When John Wai decided it was time to pack up his five-bedroom Bay Area home in favor of a cheaper lifestyle on the outskirts of Sacramento, he knew one of the hardest parts for that all this to happen would be the challenge of getting an offer on a new house while trying to sell the old one.
But in this highly competitive real estate market, he couldn’t make a tempting cash offer on a home before he could sell his $2 million home in Orinda, Calif.
The thought of finding a buyer for the house, packing up their things, then moving into a temporary rental while making offer after offer on a new home was daunting. It felt like way too much hassle and expense for the 51-year-old accountant and his wife.
Instead, he turned to Flyhomes, a brokerage and loan company that offered him the money to make a cash offer on a contemporary four-bedroom home in the Sacramento suburb of Woodland, using Flyhomes Buy Before You Sell program.
Wai credits the money and the quick closing time he provided among the reasons he won his new home. The sale was completed in October.
Flyhomes Inc., which launched in 2016, is one of many startups with programs to help buyers win bidding wars in today’s hyperactive housing market. The key ingredient: giving them the ability to make all-cash offers, without having the cash on hand in their bank accounts.
While the mechanics of the arrangements they use differ, this new generation of lending companies all aim to provide an alternative to traditional mortgages, to make it easier for first-time homebuyers and homeowners who want to up or down their size in a highly competitive real estate landscape. .
Buyers considering entering into one of these deals, however, should do so with their eyes wide open. Having all that cash at their disposal may not come cheap, and as a result, they may end up paying more in the long run.
“Whenever you use an intermediary in a consumer-to-consumer transaction, the challenge is: how is that better for a consumer?” said Barry Zigas, senior researcher at the Consumer Federation of America. “The third party expects to make money from this.”
The idea for many buyers who tap into these loans is to pay them back quickly.
Flyhomes offered Wai a bridging loan, a short-term loan used to bridge the gap between buying her new house and selling her old house, at an interest rate of 6%. (This is a standard rate for a bridge loan, although getting a traditional mortgage would have been significantly cheaper. According to Freddie Mac, rates were 3.45% on interest rate loans. fixed 30 years during the week ending January 13.)
Wai doesn’t have to make any payments until Orinda’s house closes. Then he will immediately repay the entire loan from the proceeds of the sale – which shouldn’t be a financial burden in this case, given that he paid far less than half the price of the new house than he did. that he expects to win with the old man.
How companies that help buyers make cash offers work
Some of these startups, like Flyhomes and Better.com Mortgage, earn their share of the deal by acting as both Realtors® and lenders, earning a commission as a buyer’s agent and on the mortgage. (For Flyhomes, the cash offer comes with a short-term bridging loan to acquire the property. For both companies, if buyers want to stay with the company, it will also earn them money on their mortgage at long term.)
These companies take their half of the standard real estate commission of 5% to 6% of the sale price, which is negotiated by a real estate agent who guides buyers through the process. They say the loan rates they offer are competitive with the wider mortgage market, although they don’t specify exact rates. This type of product tends to completely waive or limit other fees.
However, if for some reason the loan fails due to an unforeseen credit problem or job loss, or if the buyer is ultimately unable or unwilling to complete the purchase, in most cases , the company will keep the deposit although it depends on the company. With Better.com, that’s 5% of the purchase price, or $15,000 on a $300,000 home. (Flyhomes will repurchase the home if all of the offer’s contingencies are met.)
Other companies that help buyers make cash offers, including Ribbon Home and HomeLight, charge a convenience fee of 1% to 3% of the purchase price of the home, if the offer is accepted. In expensive markets like California, that could be a substantial amount.
First-time homebuyers and existing buyers must meet traditional underwriting standards for creditworthiness with a good credit score (in most cases a minimum of 620) and a healthy debt ratio (43% is usually the highest a lender will accept). ) But these deals start with a pre-underwriting process that usually happens at the end of a contract – during the mortgage contingency period – which is why they can close much faster.
As with any transaction, it’s extremely important to read the fine print of a cash transaction, says Ed Magedsonfounder of Rip-Off Report, a consumer reporting website.
“I’ve had clients contact me because certain companies quote them interest rates that change when they receive the documents with these cash offers,” he says. “Most of these companies are legitimate. But it’s best to deal with a company that’s been around for at least a few years, so a consumer can do a search to see if it’s a good company without complaining, reassuring them that they’re less likely to get scammed.
Cash offers are gaining importance in today’s real estate market
For Wai, the advantages of Flyhome’s cash offer program outweighed the potential disadvantages. The first offer he submitted was under contract within days.
“By the time we submitted the offer to the agent, the sellers had already received another one,” says Wai. “But they accepted our offer because it was more compelling, due to the short closing time. As I had not yet sold my other house, we were able to give the seller[s] a free leaseback period. So they didn’t have to rush out of the house.
All-cash purchases considered 23% of existing home sales in December, according to data from the National Association of Realtors® – a staggering trend, given soaring home prices. However, the figure does not include new home sales in this percentage.
Sellers like these offers because the buyers seem more financially stable than those offering a low down payment. Cash deals often close faster and may have fewer conditions than when using a mortgage, depending on the type of loan.
In some states, such as Florida, approximately half of homes sold were paid for in cash, according to the National Association of Realtors. Nevada, Arizona and West Virginia also saw incredibly high levels of cash sales.
This influx of all-cash real estate transactions dates back to the housing crisis of the mid-2000s, when a tsunami of foreclosures flooded the market.
A slew of corporations bought single-family homes with the intention of converting them to rentals, amassing huge real estate portfolios funded by and benefiting Wall Street investors. But house prices have since risen dramatically, especially during the pandemic.
Zigas of the Consumer Federation of America is concerned about the impact on the housing market of enabling more buyers to make cash offers.
First-time buyers who prefer to use a more conventional loan may find it even more difficult to close a deal when sellers are presented with cash offers and quick closings. The availability of these funds could also encourage buyers to pay more to secure a home using such a service in some cases.
Benefits of using businesses that help buyers make cash offers
Flyhomes, for example, which offers cash offer programs for existing buyers and first-time buyers, says its cash offer program has enabled customers to buy their homes 4.5 times faster than buyers. using traditional mortgages, saving them the agony of losing deals. again and again.
According to company data, their customers also save money on the purchase price. It says more than half the time Flyhomes customers win deals even if their offer isn’t the highest presented, saving on average almost 3% on the price of the home compared to the competing offer. the highest.
“The power of cash has always existed with investors,” says Tushar Garg, CEO and co-founder of Flyhomes. “We democratized it by making all our buyers cash buyers.”
Sellers these days, of course, regularly receive several offers, giving them the opportunity to choose from the most attractive terms. In 2021, households received a average of at least four bids each, according to NRA. There were only 2.9 offers the previous year.
Startups offering cash-offer programs are growing rapidly. Ribbon, Orchard and HomeLight Inc. have announced new funding rounds in recent months.
HomeLight, which is often used by agents as a roster management tool and source of referrals, has launched its cash and Exchange programs in select markets this summer. Buyers pay a commission of between 1% and 3% of the sale price of the home, depending on whether they choose to take out a long-term mortgage through the company or another lender.
According to the founder and CEO of HomeLight Drew Uherthe company also offers a 21-day free closing option, where it does not take possession of the home, instead acting as both a mortgage lender and a title and escrow company.
Bay Area Based Realtor Stephanie Nass suggests that its clients shop around for the best mortgage products that meet their needs. After doing some research, she says she would consider mentioning HomeLight Cash Offer as a potential option in some scenarios.
“It was up to the customer. If they lost [out on] a lot of properties, maybe that’s something I would consider talking to them about,” she says. “But they should understand what they were getting into and if it was worth it for them. In California, especially in the Bay Area, it is a very expensive service, considering the price of our homes.