Cash Will Always Be King
Sellers and their agents love cash offers.
They don’t have to worry about the financing falling through, appraisals that are too low, mandatory repair items which must be fixed prior to closing, and the possibility of higher closing costs.
On top of that, a cash buyer can generally close within a week or two, whereas a financed buyer might need 30-45 days – maybe more if there are delays in underwriting. That’s a lot less time for a buyer to get cold feet or something negative to happen which could torpedo the deal like a job loss. In a world of multiple offers, the seller is more likely to choose a cash offer over a financed one.
Even if the market is not generating multiple offers for properties, a seller might take slightly less money for a property if the offer is cash rather than if it is financed.
And while some sellers may consider a financed offer with a lot of money down, those same sellers may not even consider an offer with little to no money down such as an FHA or VA offer.
Others perceive cash buyers as more likely to close and less likely to “nickel and dime” them over repair items.
What if You Don’t Have Hundreds of Thousands (if not a Million+) in Cash?
Many buyers may be keenly aware of the benefits of a cash offer. They might have lost out on a dozen different multiple offer situations with the winning bidder being a cash buyer.
But if you have say $150,000 saved up in order to purchase a $750,000 home, how are you supposed to magically come up with another $600,000 in cash?
While that may be unrealistic, buyers need to be aware that there are companies that have thought through this dilemma and come up with various solutions.
Typically what happens is that they front you’re the extra cash as a bridge loan, or else they buy the house themselves and re-sell it to you.
They make money by either charging a fee, earning the buyer agent commission (typically 2.5 to 3%), earning money by originating your mortgage, and/or earning a commission on the house you are selling prior to buying the next house you need cash for.
In some cases they could earn money in more than one way. You can make cash offers, waive the financing contingency and appraisal contingency.
The List of Cash Offer Programs
1. HomeLight – HomeLight Home Loans pre-qualifies you for a loan. You either use your preferred real estate agent to find and make an offer on a home, or they will refer you to an agent (they receive a referral fee from the agent’s commission if they refer one). HomeLight pays cash for the home and buys it; they can close quickly and then wait a couple weeks for your loan to be approved and fund. They then sell the house to you. You pay a 1 to 1.5% fee to HomeLight, plus they make money as your loan originator.
2. Flyhomes – Flyhomes has both a brokerage and mortgage company. They will buy the house for you and sell it to you once your loan closes. They also have an interesting guarantee. If you make a cash offer and it is too late to back out (all contingencies have been satisfied), they will go ahead and buy the house and then sell it themselves. They will even return your earnest money (they require buyers to put up 3% earnest money deposit in California and 5% in other states) if they can sell for a profit after covering their costs.
3. Opendoor – Opendoor is an i-buyer company that is known for making you a quick cash offer for your current home. With their cash-backed offer program, you submit a regular financed offer on a home through one of their Opendoor Brokerage agents (they make money from the buyer agent commission). If you can’t close on time, they step in and buy the home for you with cash. You then buy it from Opendoor. They charge 0.02% of the purchase price per day while they hold the house.
4. Ribbon – Ribbon works through real estate agents and earns a referral fee on the buyer agent commission. They allow you to make a non-contingent offer (waiving financing and appraisal contingencies) and if you can’t close on time, they will pay cash to buy the home, then sell it to you within 180 days. They charge a 2 to 2.5% fee if they have to pay cash and a 1% fee if not.
5. Better – You need to use a Better Real Estate agent (their in-house brokerage) and be pre-approved with Better Mortgage. You can make cash offers on homes, and Better will buy the home. You can move in and pay rent until your financing is approved and you buy the home from Better. They don’t charge a transaction fee (unless you end up using a different lender, then it is 2.5%) and they rebate 1/3 of the 2.5 to 3% commission they earn on as the buyer agent.
Other programs to consider:
Knock – If you still own a home and have a lot of equity tied up in, Knock allows you to get your down payment fronted on your next home so you can go ahead and buy it. While the offer your write on the next home is financed, they give you a 30 day closing guarantee or else they will pay you $5000. They will then advance you money each month to pay your old mortgage on your old house while the house is on the market and being sold.
Hard money lenders – If the property you are interested in is off-market, like a trustee sale property, un-financeable because it needs to be fixed up, or you don’t plan on living in it, there is a chance a hard money lender can allow you to close in under 2 weeks. You will likely need a substantial cash down payment (perhaps 35%), take title of the investment property through an LLC, and show some sort of competency as a real estate investor.
Ask agents or real estate investors – while companies like Flyhomes, Opendoor, and Better have raised millions of dollars in venture capital, what they are doing in the cash offer space is not proprietary or unique. Anyone can copy it. There have been situations where an agent who wanted to earn the buyer agent commission would offer something similar by buying the home for a client then selling it to them for what they paid plus any closing costs (the agent kept the buyer agent commission). There have also been trustee sale investors that would buy a house for cash at a trustee sale, with a buyer already lined up that needed financing but was willing to pay $10,000 more (it was still a great deal).
Shared Appreciation Investment programs – if you have a solid monthly income but can only come up with a very small down payment, shared appreciation programs allow an outside investor to cover all or a portion of your down payment, while you are responsible for getting a loan and making payments each month. It is not the same thing as a cash offer, as you are still getting a loan. However, if you keep losing out on homes because you are only qualified for an FHA 3.5% down program, for instance, this might enable you to show the seller you are putting 20% down or more. The tradeoff is that the investor is entitled to a return of the down payment funds they put up plus a portion of the appreciation when you sell the home.