Cash House Buyer Scams

Shady Practices Used By Disreputable Quick Sale Companies

The cash house buying or quick house sale market has in the past earned itself a reputation for using questionable underhand and sometimes even borderline illegal business practices which led to an office of fair trading report and subsequent investigation into the sector in July 2013.

This investigation found that many, but not all, of the companies claiming to buy your house for cash were using tactics that were not deemed necessary or appropriate.

Since the investigation some effort has gone into cleaning up the industry. The National Association of Property Buyers (or NAPB) was formed in 2014 in an attempt to self-regulate the industry.

Outlined below are some of the most common “shady” practices and underhand tactics used by companies that should be avoided if you are looking for a fast, stress free house sale.

Despite this there are some practices that still continue to be used by “we buy any house” companies to this day. Even those companies that are members of the NAPB and are signed up to the best practice guidelines. These are some of the most common cash house buyer scams.

Tactic 1: Gazundering (AKA the “chip”)

What is Gazundering?

Gazundering is a term used when a buyer has offered on a property and then reduces their offer just before the exchange of contracts.

Unfortunately, this happens a lot on the open market and often leaves homeowners in a bit of a dilemma. Do they withdraw from the sale and start all over again, risk losing their ongoing purchase or put any of their other plans on hold, or do they cut their losses, take the hit and move on?

Neither situation is ideal and most home sellers, despite what they say, often do not have the willpower to start all over again and just accept the lower offer.

Unfortunately, there are some shady cash house buying companies that know this and have in fact built this practice into their sales process it is such a common practice that industry insiders have their own term for it, the “chip”.

They offer a much more appealing higher offer to start with, often a lot higher than what a genuine Cash House Buying Company would offer to draw you in to accepting it.

Read our article on “how much cash house buyers actually pay” to see how much you could receive from a genuine cash house buying company.

Then you will go through the whole process of selling your house only to have the rug pulled out from under at the 11th hour which is when they will choose to phone you and tell you that they have to reduce their offer.

This is often carried out on the day that the sale is due to complete and you have made all of your ongoing plans.

How much the offers drop

The drop in offer price can often be tens of thousands of pounds. Only recently have we come across a case where a seller was initially offered £250,000 for their home only to have it dropped down to £203,000 at the last minute. A drop of nearly 20% or £47,000! Now you might say to yourself that you would never accept this if it happened to you but we see it time and time again that people are forced to accept due to the pressure that their circumstances put them under.

Is gazundering legal?

Yes, this practice is completely legal in the eyes of the law. However it is completely immoral for a company to use this tactic as standard practice as they are misleading customers from the outset.

The Code of Practice for Residential Property Buying Companies section 5c states;

“You must not reduce offer prices late in the process without a valid reason and you must avoid putting undue pressure on the house seller which restricts their ability to make free or informed choices”

This is the provision in the Property Ombudsman guidelines (which companies have to sign up for to join the NAPB) that essentially prohibits gazundering. Although it is the phrase “without a valid reason” which provides leeway to the quick sale company as it is not clearly outlined what a valid reason is.

There are genuine valid reasons why an offer might need to be lowered, read our article about “valid reason a cash house buyer might lower your offer”.

How you can avoid being gazundered by a Cash House Buyer

The unfortunate thing is that if you choose the wrong quick sale company, gazundering is inevitable. So how can you avoid it?

There are a few things that you can do to reduce the chances that you will be caught out by this tactic;

Read the company reviews – the first thing that you should do is check the company reviews, go straight to the 1,2 or 3 star reviews and see what the customers are saying. Here you are looking for evidence that suggests the company is lowering offers at the last minute. Disgruntled house sellers will often leave detailed bad reviews of their experience. One or two reviews with evidence of offer reductions could be acceptable, there are valid reasons for a company to reduce their offer. The key things to look out for are mentions of last minute offer changes,as these are rarely warranted. Also the sheer number of reviews that mention offer changes could be an indicator that it is standard practice for the company.
Ask yourself “is the offer too good to be true” – often it’s the companies that make much higher offers than the rest of the companies which are more likely to be gazundering. Remember no genuine company will ever offer any higher than 85% of what your property will sell for and in most circumstances the offer will be around 80%. A company can only offer up to 85% in certain circumstances, for more information on these circumstances you can read our article here (article). If a company is offering you 85% without asking any questions around your circumstances this should be a point of concern. If they are offering any more than 85% this is a big red flag.
Are they asking you to sign a contract? – Another thing that companies that guzunder will do is ask you to sign a contract with them, often these contracts will state that if they do gazunder you you are free to walk away from them without charge, however, this does give them the ability to drag out the sale as long as they need to in order for you to become more and more motivated to accept whatever offer they throw at you after giving you the runaround. You can read our article on what to look out for in cash house buyer contracts here.

Tactic 2 – The Option Agreement (AKA the “the bait and switch”)

What is an option agreement?

Option agreements are contracts that give a buyer the option to purchase property at an agreed price or transfer it over to another buyer.

There are places for option agreements to work extremely well for both parties in a transaction but it’s certainly not in a situation where a home seller is looking to sell their home at a discounted rate for a quick sale.

The reason for option agreements

A good example where an option agreement works well is, say for example you had a big plot of land to the side of your property, you knew that there was scope for planning but you didn’t want to incur the architect’s costs, planning costs or even go through the hassle of dealing with the planning application.

A local developer could agree on a contract where they would take an option to buy your land but only on the basis that it got planning permission for a development. This option might last for a couple of years, and they have this time to incur all of the time, trouble and cost that it takes to secure planning.

If successful they can exercise their option to buy the land at a pre-agreed price that you are both happy with, if the planning is not successful then they are under no obligation to exercise their option but you can’t sell the land to anybody else until the contract has expired, they have incurred the cost and it didn’t move forward, you haven’t lost anything and it was a fair and transparent deal.

Option agreements in the quick house sale sector

Unfortunately some companies in the quick sale sector have come up with a creative way of using this legal vehicle, to tie you and the sale of your property to them for a certain amount of time.

If you have signed an option agreement with a company it means that they are unlikely to actually be purchasing the property from you themselves. Instead what they are planning to do is try and sell your property to a third party for a higher amount than the price you have agreed with them.

This means that if you have agreed to sell to the company for £200,000 (80% of it’s full market value of £250,000) instead of them buying it from you they find someone who is willing to pay £220,000 for the property, sell it to them and pocket the £20,000.

That’s great if it’s happened in a time frame that you are happy with but bearing in mind that you have gone to them for a quick, hassled-free sale, this could end up being far from that. Companies using option agreements will often just try their luck at selling the property on the open market. It will be on Rightmove the day after you sign the contract and they are just doing the job that any estate agent would except they don’t really care about getting the best price for it. They will just keep lowering the asking price until they find a buyer. As long as the final price is more than the amount they agreed with you they are making money.

Another issue with this is the timeframe. A tie-in with an estate agent will often be 2 to 3 months after that you can take your business elsewhere. An option agreement can be from 6 – 12 months. It also gives the company the right to put a charge on your deeds which means you can’t sell your property with anyone else until the option expires. Hardly the quick house sale that you were looking for!

How you can avoid an option agreement

Avoiding falling into the option agreement trap is fairly straightforward;

Ensure that you are dealing with a “true” cash house buyer – Ask the company if they are actually who will be buying your house or if they are just sourcing a third party buyer . This isn’t foolproof as companies can and do lie about this. There is also a gray area where companies offer both a house buying service and a “brokerage” service.
Avoid signing any contracts that mentions an option agreement – the simplest way to avoid getting tied in to an option agreement is to not sign a contract at all. The majority of true cash house buying companies will not ask you to sign a contract. If you are dealing with a company that sends you a contract read it carefully and seek legal advice if you are unsure about anything.

Tactic 3: The 48 Hour Exchange (AKA “the false promise)

What is a 48 Hour Exchange?

Usually, once you get to “exchange of contracts” a property sale is almost complete. In a normal transaction the buyer would transfer 10% of the purchase price to the seller a completion date would be set. Most commonly the exchange of contracts and completion happen on the sale day.

Some cash house buyers promise that they will get to exchange of contracts within 48 hours then in theory the seller can sit back with total peace of mind.

In practice however this is not the case.

The problem with the 48 hour exchange

There are certain circumstances in a normal property sale where you can do what is called a “conditional exchange”, this is where a buyer could agree to exchange contracts on the basis that completion takes place after the condition has been met.

If the condition isn’t met then the buyer would not be under any obligation to complete and the sale would not proceed. An example of this could be “the property might be tenanted” the tenant is due to vacate the property on a set date, the buyer has agreed to complete on vacant possession, if the tenant failed to vacate the property, the buyer would be under no obligation to complete on the sale and the contracts would be rescinded.

Unfortunately, there are “we buy any house” companies that use one-sided conditional exchange contracts to make dubious claims that they are exchanging when in fact there are so many conditions that need to be met that they effectively still have the right to change their offer or pull out of the sale at any time.

This is not the security that you were looking for when you thought you were exchanged within 48 hours.

How you can avoid the 48 hour exchange

The best way to avoid the 48 hour exchange is to simply not take any company up on this offer.

If you feel that you must explore this as an option then you absolutely must instruct your own solicitor, not one that has been recommended by the company, and ask them to check the contract and advise you. The chances are upon reading the contract you will be advised to steer well clear of it.

Tactic 4: Cash at exchange

What is cash at exchange?

Subject to prior agreement companies can agree to release some funds at the point of exchange of contracts, this can prove handy if you need to place a deposit down for a rental property or pay in advance for removals. Whilst companies will agree to do this there is often a limit to what they are willing to advance and this will often be a limited sum of money to cover just basic costs.

The trouble with cash on exchange

There are some cash house buying companies out there that use this as a marketing ploy, similar to the 48 hour exchange. They will offer to pay large sums of money (up to £30,000 or more) at exchange.

We’ve seen the terms and conditions of these offers and the small print will say that the cash advance will only be released at exchange of contracts and if the property is vacant.

So if the property is vacant at exchange of contracts then the buyer is in a position to not only exchange but complete on the sale and if that is the case then you won’t just have the cash advance but all of the proceeds of the sale in their entirety.

So you decided to use the company thinking that you would get a large sum of cash in advance but in fact you end up getting it at the same time as you would have with a standard quick sale from any other company. In short you have just fallen for a marketing tactic.

How to avoid “cash on exchange”

As with the 48 hour exchange this is simply, don’t take any company up on the offer of a large advanced sum on exchange. There is also a question of if you actually want to deal with a company who has set out to mislead you from the start.

Again if you feel that you need to explore this offer, get legal representation before you sign any contract so the solicitor can fully explain any conditions that come along with such a contract.

Conclusion

Despite efforts to “clean up” the quick sale sector there are still companies out there willing to work on the borderline of the guidelines and use practices that although are shady and underhanded are still within the law.

Many are in fact using property laws to their advantage to coax unsuspecting sellers to sign contracts that only benefit one party – the company promising you a quick sale.

If you are looking to sell your house to a cash house buying company ensure that you have read any contracts carefully and seek legal advice if you are unsure of anything. Better still avoid signing any contracts all together.

Read our guide on why you shouldn’t sign a contract with a cash buying company here

The quick sale market provides a valuable service and if you use a reputable company all of the above can be easily avoided.

If you are considering selling your house via the quick sale route we recommend that you do your due diligence before engaging with any company. To help you with this we provide independent reviews and a list of our recommended companies based on our own criteria.

Cash House Buyer Guru