Under New Programs, ‘Cash Offers’ Aren’t Cash Offers
Some private companies and even iBuyers have programs that allow buyers who need a mortgage to present offers that appear to be all-cash, a category that many analysts largely assume belongs to investors, second-home buyers and some retirees.
CHICAGO – Some newer instant cash-buyer firms help homebuyers compete in a market that’s heavy with all-cash offers. iBuyers, for example, have been helping buyers make cash-backed offers or provide cash financing as a way to help buyers catch a seller’s attention in a bidding war.
The increasing presence of these companies is at least partially behind the increasing percentage of homebuyers bringing cash to closing. In July, cash sales comprised 23% of existing-home sales, up from 16% a year earlier, the National Association of Realtors® (NAR) reports. Support from iBuyers and fin-tech companies is behind much of that growth, whether making cash offers on their own behalf or helping to provide cash financing to homebuyers, NAR says.
Buyers who use an all-cash offer program generally do it to hopefully win a bidding war. Sellers often prefer all-cash offers because they don’t have to worry about a buyer’s financing falling through.
iBuyers – such as Opendoor, Redfin Now, Zillow Offers, Keller Offers and others – have previously offered to buy homes in all-cash transactions. But a newer business model has emerged in which the institutional buyers are purchasing a property not for themselves but on behalf of buyer, who can make a more competitive offer.
For example, Opendoor launched a cash-backed offer program in March. They will back up a buyer’s offer with a cash offer to the home seller if the buyer fails to secure financing by the closing date. If the buyer is unable to get financing, Opendoor purchases the home for the buyer, and holds it for 120 days with a fee of 1% of the purchase. If the buyer still can’t get financing, Opendoor will continue to hold the property for another 120 days, though at an increasing fee structure.
Another company, Ribbon, purchases the homes for cash on a buyer’s behalf and provides the homebuyer more time to secure mortgage financing.
Many of these companies work on a structure where they’ll buy the property for the buyer with cash but charge the buyer a percentage of the purchase price for holding it.
“The cost of obtaining a cash-backed offer or cash offers is not much higher than the 3.7% to 4.4% average percent above list price that buyers have already been offering to sweeten their offer,” says Gay Cororaton, research economist for NAR. “Moreover, cash-backed or cash offers give assurance to the seller that there is a ready institutional buyer who will purchase the home should the buyer not be able to secure mortgage financing.”
The role of fin-tech companies, or iBuyers who provide cash-backed buyer offers or cash financing, will likely increase in the future due to the competitive market, Cororaton says.
Source: “Cash Sales Rise to 23% With Growing Entry of iBuyers and Fin-tech Companies,” National Association of REALTORS® Economists’ Outlook blog (Aug. 24, 2021)
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