I am trying to understand how buying houses for cash works.
My understanding is that you see a distressed home. You approach the owner, offer to pay cash for their home.
What if they owe the bank money?
What if they are upside down in their mortgage?
What am I missing?
@Kelly Lund there's not a short answer to your questions because there are several ways an investor could structure a deal depending on the scenarios you proposed. If they owe money to the bank, an investor may check to see if it's one of the rare assumable mortgages still floating around or if they can do a lease purchase while the original owner maintains the loan. If they're upside down, the investor will evaluate their risk tolerance and determine if it's a deal worth saving or passing on. Not everyone who calls you from a yellow letter or bandit sign has a home worth investing in and you have to make sure the deal makes sense for you and ideally has multiple exit strategies.
Oftentimes people do owe money to the bank, but what matters is the value of the home versus what they owe. That's why you'll see people say they are mailing to "high equity" absentee owners for their direct mail campaigns because people are trying to avoid wasting time with people that are upside down.
Cool thing about real estate though is even if a home is upside down, it may still be workable if you know how to structure the deal right. A lease option agreement can work in that situation.
Oftentimes, a truly distressed seller can't even pay the delinquent taxes or closing costs, so that's structured into the contract, so the you as the investor would also pay these costs and offer less for the home. Even if you buy in cash, you're still using a title company.
A common scenario is that someone with a moderate chunk of equity has a family emergency and is unable to pay their mortgage and falls behind on their mortgage and taxes. If an astute investor finds this person, they will pay a lesser value for the home since it's in distress and needs work done, and also pay the fees that the seller can't pay and take it out of the seller's end to still clear a profit.
If you are a cash buyer all liens will be paid at closing including mortgages, taxes, etc. Cash is great but at some point, unless you are cash heavy, OPM will need to be considered to grow.