I am sure you have seen the signs, or the ads that say things like “We Buy Houses For Cash” or “Sell Your House For Cash Fast”. You may have wondered what exactly does cash house buying actually mean. A question I have gotten when it comes to my business is – “so you guys just go around with a big suitcase of cash?” Not exactly. This is cash house buying in Houston explained
Paying in Cash
“Paying in cash” in the real estate industry has a specific meaning, and it doesn’t involve anyone carrying around a suitcase filled with $100 bills at closing. That may have been true at one point in time, but I am sure you could imagine the danger that would be associated with carrying such a large sum of money around like that. A more accurate phrase would be “Without bank financing”…but that just doesn’t sound as good.
In a traditional transaction, a person who wants to buy your house may not have access to the money required to fully purchase it. This means that they will need to go to a bank to get a loan. Banks are the single largest source of issues when it comes to buying or selling. This is because the bank does specific underwriting (analyzing) of the buyer and the property. One of the reasons is for them to be able to sell your mortgage to Fannie Mae/Freddie Mac; they have some strict guidelines that they must abide by (that is for another blog).
All the guidelines and rules that a bank must follow for underwriting results in a average timeline of 30-45 days for a loan to be approved and funds available for closing. If you are paying with cash, your only delay will be scheduling with title company and verifying that the house doesn’t have any title issues. If there are no issues with the title, closing can be done the same week.
Where Does The Money Come From?
Another thing people say is “you must be rich”. Some people are, but that is not always the circumstance. As I stated earlier, a person who wants to buy your house may not have access to the money. Having access to a million dollars and having a million dollars are two VERY different things. So how can you have access to a million dollars, but not have it?
Lines of Credit
Everyone knows about credit cards – these are “unsecured” and are a very common type credit. Would you buy a house with a credit card? Probably not. The reason is that the interest rate is extremely high on a credit card, 19-20% on average. Who would want to buy a house at 20% interest?
There are types of credit that are “secured” that have a much lower interest rate. For example, a business line of credit is a better alternative that has much lower interest rates. Secured credit just means that it is backed by some collateral.
Small Business Loans
Small business loans from banks are the bread and butter for most small businesses. However, due to the nature of home buying, small business loans are not a great means of obtaining money for purchasing a house. Now that isn’t to say they cannot be utilized for an actual storefront, and the procurement of business equipment, but you cannot utilize a small business loan effectively for the actual purchase a house in most circumstances.
Hard Money Loans
Hard money lenders are companies that operate similarly to a bank, except that they set their own rules as to what they will lend on. In exchange for this, they charge a higher interest rate for their loans usually 10-12% with a couple of points. They are much faster at giving out a loan as well, and typically can do so within a few days. However, unlike a bank loan, these will be shorter term loans, usually not more than a year. If a company or individual pursues this type of loan, they will need to refinance the house in the year, or sell it.
Private Money Loans
Here is where knowing someone with a lot of money is useful. These can be attorneys, bankers or just individuals that have a lot of money in an account. Just like with the hard money lenders, in exchange for them loaning you the money, they receive a high interest rate on their money. If you had some money to invest, would you want it in a bank at 2% interest, or getting you 8 or 9%? Pretty easy answer. Again, this will be a short term loan, however you will likely have even more flexibility since you are dealing with an individual loaning you money instead of a company or bank.
I know this one is self explanatory, but, having money in an accessible account is always a good option. While lines of credit and alternative loans are great options, a good home buying company should always have money they can pull quickly from their own account.
Will It Be In 10’s or 20’s?
As I mentioned earlier, the money will not be in the form of cash. It will be sent to the title company in the form of a wire transfer or a check. Your choice. I personally prefer a wire transfer since you can’t deposit that large of a check using your phone, and I just really don’t enjoy going into the bank.
How Does It Affect The Seller?
The big picture is that there are a lot of ways for businesses to buy homes for “cash”. The actual source of the money won’t have any impact on the seller since in the end it will be used the same way, and they will never know the difference. The most important thing for a home buying company is to always have the money available to be able to follow through with their purchase, and keep their word.
While explaining where the money comes from is not necessary to operate a business, I feel it is important to be transparent. It takes a long time to build a good reputation, and short time to lose it. I hope this blog shines some light on how I can have a home buying business, and not be a billionaire.
As always, if you are interested in selling your home for cash, please check out our company page Brilliant Day Homes.
In Case You Missed It – Check our our last article “How To Buy Your Home Using Rent To Own in Houston”