What do those "we buy houses for cash" companies actually do?

Most home sellers work with a real estate agent to help them find the right buyers. In 2023, nearly 90% of home sellers used a real estate agent, according to research from the National Association of Realtors.

But selling your home through the traditional method takes time, and you may want (or need) to close the deal in a hurry. This is where a company advertising "we buy houses for cash" or that it buys homes "as is" could be worth looking into.

However, this type of deal comes with a significant drawback. "If you sell your house this way, you're bound to get much less money than what your house would sell for on the open market," says Sharon Cornelissen, director of housing at the Consumer Federation of America.

If you're considering a quick sale to a company that buys homes for cash "as is," here's what you need to understand about how these deals work and the tradeoffs with this option.

The companies behind the "we buy houses for cash" signs you find stapled to telephone poles are usually wholesalers. These businesses are intermediaries that find real estate deals for other investors. That said, investors who want to directly purchase your home and fix it up to sell or use as a rental could also advertise with "we buy houses for cash" signs, although this is less common.

Wholesalers identify distressed properties or homeowners who are motivated to sell, such as someone in pre-foreclosure or going through a divorce. "Maybe they're younger, they've inherited a property from a family member and they don't know what to do with it or it's in bad shape," says Cody Rudolph, real estate investor, marketer and blogger with 15 years of industry experience. "These are typically the folks that want to move a property ... they don't want to spend a lot of money to update ... they just want it done."

The wholesaler wants to secure the right to buy a property at below-market value and then sell that right to an investor for a fee. And as a rule of thumb, they'll aim to secure a price at 70% of the after-repair value (ARV) of the home, Rudolph says. The final offer will also factor in the cost of repairs and the fee wholesalers charge to investors, which varies.

If you're considering selling a home this way, you should go into the negotiations armed with a good idea of how much your home is worth and what it would cost to get it ready to sell. "You won't always run into an ethical person with a fair offer," Rudolph says. Be sure to read the fine print and understand what "outs" the buyer may have. Wholesalers can back out of the deal if they can't find a buyer, so make sure the contract spells out who the end buyer is. "If they don't tell you who's gonna buy the house, that would be a red flag for me," Rudolph says.

When you sell to a wholesaler or an investor who is paying cash, the biggest advantage is you usually can complete the transaction much more quickly. This reduces the costs associated with holding the property such as the mortgage payment, maintenance or property taxes. You can also sell the house "as is" and not have to worry about the headache, cost or time it takes to make the repairs that are necessary to get the best price.

However, an offer from a wholesaler is likely to be significantly less than what you may be able to sell your home for if you list it with a real estate agent, even when you factor in the agents' fee of up to 6%. And if you have close ties to the neighborhood, you may prefer to sell directly to an owner-occupant. "Maybe you want to see another local, a young family move in instead of a hedge fund buying your property and listing it on Airbnb," Rudolph says. "There's some sentiment that goes into the decision."

Real estate agents have a licensing process they need to go through to represent you when you're selling a house, but that's not the case for wholesalers or investors. So it's important to research any company you're considering working with. Verify it is reputable and understand the tradeoffs with this type of deal.

Pros

• Quick closing
• No need to make repairs

Cons

• Below market price
• No licensing, so you need to be aware of unethical practices

From the home seller's point of view, the biggest benefit a wholesaler can offer is a quick and efficient way to close the deal. That becomes less important when there's a high demand for homes. "Nowadays, they move so fast," Rudolph says. "[Sellers] can still pretty much ask for whatever they want and as long as they're in a halfway decent area they can probably get it within three or four weeks."

What you gain in speed by selling to a wholesaler or investor may be less than it has been and what you're sacrificing in price could be more than it used to be.

Also, if you're selling your home because you feel you can't afford it, be sure to consider all your options. If you're struggling to make your mortgage payments, the first thing to do is call your lender. "Forbearance has really expanded since Covid," Cornelissen says. "There's a lot of good options out there for homeowners that are dealing with high mortgage payments."

You can also find assistance with property taxes or home repairs. Homeowners with lower incomes can qualify for lower tax rates, and you can also apply for home repair grants through local governments or organizations. Cornelissen recommends talking with a local housing counselor to help you understand all of your options before selling your home for an infusion of cash.

Working with a company that's offering to buy your home as-is or with an all-cash offer doesn't make sense for most home sellers, especially in a market where properties move fast and fetch high prices. So it typically only makes sense in a situation where it's advantageous for you to offload the property sooner and you can't afford, or don't want to deal with renovations.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Sharon Cornelissen, director of housing at the Consumer Federation of America, and Cody Rudolph, real estate investor, marketer and blogger with 15 years of industry experience.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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