Introduction to Property Cash Buying Companies
Property cash buying companies have been around for a little over ten years. It is still a relatively new industry and it remains unregulated. As with most industries there is a mixed bag of participants ranging from the genuine professional companies to the rogue operators. A genuine property cash purchasing company will provide a guaranteed property purchase within mutually agreed timescales. The purchase should be hassle free, stress free and minimise inconvenience to the vendor. The agreed timescales may vary from just a few days to several months depending on the vendors requirements.
Whilst all companies market a “cash purchasing service” not all of them actually deliver the service they claim to be providing. Some will lock you into agreements to prevent you from selling your property elsewhere whilst offering no guarantee that they will buy your property. These agreements are usually called option agreements. It is important to stress that there is nothing wrong or illegal with an option agreement. They can provide a very workable solution for all parties. They are used across many different industries and are a recognised contract agreement. However, as with any legal agreement the devil is in the detail as to whether it will work for you!
Beware Property Option Agreements
A property option agreement provides the buyer with an option to buy a property at an agreed price within an agreed timescale for an agreed fee.
For example, let’s say a property buying company pays an individual an option fee of £10,000. In return the individual provides the company with an option to buy a property for £200,000 within an agreed three month period. The property is independently valued at £220,000. If the company fails to buy the property within the agreed 3 month period then it forfeits the £10,000 option fee to the individual. Providing the individual understands that the company does not have an obligation to buy the property within the three months then there is nothing wrong with this arrangement. The individual would reasonably assume that the company will be sufficiently motivated to buy the property because they will not want to forfeit the £10,000. However, if the company does fail to buy the property then the individual benefits from keeping the £10,000 and still retains ownership of the property.
Now imagine the scenario where the property buying company only pays a £100 option fee for the same option agreement. If the company fails to buy the property within the agreed three month period it only stands to forfeit £100. This is a no risk contract for the company. The company has three months to find a third party buyer willing to pay more than the £200,000 for them to make a profit on the deal. The profit would be the difference between the option price of £200,000 and the sale price they actually achieve. For example, if the company finds a buyer willing to pay £210,000 it can sell the option agreement and make a £10,000 profit. If the company fails to find a buyer they can simply walk away at the end of the three months and only forfeit £100.
From the property seller’s point of view this is the worst of all worlds. There is no guaranteed sale at the end of the three months. All they get is the £100 fee and they have lost three months. Should the property company succeed in selling the property the seller pays much more than they would pay if they had used an estate agent. An estate agent would typically charge 2% of sale price which in this example would cost the seller £4200 plus VAT. Whereas the property buying company has cost the seller £10,000. This illustrates an unfair contract structure as it only benefits the property buying company and all the risk lies with the seller.
Perhaps of more concern is that the property seller may be under the impression that they have entered into an agreement that provides a guaranteed sale of their property within three months. If the sale does not take place as expected it can leave the seller in a desperate situation and vulnerable to a last minute price reduction. If you have been a victim of such a situation please contact us as we would like to hear your experience.
How to recognise genuine Property Cash Buying Companies
There are a few ways to tell the difference between genuine property cash buying companies and those companies that are basically offering a brokering service much like an estate agent.
Property Viewings
Genuine property cash buying companies will insist on viewing your property before making a formal offer. This sounds like an obvious statement to make. However, if a company is offering a brokering service they don’t need to view the property as they are not buying your property. Only if and when a third party buyer is found will they arrange to view the property. This may happen several weeks or even months down the line.
What percentage of market value are you being offered
Property cash buying companies will typically offer between 75% to 80% of market value for properties. Genuine cash buyers are unlikely to offer more as transaction costs, involving stamp duty, are so high it is not worth the risk. If you are being offered around 90% of market value it is unlikely that you are being offered a quick cash purchasing service. The chances are that you are being offered a brokering service or a contract structure where the sale will not be so quick.
The company may be upfront about this and claim that they have a list of cash buyers ready to buy your property. This is no different to the service offered by estate agents. There is nothing wrong with this unless you have been led to believe that you are receiving a quick and guaranteed purchase. If the company offers 90% of market value and claims they are buying your property directly then you should ask yourself some questions. Has my property been independently valued? Is this truly a quick sale? Is the purchase really guaranteed? Does the property buying company bear any risk if the sale does not complete?
Upfront survey costs and charges
Some property cash buying companies will charge a valuation fee upfront before they view the property and before they make an offer. The offer will arrive by post for far less than 75% of market value. This type of company operates a business model where a profit is made from the volume of desktop valuations. There is no need for anyone to pay for such a valuation. Move on and find another company that doesn’t charge for property valuations.
