Whether you're looking to purchase a new home or already own one, you may run into one of several "new and unique offers" resurfacing in the housing market today. The problem is, these offers are neither new nor unique - even if they are to you.
These offers marketed to home buyers and homeowners will work in certain situations, but they're risky, and you must know the pros and cons before jumping in feet first.
This article will highlight three risky real estate offerings resurfacing in today's housing market.
Partial Ownership Cashout
First up is an offer targeted toward existing homeowners' experiencing financial hardship or just looking to access some of the equity in their home. Once you own a home, the only way to access your equity is to borrow it.
For some homeowners, taking on more debt isn't a viable option. They may have a low credit score, employment, and income issues and cannot qualify for new debt.
Along comes a company offering them access to a chunk of their equity without having to make a monthly payment. They'll give the homeowner the money from their equity interest-free. That's an offer that's hard to pass up.
So, what's the catch? Something that looks too good always has crucial fine print. And, in this case, it's giving up a portion of the ownership in your home in exchange for these investment companies providing you cash.
Several companies are currently offering cash for a percentage ownership of your home. Each one has slightly different terms but, in general, they require:
- A 10-year term. Any time during, or by the end of, that term, the homeowner must pay back the equity, plus the agreed-upon future share of the home. This can be done through a conventional cashout refinance of the house. Or by selling the home to satisfy the contract terms with the investor.
- The amount of cash the homeowner can expect to receive usually runs between 5-15% of the current appraised value. The investor orders the appraisal and discounts the appraised value to create a cushion against the home value falling in the future.
- The investor charges a fee of approximately 3% fee upfront and places a lien against the property. The fee, and any other closing expenses, are deducted from the cash provided to the homeowner.
- The homeowner gives the investment company an equity interest in their home in return for the money.
For example, in exchange for 10% of the home's value in cash (as determined by the investment company,) the owner grants 12-15% equity share in their property.
While this offer might work perfectly for certain homeowners, it isn't the right option for the majority. If you can qualify, use a home equity loan or a full cash-out refinance and keep 100% of the equity in your home.
All Cash Purchase Assistance
The following "new" risky real estate offer to resurface in today's housing market targets frustrated buyers. The stage was set with the combination of too many buyers for the number of available homes for sale. The competition this created in many real estate markets across the country grew severe during the pandemic.
This created a unique and difficult challenge for would-be homebuyers competing against multiple offers to buy a home. And an all-cash offer presents a low-risk buyer for sellers with multiple offers.
A "normal" buyer might find themselves making offer after offer and continually falling short. At this point in the homebuyer's journey, imagine a company offering them the ability to compete as an all-cash buyer. Too good to be true?
First, understand that the companies offering to help buyers pay all cash for a home are for-profit companies. First theyirst preapprove homebuyers to determine if they qualify for a mortgage and, once completed, provide their proof of funds to a seller. The buyer works with their real estate agent, and the seller benefits from a snag-free cash sale.
Once the sale is final, the same company provides a mortgage to the buyer and sells them the home for the same price. For tired and jaded buyers, this option sounds like a dream. It may be, but buyers need to do their homework before signing on.
Start by shopping for a mortgage to learn the current interest rates, fees, and terms lenders offer. You should also find out if a prepayment penalty is tied to the offer. This forms a basis for comparing the terms and conditions provided in return for an all-cash purchase option.
Each company's fees vary. To buy a home all-cash, sell it to their client, and provide mortgage financing, companies charge between 3-6% of the original purchase price. Others may load their fee into the closing costs of the mortgage they provide at the end of the transaction.
Your real estate agent will advise you on the credibility of making an offer structured as all cash, but buyers must ultimately make their own decision.
Buying A Bright and Shiny Flipped Home
At the top of most buyers' wish lists is buying a "move-in ready home." One with an updated, modern kitchen and bathrooms, fresh paint, and landscaping. After searching for the perfect house and seeing one old, dated, and tired house after another - a newly remodeled home doesn't just stand out - it shines.
The chances are that the newly remodeled home is a "flipped house." One that an investor recently purchased, quickly remodeled, and popped back on the market. Before you say, "what's wrong with that?" let's run through some of the issues buyers need to be aware of when it comes to a flipped house.
The most common issue with a flipped house is that minor cosmetics might be the only thing the investor changed before relisting it at a much higher price. Those new cosmetic fixes can dazzle the buyer's eye and keep them from seeing hidden and possibly severe issues with the home.
Buyers need to have the home inspected to uncover hidden issues. Also, real estate agents can research the home's title to see how long the seller has owned it, how much they paid, and inquire about the items repaired, replaced, or remodeled. This will be critical information for the buyer's lender.
Some loan programs have strict guidelines for flipped homes. These can include documentation for what was repaired and remodeled. Also, lenders may require that a licensed contractor did any work completed.
These requirements may sound obvious to buyers who assume everything is on the up and up. However, from experience, lenders know that many flip investors buy as low as possible, maintain tight control over the cash they invest in remodeling and sell as fast as possible.
When the housing market heats up, risky real estate offerings resurface everywhere. Before moving forward with one of them, stop and, as they say, read the fine print.
The best advice: don't fall in love with a flipped home until you've done your due diligence to ensure the property meets a lender's guidelines and has no hidden issues.