At face value, working with cash buyers should be simple. Unfortunately, this is not always the case, and working with cash buyers can be difficult. There are a few malpractices to look out for when working with cash buyers to save time and frustration. Over the years, many cash buyers draft terms in their offers that should be seen as red flags and warning signs. Whether you’re thinking of selling your property to a cash buyer or you’re listing a property attracting cash buyers, knowing what to avoid is the best way to optimize the real estate transaction.
In this article, we’ll explore tips for selling to cash home buyers. Knowing how to prepare ahead of time will put you in a much stronger position in the transaction and simplify the process of selling your home for cash.
What to Look Out for When Working With Cash Home Buyers
The “Non-Contingent” Offer
What exactly is a non-contingent offer? When a buyer submits a “Non-Contingent” offer they are essentially forfeiting all of their privileges to perform due diligence on a property, including but not limited to:
- Additional inspections
- Reviewal of the seller disclosures
- Confirmation of clean ownership with a title report
- A final walkthrough
Companies that buy houses for cash say they’re non-contingent and that they “don’t need an inspection period”. Oftentimes their goal here is to make their offer appear as strong as possible and get their offer accepted faster. Many cash home buyers take advantage of their “earnest money” period to complete their due diligence.
Once their offer is accepted, they typically have 72 hours to submit their Earnest Money Deposit. During this time, they can complete an initial walkthrough of the property, perform inspections, etc. If they find something they don’t like after walking through the property, they can cancel their offer or try and re-negotiate the price.
Long or Unnecessary Inspection Periods
While typical financed buyers get about 17 days to perform their due diligence on a property, cash buyers should be writing in a much shorter period into their contracts. The time a cash buyer needs to perform inspections depends on the complexity of the renovation and the need for additional inspections. The more complex a project, the more time a buyer may need to perform due diligence.
Regardless, most cash home buyer should complete their inspections on an average 2,500 sq. ft house in 3-4 days. Some investors work faster and others may need more time to perform additional due diligence. For cash buyers asking for 8+ days to perform due diligence on an average home with an average scope of work, it’s best to have a firm idea of the buyer’s plans. They may be biding time to scan the market for a better price.
Low Earnest Money Deposit
Any experienced seller should want their buyer to have stakes in the game if the buyer does not perform to the contract. This typically comes in the form of the Earnest Money Deposit which is submitted within 72 hours of offer acceptance. Should the cash home buyer cancel their offer or not perform per the contract after removing their contingencies, escrow may be obligated to disburse those funds to the seller. The lower the earnest money amount, the lower the stakes are the buyer involved, giving them less incentive to close the deal.
Unusually High Offers
If the property has multiple offers on the table, be wary of investors offering a significantly higher price than the average offer price of others. Some investors knowingly come in higher than what they can pay for the property to tie the property up. After, they use the contingency period to negotiate the price back down to a number they can manage.
Non-Local Cash Home Buyers
If you catch wind that a cash buyer submitting on your listing/property is from out of your area, proceed with caution. While not all out-of-area investors are “bad”, it’s likely a safe bet that these buyers don’t know the local neighborhoods as well as local buyers. Out-of-area cash home buyers usually require more market due diligence during their contingency period to confirm their numbers to feel comfortable purchasing. More due diligence means more uncertainty and puts the transaction at a higher risk of changing value mid-escrow and necessary price negotiation.
Suggestions for Working with Cash Home Buyers
Now that we know what to avoid when working with a cash home buyer, many ask, “why do home sellers prefer cash buyers?” After all, the number of red flags can cause make sellers hesitant. On the flip side, working with a cash buyer is also one of the easiest ways to expedite a sale if the buyer is serious about moving forward. Sellers need to exercise caution and stick their ground. Let’s explore some helpful suggestions for sellers working with cash home buyers.
- Write up Seller Counter: For a situation of a buyer wanting a longer inspection process, write up a Seller counter. You can always counter inspection days to whatever timeline you feel is fair. Shorten the earnest money period to 24 hours or sooner and make it clear that no further inspections will be allowed until escrow receives the buyer’s non-refundable Earnest Money!
- Don’t Be Afraid of Countering Up Earnest Money Deposits: Keep in mind, 1% of the purchase price is industry standard. (Earnest money on a $600,000 purchase contract should be at least $6,000). Anything below that, consider countering up! Remember: If a buyer is unable to submit a reasonable amount of money to escrow, how will they bring all the funds to close?
- Ask Logical Questions: Use logic, ask questions, and see HOW an investor plans on using the property once completed. If a buyer is doing so to renovate and re-sell themselves for a profit, how do they plan on making money by paying significantly more than other competitors?