Considering An “Easy Cash” Offer?
Talk to a Realtor or attorney before accepting that “easy cash” offer, which may be anything but.
At this point in the post-Harvey recovery, many homeowners are considering giving up and selling their homes as-is* for a variety of reasons, so it’s more important than ever to get the word out that flood-damaged homes can be sold with appropriate disclosures on the MLS, known locally as HAR.com, in all conditions — unremediated, for lot value alone; gutted and cleaned out, ready to rebuild; or partially or fully rebuilt/remodeled.
Harvey didn’t change the market fundamentals. The best way to get a fair price on any property will always be to reach as many potential buyers as possible. In the case of Harvey-damaged properties, that group includes flippers, buy-and-hold investors willing to put in sweat equity or bear a little risk, and individuals or families wanting to buy a home to fix up and live in themselves. This last group will likely emerge as a strong market force this spring, as flood fixer-uppers bring previously unaffordable school districts and neighborhoods within reach for a broader set of buyers. As a seller, the way to reach all those groups at once is to list the property on HAR.com, which syndicates to Zillow, Trulia, Realtor.com, and just about everywhere else.
Unfortunately, desperate or exhausted homeowners may be overwhelmed by any number of things five months in — the insurance runaround, regulatory uncertainty, the cost of uninsured or additional surprise repairs, etc. — and may not be aware of their options. Some will be tempted by bandit road signs offering cash for flooded houses, or fall victim to a phone call, door-knock, or handwritten note offering quick cash and a quick close. Although nearly all of these off-MLS deals will offer less than market value, a type of investor known as a wholesaler presents the greatest risk to sellers.
So, what is a wholesaler? Wholesalers like to describe themselves as “middlemen.” They contract to purchase a property from a distressed seller and immediately market the property to investor purchasers for (much) more than their contract price. If they find an end buyer, they move forward to closing, where they frequently bring no money at all to the closing table and walk away with the difference between the two contract prices, sometimes closing both deals simultaneously in adjacent rooms. It can be devastating for vulnerable sellers to walk out of closing on their flooded home only to learn that an investor in the next room just bought it for much more than they got in the sale. Sometimes the sellers never find out, but when they do, they can be murderously angry at both the wholesaler and the investor purchaser.
That’s one side of the lose-lose equation for sellers caught in a wholesaling deal.
The other is that if the wholesaler can’t find an end buyer, they will walk on the deal just before the closing date, leaving the seller more distressed than they were to begin with, since most sellers will have made arrangements to move, and may have negotiated and made repairs, signed a lease elsewhere, or contracted to purchase another property — or they may simply find themselves back at square one, 45 or more days closer to foreclosure. They may lose their home entirely.
But a middleman sounds so harmless, right? After all, wholesalers say that’s what brokers are, and brokers are everywhere. The reality is that wholesalers are nearly the opposite of real estate brokers. Listing brokers and agents represent sellers in a fiduciary relationship, meaning they have a legal obligation to hold the clients’ interests above their own. Wholesalers, on the other hand, are almost never real estate brokers or agents, primarily because the easiest (only?) way to achieve the pennies-on-the-dollar deals wholesalers are looking for is to mislead the seller as to the value of their property. And finally, the crucial element in wholesaling is secrecy; the scheme is completely dependent on it. If a seller knew what the true purchaser of the property was paying, they would hold out for that amount themselves. By contrast, a broker is generally marketing a property to the broadest audience possible.
In 2017, the Texas legislature finally regulated wholesalers, specifically protecting end purchasers — which means wholesalers can now deal only with investors and other sophisticated end buyers who understand they’re contracting for the wholesalers’ equitable interest or option to purchase — but there is still no requirement that wholesalers disclose their lack of good faith intention to close or ability to close to sellers at the time they enter into the primary contract. 22 Tex. Admin. Code § 535.6. The legislature preserved the element of secrecy on the wholesalers’ buy-side… for now. It likely won’t be long before the legislature or the courts fully clarify a requirement that any contracting buyer be a bona fide purchaser, particularly after Harvey horror stories make the rounds.
So, how can you tell if an offer is coming from a wholesaler? Here are some warning signs:
- The earnest money is very low. Typical earnest money in the Houston market is 1% of the purchase price or more. Wholesalers will usually offer far less than 1% in earnest money so they can painlessly walk on the deal if they can’t find an end buyer.
- The option period is longer than 10 days, and/or the option fee is less than $100. Wholesalers frequently write an unrestricted right to terminate up to the closing date, which may be as long as 30 days or more, and offer less than is typical for even a short unrestricted right to terminate the contract.
- The hook was a “quick, cash close,” but the closing date is 30 days or more away. Even a conventionally financed deal can typically close within 30 days in Texas, but a wholesaler needs time to market the property to their network — primarily made up of green mom-and-pop investors cultivated through paid investor seminars and radio and internet ads.
- Consider how the seller came into contact with the “buyer.” Generally, a wholesaler recruits local salespeople who knock door-to-door or leave cheap, handwritten signs at heavily trafficked intersections around affected areas. The less their representatives understand wholesaling, the better for the wholesaler; salespeople can’t give away information they don’t have. And uninformed but well-intentioned salespeople can be very effective closers for wholesalers; a vulnerable seller may not even realize the salesperson isn’t the “buyer” him- or herself.
- How embarrassingly bad is their correspondence? If it’s super bad, that’s a wholesaling red flag. Wholesalers will sometimes mail obviously fake “handwritten” notes to entire neighborhoods. For some wholesaling operations, fakeness and cheapness are a deliberate strategy to weed out the sophisticated, leaving only the vulnerable in their pool of potential marks.
In conclusion: there is no reason to sell to a wholesaler, ever. By definition, buyers at higher prices exist in these neighborhoods, or the wholesalers wouldn’t be there. If a wholesaler can find an end purchaser with their limited exposure and frequently limited means, chances are excellent that listing the property openly on the MLS would result in a quick sale at a much better price. The easiest way to find out is to call a Realtor, who will typically provide a comparative market analysis and probable sale price opinion at no charge.
Meredith Levine has been a member of the State Bar of Texas since 2002, and a licensed Realtor since January 2011. She is the managing broker of Houston-area real estate brokerage Levine & Co., where she works with a team of highly-credentialed agents representing residential buyers and sellers.
*”As-Is” is a real estate term that can mean a variety of things: in some post-flood cases, and by necessity, some sellers are expressly disclaiming warranties of habitability or merchantability, which means that sellers make no guarantee that the home can be lived in safely or legally (habitability), or sold on to another party (merchantability). These are significant disclaimers, and will affect the price a flooded property will fetch on the market. Other sellers (and sometimes their agents) use the term “as-is” colloquially, meaning only that the seller will make no additional repairs. Finally, some investors and others disclaim warranties of title, and that is sometimes referred to as an “as-is” sale as well. It’s best to be very clear, in writing and in the contract, about what the term “as-is” means, in order to be sure there is no misunderstanding between buyers and sellers.