In a hot market, you can buy a house with cash – even if you don’t have a lot
12.18.21 7:07 am
Nicole Howson and her partner spent the pandemic locked in a small Florida rental apartment with their two children. So they decided it was time to move back to the Atlanta area, where they have family, and buy a house with more space.
Howson was in shock. When they started looking at houses near Atlanta, they kept hitting a wall.
“I made, I think, 27 offers,” she said. “None of them were accepted.”
They have discovered that it is the most difficult real estate market that buyers have faced in many years. There is not enough housing to meet demand and it sells out very quickly.
Howson liked a house so much that she bid more than asking. She loved the fenced yard and the neighborhood kids playing nearby. She remembers praying, “God, please let it be this one!” But that offer was not accepted either.
Howson began to hear that winning bids often came from buyers offering cash. It meant people or investors who could prove they had money in the bank. Cash is incredibly attractive to sellers, who are often concerned that transactions will fail if a buyer does not qualify for a mortgage.
Howson doesn’t have hundreds of thousands of dollars in his checking account. She has a job selling cosmetics and doesn’t make that much money. But then his real estate agent told him his company had a new program that would allow him to make a cash offer anyway. The company would pay him the money.
âAt first I was skeptical,â Howson says. “I was like, so you tell me if I want the house you’re just going to buy it for me and I’ll pay you back?” “
His real estate agent said that was exactly how it would work. “It’s like, yeah, I mean, you find a house, you make an offer, then we buy it and we sell it back to you.”
Her sister warned that this sounds fishy and could be some kind of scam. But it turns out a bunch of legitimate businesses are starting to help homebuyers make cash offers this way – some on homes up to $ 1 million.
In a bustling real estate market, the wealthy and investors alike have an advantage because they are able to offer cash. About a quarter of home sales are now cash offers.
Some companies see it as an opportunity. The way it works is that they offer to buy the house on your behalf with the cash and close the part of the loan with you later.
“Cash offers have traditionally been reserved for the few who can afford to make a cash offer,” says Tom Willerer, an executive at Opendoor, one of the companies that does. Now, he says, “you can use our money to support your offer, and that really democratizes access to cash offers.”
Some of these lenders also have real estate transactions so they pay realtor commissions or other fees. Businesses therefore hope to make more money with these cash offer services by helping more customers make winning offers on homes, as cash offers are more likely to be accepted.
“They are four times more likely to win the auction on the homes they want,” said Christian Wallace, manager of the new cash offers program at Better Real Estate, the company Howson worked with. âWhen they come to the table with money, it’s so much more appealing to the salespeople.â
Before Howson could make a cash offer through Better Real Estate, the company wanted to make sure they could really afford it and qualify for a mortgage. âThey want your W-2s, your tax returns, your pay stubs,â she says.
Companies also have another guardrail in place. They don’t let you offer more than they think the house is worth.
âWe have models and algorithms in the background that predict the home’s value,â says Shaival Shah, founder and CEO of Ribbon Home, another company that helps buyers make cash offers. He says that the very day you find a home you like, the business can quickly generate an estimate of its value and allow you to make a cash offer up to a certain amount.
âEverything is fully approved, ready to make a written cash offer,â he says. “So it’s really, really, really fast.”
Howson thought she would try it. She found a home she truly loved in Griffin, GA with a lovely yard for the kids.
âIt’s super cute,â she said. “It reminded me a bit of the house I grew up in.”
Better Real Estate quickly approved her to make a cash offer of $ 170,000, which was just a bit above asking.
âThis house was the first cash offer I made, and it won,â she says. âI was like, ‘Oh, thank goodness! It was as if a heavy weight was heaving off my chest. I was so happy, very happy. “
Many of these cash offers services are new, and so far only represent a tiny fraction of cash offers for homes. Every business has a different set of fees and rules, and these can change as things happen. to evolve.
âI highly recommend that you read the fine print to make sure you understand all of the terms and conditions,â says Deeksha Gupta, a finance professor at Carnegie Mellon University who studies the housing market.
For example, Ribbon Home charges a 1% fee for most homebuyers if their offer is accepted – so on a $ 400,000 home, that’s $ 4,000. Better Mortgage is structured differently and makes money on the real estate agent’s side of their business by making a buyer-seller agent commission. So Better does not charge this 1% fee.
But if there are issues with the loan and the actual owner cannot purchase the house from Better, they may lose a 5% down payment on the house. âIf the client is unable to purchase the home from Better Real Estate, the security deposit will be forfeited to Better Real Estate,â the company’s website states. On a $ 400,000 house, that makes $ 20,000. Opendoor says you can lose a 1% deposit.
âIt could be a great way to be very competitive in a booming housing market,â says Gupta. “But there are risks.”
Gupta says you need to make sure you ask these companies what happens if you have unexpected problems getting a mortgage or if the official home valuation is lower than expected. And get the conditions in writing.
Everything turned out well, however, for Howson in Griffin, Ga. She got a good mortgage rate and no additional fees. And now it’s time to start ripping and replacing bathroom and kitchen floors. âWe’ve done a lot of renovations,â Howson says.