At face value, working with cash buyers should be easy and simple. Cash, as-is, no appraisals.. easy! Unfortunately this is not always the case and working with cash buyers can be difficult at times. The good news is, knowing what to look out for when working with cash buyers before opening escrow can prepare you to save time and frustration! Over the years we have seen competing cash buyers include certain terms in their offers that could be seen as red flags or warning signs. Whether you are thinking of selling your own property to a cash buyer or you are listing a property for a client that is attracting cash buyers, keeping an eye out for the red flags below could help avoid choosing the wrong buyer!
Knowing why investors include these terms in their offers and how to counter them will put you in a much stronger position in the transaction and simplify the process of selling your home for cash.
The Contingent Free Offer
What exactly is a contingent free offer? when a buyer submits an offer without a contingency, they are essentially forfeiting any and all of their privileges to perform due diligence on a property they are interested in. They are giving up their right to:
- Perform further inspections
- Review seller’s disclosures
- Confirm clean ownership with a title report
- Complete a final walk through
We see this in competing offers all the time. Companies that buy houses for cash say they are non-contingent and that they do not need an inspection period. Often times their goal here is to make their offer appear as strong as possible and get their offer accepted. Unless you’ve seen the tactic before and know how to prevent it, buyers may take advantage of their earnest money period to complete their due diligence. They know that once their offer is accepted, they likely have the industry standard 72 hours to submit their Earnest Money Deposit and can use this 72 hours to do their initial walk through of the property, perform inspection, etc. If they find something they don’t like or realize the numbers do not make sense after physically walking through the property they can cancel their offer or try and renegotiate by asking for a price reduction. all this happens before any of their money has been submitted to escrow.
Pro Tip: write up a seller counter. 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 nonrefundable earnest money.
Long & Unnecessary Inspection Periods
While a typical financed buyer has about 17 days to perform their due diligence on a property, cash buyers should be writing in a much shorter time period into their contracts. How much time does a cash buyer need to perform inspections? It’s a loaded question and depends on a couple things:
- The complexity of the renovation
- Necessity of additional inspections – foundation, soils report, zoning and planning research
The more complete a project, the more time a buyer may need to perform due diligence. With that said, a cash buyer should be able to complete their inspections on an average house of average size in three to four days. Some investors may be able to work faster while others may rightly need more time to perform additional due diligence. But digging deeper into the buyer’s plans is highly encouraged if they are asking for 8+ days to perform due diligence for a basic home. They may be trying to give themselves as much time as possible to farm out to other buyers.
Pro Tip: write up a seller counter. You can always counter inspection days to whatever timeline you feel fair.
Low Earnest Money Deposit
Any savvy seller should want their buyer to have skin in the game. This typically come in Earnest Money Deposit which is usually expected to be submitted to escrow within 72 hours of offer acceptance. Should the buyer cancel their offer or not perform per the contact after removing their contingencies, escrow may be obligated to disburse those funds to the seller. The lower the earnest money amount, the less skin a buyer has, and the less incentive a buyer has to perform to the contact. It is important that the amount of earnest money is significant enough to motivate the buyer to perform.
Things to keep in mind:
- 1% of the purchase price is industry standard. Earnest money on a $350,000 purchase contact should be at least $3,500.
- Anything below that, consider countering with a higher ask
Remember – if a buyer can’t submit a reasonable amount of money to escrow, how are they going to bring all the funds to close?
Unusually High Offers
If you are selling a fixer property for cash in Minnesota, it’s likely that it will get a lot of attention from local investors if exposed to the local market. If the property you are selling has multiple offers on the table, be wary of investors that are significantly higher than the average offer price of others you have in hand. Some investors knowingly come in higher than what they can actually pay for the property to tie it up and use the contingency period to negotiate the price back down. Keep in mind that most fix and flip investors have a similar way and method for running numbers and determining their offer price. If one fix and flip buyer is significantly higher than the others, something might up.
Pro Tip: use logic and ask questions. Ask how an investor plans on using the property once completed. If a buyer is planning to renovate and resell for a profit, how do they plan on making money by paying significantly more than their competitors?
Out of Area Buyers
If you catch wind that a certain buyers submitting an offer is from out of your area, proceed with caution. While by no means are all out of area investors bad, it’s likely a safe bet that these buyers don’t know the local market as well as a local buyer would. Investor-buyers that are not from the Minnesota area likely are not as familiar with the market as a local buyer who has an established track record. These types of buyers usually need to do more market due diligence during their contingency period to conform their numbers. More due diligence means more uncertainty for you, and puts the transaction at a higher risk of changing their numbers mid-escrow and potentially asking for a reduction.
We hope that buy knowing these tips in what to look out for when working with cash buyers you will be better equipped and more prepared for an easy escrow.
Buffalo Bay Management is a provider of residential management solutions for small and mid-sized properties. Contact us to see how we can work together to achieve your investment strategy.