This is for the home sellers - several times a year our neighbourhood gets these notes in our mailbox. I just got one yesterday.
It usually inspires a lot of chatter on the local Facebook groups. So are these legit or are they too good to be true? Well, here’s what I know about these.
If you’ve seen the ads for seminars and conferences about how to make money in real estate, quite often this is the strategy they are teaching. Often they're pitched as buying real estate with little money down.
These notes are usually from a group of investors, pooling their money together to buy homes. They look low key & designed to look hand written. I imagine they appeal mostly to people who haven't been able to renovate, estate sales, or people who have not been able to keep up with repairs. Here's what the one I received looks like:
So how do they make money? From what I understand, they make money one of two ways; they either 'flip' or 'assign' the purchase contract itself or buy homes below market value to renovate and re sell.
Often they will buy homes for less than a house would sell for on the open market. Their pitch is you can save real estate commissions.
Method 1 Assigning or reselling the purchase contract: Once they have purchased a property, they will try and assign the paperwork to another buyer before the home closes. They are basically reselling their purchase contract to a second buyer. That way they make profit without having to pay out a hefty land transfer tax, which is due on closing. Is this legal? Yes it is! As a matter of fact, it happens all the time with pre-construction condos where the original buyer will try and resell the unit before closing. They are trying to assign the contract for a profit - the catch is the second buyer may pay substantially more for the contract than the seller made with the cash buyers. And none of this money filters down to the seller.
Method 2 Flipping. I'm sure you have all heard about house flippers. They purchase a house, renovate it and resell it for a profit. This is a totally legit way of making a living. But when house prices, mortgage rates & construction materials increase substantially, profit margins fall. This is where the 'cash buyers' come in. They will offer to buy your home for substantially less than market value so they can flip and resell.
Both of these tactics bring up 3 important questions to me:
1. Is there a benefit to selling to an all cash buyer? Yes, this is a thing in the USA. But in Canada our mortgage laws are different - which is why we were protected from the US crash that happened in 2008. In Canada it makes absolutely no difference to the seller whether your buyer is taking out a mortgage or not.
2. What happens to the deposit money? I am not sure how the deposits work for this type of purchaser, but for organized real estate, we are bound by regulations to make sure deposits are protected. Brokerages and lawyers must have Trust accounts to keep the deposit money safe for consumers. And if a buyer can’t close or decides to walk away from a purchase, there is a strong case law that the seller will get to keep the deposit money. I am not sure how secure the deposits are with the cash buyers from the flyer.
3. As a seller, how do you know you're getting market value? As a real estate professional, we spend a lot of time learning how to price properties - both for the benefit of the seller - to get the best price, and buyers - so they don't overpay. We do this by analyzing and comparing sales and home features. While some of this information is available publicly, the details (and how to interpret them) are available to Realtors. And it always pays to get a second opinion!