Successfully Sell A House As Is By Avoiding These 6 Red Flags
For most people, their house is one of the largest assets they own. Selling it is something that should not be taken lightly at all, especially when looking to sell a house as is for cash. Doing it this way typically entails attempting to find an investor to purchase the house for cash in a private sale.
Since this is largely an unregulated space when dealing with investors, caution should be taken when looking at the different investors to choose from. Almost everyone in this space advertises in a similar manner claiming they will “buy your house fast for cash” or that you can “sell a house as is in 7 days.”
However, there are many deceptive players that do not operate with the sellers’ interests in mind. These people are known as real estate wholesalers. Here is a link to an article that goes into more detail about them.
The purpose of this article is to discuss the red flags pertaining to the contract specifically that these wholesalers will use and why they do it. At the contract stage, this is usually after the wholesaler has met with the seller and looked at the property. From here they will make an offer to purchase the property by sending a contract.
Contracts Used When You Sell A House As Is vs. A Traditional Sale
When a property is sold the traditional way with a realtor, the contract is usually standard for the state the property is located in. But, when you sell a house as is direct to an investor, the contract is usually provided by the investor and they can all vary to some degree.
To someone less familiar with real estate, these contracts may appear to be normal and similar to each other, however upon examining them in detail, you can see that they certainly are not.
The Contract To Avoid When You Sell A House As Is
Below is a contract that was the first Google search result when I typed in “real estate wholesaler contract.”
Red Flag #1: The Earnest Money Deposit (EMD)
The first thing you can see is the extremely small EMD:
An EMD is the deposit that a buyer puts up to show they are serious about purchasing your home. Since you are committing to only working with that buyer and not entertaining any other offers, there is an opportunity cost to signing the contract. Therefore, EMD’s exist.
They prevent people who are not serious from making offers since they must risk their money in the form of a deposit. If a buyer were to get cold feet and back out of the contract, the EMD should be able to be kept by the seller. This is the rationale behind an EMD.
A rule of thumb in real estate is that the EMD should be no less than 1% of the sale price. So, for example, if the purchase price of the property is $200,000 the EMD should not be less than $2,000. As you can see here in this wholesaler contract, the EMD is $100. This is laughable and should be a huge red flag if you see something like this, yet this is extremely common with wholesalers.
Red Flag #2: The Financing Section
The next red flag pertains to the financing section of the contract:
This essentially sets the stage for the “buyer” to flip the contract to someone who will actually close on the property, and it enables them to do so in a cleverly worded way. By being ambiguous and stating things such as, “buyer’s investors” and “partners” it allows them to do this.
Real estate wholesalers will also tell sellers that they plan on having some of their “students” come through the house as well to learn, and that it would be best if the seller were gone when this occurs.
This is just another lie wholesalers tell to sellers. These are not students at all, just other potential investors they are attempting to flip the contract to.
Red Flag #3: The Contingency Period
The next section of the contract is probably the most insanely wholesaler-friendly clause and ensures they have absolutely ZERO risk in the transaction:
When translated from legal jargon to plain English, there is not much of a difference at all; this basically says, “From the second the contract is signed until the day before settlement the buyer has the ability to cancel the contract for any reason they choose, and their EMD will be refunded as well.”
This is pure insanity, and no one should ever consider signing a contract that says something like this. Having a clause like this is simply a license for the wholesaler to make an offer to purchase someone’s house in complete bad faith.
The only reason an “investor” would ever want this in their contract is to have the ability to back out without any consequences. Most people look to sell a house as is in order to avoid this kind of thing and have complete certainty that the buyer is going to perform and do what they say.
Red Flag #4: The Invasion Of Privacy
The next section that raises eyebrows has to do with privacy, or the invasion of it. See below:
Now, this may appear on the surface to be pretty normal. After all, the buyer is looking to spend tens or even hundreds of thousands of dollars, so having the ability to inspect the property beforehand shouldn’t be too much of an ask. However, you will notice a few things:
(1) They use a blanket statement that pretty much allows anyone they have ever come in contact with in their entire life to access the property.
(2) They mention installing a lockbox of theirs on someone else’s property and having access whenever they please.
(3) They have a statement that says that sellers are aware that unauthorized people may enter the property, and that they are free from any liability caused from this unauthorized access if damage occurs.
If you consider the reason they have this verbiage in there, you’ll realize exactly what it is meant to protect them from. Since they never intended to purchase the property in the first place, they are tasked with trying to assign the contract to a real buyer.
The real buyers that are interested in purchasing the contract from the wholesaler need to be able to view the house. So, the wholesaler will set up a lockbox on the property in order to allow people into the house to check it out.
This is typically done under the guise of them needing “contractors” to come look at it so that the seller doesn’t realize they are actually just attempting to flip the contract to someone else. I don’t know about you, but to me this seems to be a HUGE breach of privacy.
A lot of people choose to sell a house as is, off-market in this manner to maintain privacy by selling direct to an investor. By doing it this way (as opposed to selling the traditional way) they don’t have to entertain showings, do open house and have nosy neighbors looking at their home.
This completely undermines those attempts to maintain privacy by broadcasting the seller’s business to lots of people.
Red Flag #5: The Assignment Clause
The next section is the most important section of the contract for the wholesaler and is the red flag of red flags. This is called the assignment clause:
Assigning the contract to a buyer is something the wholesaler looks to do, and this clause is what allows them to do it legally. When the buyer is assigned to the contract, they take over all terms and conditions of the contract and are now responsible for closing on it.
The assignment clause on its own is not where I have a problem, the problem I have is how wholesalers will use deceptive tactics to go under contract in the first place without mentioning that they are planning to assign the contract.
Most real estate wholesalers have zero ability to purchase the homes they are making offers on, so these offers are made in complete bad faith.
In a hypothetical scenario, let’s pretend that wholesalers acted in an ethical manner. I know it is extremely difficult to imagine this, but bear with me!
If John the wholesaler was to advertise that he was a fantastic marketer and planned to go under contract with you, then market the property to his list of investors to ultimately sell to, then I would have zero problem with this. In this scenario John was truthful about what his intentions were and there were no surprises.
If you were able to successfully sell a house as is without headache and understood exactly how John was doing this, then there is nothing to get upset about and everything is “above board.”
Unfortunately, John would have trouble staying in business if this is how he advertised his services because very few people would ever agree to something like this. So, for these reasons John is better off deceptively advertising his services as “we buy houses in 7 days” or “sell a house as is fast for cash.”
One of the reasons people generally look to sell a house as is to an investor in the first place is because they want peace of mind knowing that the transaction is going to close and that there will be no issues. That is why having a marketing message that says this is of high importance for these deceptive players.
The very quick and easy rebuttal to John explaining how he will wholesale the seller’s property is that a realtor can do the same thing in a much more efficient manner.
Some of the larger wholesalers have thousands or even tens of thousands of investors signed up to receive emails when they have a new property.
This may sound like a lot, however realtors have access to millions of people when they list a property, so it is not even a comparison. It is a much more efficient market and the realtor commissions will likely be way less than what a wholesaler gets from the assignment fee.
If John the wholesaler puts someone under contract for a price of $150,000 but ends up selling to an investor for $200,000, they essentially charged the seller a 25% commission. In the same example, if a realtor charged the seller 6% and also sold the house for $200,000, then this cost them $12,000. $12,000 seems to be a much better price to pay than $50,000.
I’d rather pay a 6% commission than a 25% commission all day long.
Red Flag #6: Right To Counsel
The final section of the wholesaler contract that raises red flags is this one:
They say that every clause in a contract is there because of a lawsuit that came up that led to a new clause being inserted to protect against it in the future. I can say with almost 100% certainty that applies to this clause as well. This clause falls into the category of CYA (cover your a**) and prevents the seller from claiming down the road that they didn’t understand an element or elements of the contract.
People tend to get upset when they realize that they were duped or misled into a situation they didn’t intend to get into. Hence, the need for this clause in the contract.
Most of us are not attorneys and don’t know how or don’t want to decode legal jargon to understand what it means on our own. Instead, it is nice to have a trusted resource explain it to us in plain English.
Wholesalers will do this prior to signing a contract with a seller and either glaze over these sections or explain that it is “standard” to have this and blame it on the attorneys.
Summary Of The Red Flags To Look For When You Sell A House As Is
To boil it down into a list, here are the things to look out for on the contract that we just went over when looking to sell your house fast to an investor:
(1) A very small EMD (earnest money deposit) – this is known as a good faith deposit and is what a buyer puts up when they make an offer to buy a property. An EMD around 1% or more is fairly common. If you see one in the amount of $100 or so, this should be a huge red flag that the person making the offer intends to wholesale the property or is not serious.
(2) Ambiguous financing section referring to “partners” – this is a red flag because a real buyer usually does not need to state this. The term partners is usually code indicating that they are going to wholesale the property.
(3) A long contingency allowing the buyer to cancel the contract for any reason – HUGE red flag right here. A real buyer will either have no contingency, or they will have a short one (1 week or less) for a specific purpose, such as getting a foundation or mold inspection.
(4) Verbiage about their access to the property being too invasive – typically, this is to account for the fact that it may take a while to find an actual buyer to assign the contract to. The wholesaler needs to have property access in order to show it to the buyers and generate interest.
(5) Assignment clause – this is the red flag of red flags and allows the wholesaler to assign it to someone else at a higher price
(6)Right to counsel – this is not necessarily a red flag on its own, but if it is seen in conjunction with some other red flags, then it likely is not a good thing.
Choosing to sell a house as is directly to an investor is a decision that should be carefully considered. There are lots of people in this space that try to profit off of people’s lack of industry knowledge. Be very careful and do your diligence when speaking with investors. As always, if you have any questions feel free to reach out to us any time and God bless!