In this 5-part video series, Express Homebuyers’ CEO Brad Chandler discusses the "We Buy Houses" scams out there and how to protect yourself from nasty house buying scams.
So back to the questionable activities and traps. One very common practice in real estate investing is a technique called wholesaling. Wholesaling is a process in which a “we buy houses” investor gets your home under contract and then assigns the contract to another buyer who actually closes on your home.
Why do some investors choose to wholesale instead of buying your home and fixing it up? There are several reasons. One is they don’t have money to buy the home. Or they don’t like the headaches and liability associated with renovating a home. Or they may just want or need to get paid immediately instead of waiting months for the property to be renovated and sold.
So – let me give you an example to better explain the wholesaling process. Lets say Bill investor says he will buy your home for $100,000 cash and can close in 2 weeks. You say great and sign a contract with him. Bill then goes to Jim investor and says “hey Jim, I have a house in Washington DC under contract. Would you like to buy it for $120,000?” Jim runs his numbers and thinks he can still make a profit by buying your home for $120,000, so he says yes. At this point Bill prepares a document called an assignment of interest and assigns the contract to Jim. In 2 weeks, Jim shows up to settlement and pays the settlement company $120,000. $20,000 goes to Bill and you get $100,000 – the contract amount that Bill promised you. Of course, if you have a mortgage that needs to be paid off you won’t get the full $100,000, but you get my point.
The scenario I just outlined in and of itself isn’t a problem. The problem occurs when Bill gets your house under contract and promises to close in 2 weeks with cash that he really doesn’t have. And the sad truth is, most investors don’t have the cash to buy your home. Because Bill doesn’t have the cash, he must quickly find a buyer who has cash and to whom he can assign the contract. What often ends up happening is Bill can’t find a buyer or he finds a buyer but the buyer backs out. Either way YOU are left without a buyer for your home.
You thought you had a signed and sealed contract. You started packing and have movers lined up. Then you get a call from Bill – if he is even professional enough to call you. Bill can’t buy your home and the deal is off. Needless to say, this can be a crushing disappointment, especially if you have an impending foreclosure auction or a deadline to move. We get calls every month from people with similar stories to this one!
So how do you avoid this situation? Very simply – you require the buyer to show you proof of funds before you ever sign a contract with a “we buy houses” company. Any reputable property investor should be able to share a current bank statement showing sufficient funds to purchase your home. You also must require the real estate investor to make a large, non-refundable deposit to the settlement company handling the closing. That way, if like in the example I just mentioned, Bill can’t find a buyer, he forfeits $5,000 to you.