wants to get away from each other as quickly as possible.

• Inherited the Home:

The adult kids who live out of state inherited the home and don’t want to wait much longer to get some cash from it.

• Tired Landlord:

The owner was sick of being a landlord and wanted to sell the property quickly with the tenant still in it not paying rent. The rehabber was willing to deal with the tenant and the eviction process.

In all these situations, the home seller has little to none emotional attachment in the home.

If you are in one of these situations and want to sell your house fast and are willing to wait upto 30 days for the sale of your home, please contact us so we can get you top dollar for the home and put an extra 20k or more in your pocket.