Predatory home buyers appear under any market conditions and prey on sellers of any type of property. Their objective is to coerce sellers into accepting unfavorable contract terms or agree to changes in already agreed-to purchase agreements to achieve a better deal for themselves. Predatory home buyers and their tactics are not always easy to spot up front, so let’s look at four types of predators and some of the tricks they use to place sellers in a disadvantaged position. We’ll wrap up with a few tactics to avoid or counter predators when we sell our property.
The most common predator is the low-baller. Low-ballers seek to take advantage of sellers in distress (e.g. behind on their mortgage payments), sellers who need cash fast, owners of rental property generating negative monthly cash flow, owners of property in poor condition (possibly unable to qualify for most mortgages) or sellers who are ignorant of the value of their property. They typically offer all-cash deals that close escrow quickly at a price well below current market value. Their bids often arrive within hours of the property going on the market. Many low-ballers watch for properties advertised as “coming soon” and try to get their offer accepted before the listing is active and competing buyers arrive on the scene. The primary difference between low-ballers and other predators is that low-ballers, for the most part, fully intend to complete the sale in accordance with the terms they offer. Their price may be low, but they can usually deliver the promised cash and will make every effort to close escrow on time.
Before we dive into the other three types of predators, let’s look at the one tactic these three commonly use. It’s a clause in their offer that allows the buyer to cancel the sale at any time all the way up to the day that escrow is scheduled to close. If they can’t coerce the seller into making contract changes favorable to them, they could cancel the deal at little or no cost to them – and they get their deposit back.
I call the next predator the schedule stretcher. This buyer demands extensions to the escrow period for any number of reasons and for as long a time period as possible. The stretcher may be working toward one of three common objectives: 1) keep the property off the market long enough that other potential buyers move on to look at other properties, then demand a lower price by claiming the market has cooled since their offer was submitted; 2) claim the market has cooled, but the bank is the culprit and has reduced the amount they are willing to lend; or 3) simply wear down the seller to the point that they will make concessions just to get the deal completed.
The manufacturer is an expert at manufacturing excuses not to pay the price they offered for the property. It is reasonable for buyers to request repairs or a price reduction when problems are discovered during inspections. The manufacturer will take these requests to the extreme. Here’s an example: Dave is selling his house and the buyer (a manufacturer) hires a roof inspector. The inspector finds some damage to the 25 year old roof and recommends replacement. A reputable contractor estimates $15,000 to do the work. The manufacturer expresses concern with condition of the sub-roof and framing, even though the property inspector saw no problems in the attic. The manufacturer claims these areas cannot be adequately inspected until the roof is removed during replacement. Replacing the roof could delay close of escrow, so Dave agrees to reduce the purchase price by the cost estimated by the roofing contractor. The manufacturer demands a $25,000 price reduction due to the risk of discovering more damage when the roof is removed. After escrow closes, the manufacturer takes the roof contractor’s bid to competing roofers and negotiates a better price, let’s say $12,000. This tactic potentially saves the manufacturer $13,000 on the purchase of the home.
I’ve saved perhaps the most controversial predator for last – the wholesaler. Wholesalers offer low-ball prices for distressed properties and then sell the property to someone else before escrow closes. Here is an example: Ben owns a home and is having trouble making his mortgage payments. His property has serious structural problems that would make it hard for a buyer to obtain a mortgage, e.g. a cracked slab or a non-functioning septic system. A wholesaler who monitors filings of Notices Of Default (official notices mortgage lenders send to borrowers who are behind on their payments) contacts Ben and says he will buy the property for cash. Ben accepts the offer and escrow is scheduled to close in 30 days. The wholesaler immediately notifies his list of investors that he is selling the house. The home, in its current condition, has a market value of $150,000. The wholesaler gets Ben to sell it to him for $100,000. The day after he signs a purchase agreement with Ben, the wholesaler agrees to sell the property for $125,000 cash to an investor who will rehab and flip it. Close of escrow for both sales will occur on the same day in what is called a double closing or simultaneous closing. The flipper deposits $125,000 in escrow, from which the escrow officer pays Ben the seller $100,000 and closing costs of about $5,000. The remaining $20,000 goes to the wholesaler. How can the wholesaler sell a property he doesn’t own? According to the purchase contract with Ben, the wholesaler owns the right to buy the property from Ben and his sale to the flipper is contingent upon closing that purchase. In the wholesaler’s contract with Ben, the buyer is identified as “John Smith and/or assigns.” This gives wholesaler John Smith the right to assign the purchase to another buyer – the flipper. If a wholesale buyer doesn’t identify themselves as a wholesaler, some do and some don’t, there are hints. One is the assignment, another is a statement in the offer that reads something like “Purchase is being made by a real estate investor for the purpose of making a profit.” Final note – not all wholesalers are unethical or predatory. Some disclose their intentions up-front and provide a valuable service to sellers who need their type of help. However, I recommend consulting with a licensed real estate professional before entering into any type of agreement with a wholesaler.
Home sellers can guard against predatory home buyers by identifying them and either implementing strategies to counter the predator’s tactics or by simply ignoring their offers. Here are some recommendations:
Consult with a real estate professional. If you’re considering a sale, start the process by speaking with a real estate professional who has experience with your type of property and who can help you recognize predatory home buyers.
Know your home’s value. Have a real estate professional or appraiser estimate the value of your property in its current condition and under current market conditions. Before placing a property on the market, have inspections performed that identify items needing repair or that could be reasonably credited to buyers.
Sell on the open market. Many predators troll for “off market” properties. Not listing a property on the open market, e.g. through a REALTOR®, often results in fewer competing buyers, generally weaker offers, and offers from predatory home buyers. Even if the seller is in distress or the property is in less than perfect condition, attracting the maximum number of potential buyers is likely to yield better offers.
Limit cancellation risk. Don’t accept offers that allow the buyer to cancel the transaction up to the day escrow is scheduled to close without losing their deposit. Require reasonable contingency release periods for inspections and mortgage qualification.
Limit extensions. Do not accept unusually long escrow periods or agree to contract extensions without cost. Some properties, such as land that buyers plan to build a home on, often have long escrow periods to allow the buyer time to submit building plans for approval before taking ownership of the property. Many land buyers, especially professional developers, typically will not close escrow on land until they have assurances from local government that they can build what they want on it. This is normal and not predatory. Selling an option or requiring a non-refundable deposit early in the escrow period are strategies sellers can use to reduce their risk. To counter predatory home buyers like schedule stretchers, require a non-refundable deposit for each schedule extension.
Don’t sell without an agent. Offers from wholesalers typically do not require the seller to have an agent and many predatory home buyers will back away if the seller hires one. Wholesalers are often not agents, as they do not need a license to buy or sell properties for their own use. Not having an agent puts sellers at a disadvantage regarding offer analysis and how to properly close the sale.
Have questions about buying and selling real estate? Drop me a line!