Lowball cash offers to buy homes or land at drastically below-market prices are weeds that can spread like crabgrass in otherwise healthy real estate markets. If you’re planning to sell your home this spring – or sell a property as a trustee or executor of an estate – beware. Lowball cash offers are usually presented to sellers who are, or appear, desperate for immediate cash and may not have time for a traditional, market value sale. Lowball offers are common during probate and trust sales, when legal expenses, taxes and other costs of settling an estate often consume available cash quickly. Lowball cash offers might appear straightforward, but they are not always as simple, fast and easy as they appear. So let’s examine three common lowball cash offer scenarios and the potential risks they pose to sellers.
The Home Buyer Looking For A Deal
Buyers looking for a good deal on a place to live are typically the most common all-cash buyers. They may have poor credit that keeps them from qualifying for a mortgage, but good employment that allows them to save enough cash to make an all-cash offer. Maybe they have great credit and just don’t want to take on debt. They might also be working with a pool of cash obtained from friends or family who would share in ownership of the property. If the buyer is able to show proof of funds (e.g. bank statements) to verify they have enough cash in the bank to do the deal, there still could be a risk in their offer. That risk is simply the money lost by accepting an offer below market value when higher offers could be available. After all, the definition of lowball is drastically below market value.
A second lowball buying scenario is the flip. Flippers are investors who usually do cash deals and are accustomed to closing purchases quickly because good flip candidate properties often sell fast. There are two common variations of the flip scenario:
1) The property is purchased via a quick lowball cash sale, cleaned up a little, then immediately listed for sale at market value. Making a profit requires the flipper to purchase the property below market value.
2) The property is purchased and rehabilitated (extensively remodeled), then sold for the improved market value. The rehab flipper may not always seek a drastic lowball deal, but he increases his bottom line when he purchases the property below market value.
Sellers could also risk losing time if the flipper’s purchase contract is not structured fairly. Opt-out clauses that allow buyers to cancel the deal and receive their full deposit back, all the way up to the scheduled escrow closing date, are often found in lowball cash offers. Most flippers are professionals who fully intend to purchase the property as described in their offer. But there are also flippers who rush to tie-up a property in escrow and then try to re-negotiate the terms of the purchase agreement, usually by A) claiming they need the escrow period extended to complete inspections, B) requesting price reductions due to issues they find during property inspections, or C) both. When reminded that the property is supposed to be accepted in as is condition at an already agreed-to price, lowball buyers may argue that it’s better to keep working with them and to be flexible with terms rather than restarting the entire sales process with another buyer. They know that as time passes during escrow, other buyers with quick cash offers may have already moved on to other properties. This risk is typically mitigated by requiring fair opt-out clauses and soliciting back-up offers while in escrow.
A third type of buyer who uses lowball cash offers almost exclusively is a wholesaler. Wholesalers enter into contracts to buy homes for cash at a huge discount, then – immediately upon having their lowball cash offer accepted – they begin looking for a second buyer. When the wholesaler finds a second buyer willing to assume the terms of their original purchase contract, the wholesaler assigns the contract to the second buyer. That second buyer basically buys the right to purchase the property from the wholesaler for a fee.
Another approach to wholesaling involves the wholesale buyer entering into a purchase contract, then finding a second buyer who is willing to buy the property from the wholesaler and close escrow on the same date and under the same conditions specified in the purchase contract the wholesaler has with the original seller. On escrow closing day, a simultaneous closing (sometimes called double closing) is conducted by the escrow company, during which both the original sale and the second sale happen at the same time. The wholesaler makes a profit by selling the property to the second buyer for more than the wholesaler paid for it.
Wholesalers usually target owners of distressed properties (those who have received a Notice Of Default due to late payments on their mortgage) and properties that require significant repair. These owners are believed to be the most likely to consider lowball cash offers. Sellers concerned with how to negotiate with a wholesaler should seek the advice of a licensed real estate professional or an attorney.
Even though a wholesaler offer looks just like any other offer, there are a couple easy-to-spot signs that the buyer is a wholesaler. One is that somewhere in the purchase offer they will add a statement similar to “This offer is made by a real estate investor for the purpose of making a profit.” They also make sure the purchase agreement is assignable, usually by listing the buyer as “John Smith and/or assigns” or including a specific assignment clause in the agreement. However, assignment is not used just by wholesalers. Many investors who plan to place ownership of an acquired property in a limited liability company or other entity under their control at close of escrow will want the purchase agreement to be assignable. So will families who want to place ownership of their new home in a family trust.
Lowball cash offers are seldom a good option for sellers simply because the seller doesn’t receive a fair market price for the property being sold. When consideration of a lowball offer is necessary, consult with a real estate professional to mitigate risks in the deal.
Have questions about lowball cash offers or other aspects of real estate buying or selling? Drop me a line!