Types of Cash Offers
Wholesale Cash Offers
You might not have heard of Wholesalers (at least in regards to real estate) but it’s not exactly like wholesaling in other industries. That being said if you are talking to someone offering to buy your property cash and close quickly it is more often than not a wholesaler. This is something to really be concerned with. Especially if you are relying on them to complete the transaction.
Here’s how a typical wholesale deal works. Someone offers to buy your property cash. They don’t necessarily have the funds or lenders to complete this purchase. Their goal is to contract the property at a low price and sell that contract to a true cash buyer (like us). They are essentially being a middle man but not taking any risk. The best comparison I can give is to think of a realtor that has cash buyers lined up except instead of trying to get you the most money they are trying to offer you the least money so they can sell their contract and make the difference. A realtor would just get a commission usually much smaller than a wholesalers fee.
Now that you have heard the bad, there are good wholesalers out there. The issue is it is hard to tell. It’s the most common method taught these days because there is no barrier to entry. So if they don’t actually have the money or can’t get the money then you could be in for a surprise if they can’t find a buyer. We have bought plenty of houses that were supposedly sold when the wholesaler failed.
We have also bought plenty of houses from good wholesalers and the good ethical ones won’t contract your house unless they are sure they can move it or at least if they can’t they have the resources to buy it themselves.
If you think you have a wholesaler just ask them. If they say yes be careful. Just get more references. There are good ones that have great intentions but there are plenty of beginners that just won’t perform. Unless you are not concerned with a failed sale, make sure they will close regardless of whether they find an end buyer like us.
Hard Money Cash Offer
This is probably the most common source of funding for cash offers. It’s often used by fix and flip companies or landlords that are purchasing properties to update prior to refinancing them into longer-term loans. There are a few things to be careful with as the actual hard money lender can stop the deal from moving forward. Hard money lenders are basically companies that source private money from individuals or companies. They act as the broker for the deal, similar to typical mortgage brokers that source standard bank financing. The difference is that this financing is very quick and is not subject to most lending guidelines because the buyers using these loans are not going to live in the property. It’s up to the hard money lender to underwrite based on their own in-house criteria.
Things the underwriters on these loans are looking for are below:
- Loan to Value – Most hard money lenders want a large amount of equity to protect themselves and their clients. Typical numbers range from 20 to 40 percent equity
- Large down payments – To meet equity requirements they usually want larger down payments so the buyer has something to lose if the deal goes south
- History with the buyer – The longer the history the less likely a deal will fall through.
- Scope of work - They want to know the buyer is ready to get the work done. Usually by having a timeline and a list of work needed, often with pictures.
- There are other things but most important to consider is that any obstacle can usually be overcome if the buyer is willing to put more of their own money down. If a lender doesn’t approve the deal the buyer either doesn’t have a good enough relationship built with the lender or not enough money.
We use hard money often as well as other sources. It is very fast and our relationships with our lenders are very solid. It is still something to consider if it’s your buyers only option, it could be a red flag but shouldn’t be a deal killer.
Private Money
This is a very common method to purchase properties cash and is utilized by flippers, landlords even some of the better wholesalers might have this in their back pocket in case their real buyers back out. You might look at this as hard money without the middle man. It’s one of the best sources of money for buyers as it is still very fast and very few lending guidelines to meet. It’s up to the buyer and their agreement with their private money investors. This money is often less expensive for the buyer than hard money since there is no middle man. It can be faster but there also is a chance it could fail. If the buyer has multiple sources probably not an issue but unlike hard money lenders sometimes a buyer only has one private money partner/lender. Hard money lenders usually have pools of money or multiple lenders to complete the deals.
True Cash
Very uncommon but it does exist. This type of offer is the most solid but it is extremely unusual. Typically this would occur if a company recently sold some of their properties and were ready to purchase more. This is loan free and partner free. So there is no one to underwrite the deal other than the buyer. Although we have purchased this way it’s not common for us. If you come across a buyer that is true cash they are serious and there isn’t much negative to worry about other than making sure you see their proof of funds and have a solid contract with earnest money.
