Can’t afford an all cash deal? These companies will help you at a cheap price

When John Wai Deciding it was time to ditch his five-bedroom Bay Area home in favor of a more affordable lifestyle on the outskirts of Sacramento, he knew that one of the hardest parts of making it all happen would be the challenge of accepting an offer a new home while trying to sell his old one.

But in this highly competitive real estate market, he couldn’t make an enticing cash offer on a home until he could sell his $2 million home in Orinda, CA.

The idea of ​​finding a buyer for the house, packing up your belongings, and then moving into a temporary rental while bidding on a new home was daunting. It seemed far too much hassle – and expense – for the 51-year-old accountant and his wife.

Instead, he turned to Flyhomes, a brokerage and lending company, who provided him with the money for a cash offer for a modern four-bedroom home in the Sacramento suburb of Woodland using Flyhomes’ Buy Before You Sell program.

Wai credits the cash and quick closing time as one of the reasons he won his new home. The sale ended in October.

Founded in 2016, Flyhomes Inc. is one of several startups offering programs designed to help buyers win bidding wars in today’s hyperactive housing market. The key ingredient: giving them the ability to make cash offers without having the money in their bank accounts handy.

Although the mechanics of the agreements they use vary, these new lending companies all aim to offer an alternative to traditional mortgages to make it easier for first-time buyers and homeowners looking to move up or down in a highly competitive real estate landscape.

However, buyers planning to close any of these deals must do so with their eyes wide open. Having all that money on hand might not come cheap, and as a result, they might end up paying more in the long run.

“Anytime you involve an intermediary in a consumer-to-consumer transaction, the challenge is: what’s better for a consumer?” says Barry Zigas, Senior Fellow at the Consumer Federation of America. “The third party expects to make money from it.”

The idea for many buyers who take advantage of these loans is to pay them off quickly.

Flyhomes offered Wai a bridging loan, a short-term loan that will be used to bridge the gap between buying his new home and selling his old home, at an interest rate of 6%. (That’s a standard bridging loan rate, although getting a traditional mortgage would have been significantly cheaper. According to Freddie Mac, rates on 30-year fixed-rate loans were 3.45% for the week ended Jan. 13.)

Wai doesn’t have to make any payments until House Orinda closes. Then he uses the proceeds from the sale to pay off the entire loan at once – which in this case shouldn’t be a financial burden since he paid far less than half the asking price for the new house than he expected the old one to.

How companies that help homebuyers make cash offers work

Some of these startups, like Flyhomes and Better.com Mortgage, make their share of the business by acting as both Realtors® and lenders, earning a commission as a buyer’s agent and on the mortgage. (The cash offer comes with a short-term bridging loan to purchase the property. If buyers want to stay with the company, it also earns money on their long-term mortgage.)

These companies take their half share of the standard real estate commission of 5% to 6% of the sale price, which is negotiated by a flesh-and-blood broker who guides buyers through the process. They say the loan rates they offer are competitive with the larger mortgage market – although they don’t specify the exact rates. This type of product tends to waive or cap other fees entirely.

However, if for some reason the loan fails due to unforeseen lending, job loss, or the buyer ultimately is unable or unwilling to make the purchase, the company will retain the deposit in most cases. With Better.comthat’s 5% of the purchase price, or $15,000 on a $300,000 home.

Other companies that help buyers make cash offers, including Ribbon Home and HomeLight, charge a processing fee of 1% to 3% of the home’s purchase price if the offer is accepted. In expensive markets like California, that can add up to a sizable sum.

Both first-time buyers and repeat buyers must meet traditional credit standards with a good credit score (at least 620 in most cases) and a healthy debt-to-income ratio (43% is typically the highest a lender will accept). ) But these deals start with a pre-underwriting process that usually takes place at the end of a contract — during the mortgage emergency period — which is why they’re so much quicker to close.

As with any transaction, it is extremely important to read the fine print of any all-cash deal, says Ed Magedsonfounder of rip-off reporta consumer reporting site.

“I’ve had consumers contact me because some companies are giving them interest rates that change when they actually receive the paper with these cash offers,” he says. “Most of these companies are legitimate. But it’s best to deal with a company that has been around for at least a few years so a consumer can do a search to see if it’s a good company with no complaints and reassure them that he is less likely to be ripped off.”

All-cash deals are becoming increasingly important in today’s housing market

For Wai, the benefits of Flyhome’s cash offer program outweighed any potential downsides. The first offer he made was under contract within days.

“By the time we made the offer to the broker, the sellers had already received another one,” says Wai. “But they accepted our offer because it was more convincing due to the short closing time. Since I hadn’t sold my other house yet, we were able to sell the seller[s] a free leaseback period. So they didn’t have to rush to get out of the house.”

All cash purchases settled 23% of existing home sales in December, according to data from the National Association of Realtors® – a startling trend given the rise in home prices. However, the number did not include new home sales in that percentage.

Sellers like these offers because buyers appear more financially stable than those offering a small down payment. Cash offers often close quicker and, depending on the type of loan, may have fewer strings attached than using a mortgage.

In some states, such as Florida, approx half of homes sold were paid for in cash, according to the National Association of Realtors. Nevada, Arizona and West Virginia also saw surprisingly high levels of cash sales.

This influx of real estate transactions dates back to the real estate bust of the mid-2000s, when a tsunami of foreclosures swept the market.

A number of companies bought single-family homes with the intention of converting them into rentals, amassing huge real estate portfolios that were funded and benefited by Wall Street investors. Since then, however, house prices have risen significantly — 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 would rather take out a more conventional loan may find it even more difficult to close a deal when sellers are presented with cash offers and quick deals. The availability of such funds could also encourage buyers to pay more to secure a home by using such a service in certain cases.

Benefits of using companies that help homebuyers make cash offers

Flyhomes, for example, which offers cash offer programs for both existing and first-time homebuyers, claims its cash offer program has enabled customers to buy their home 4.5 times faster than buyers using traditional mortgages, saving them the agony Losing deals again and again.

According to their own statements, their customers also save on the purchase price. It is said that Flyhomes customers win bids more than half the time even though their bid is not the highest, saving an average of almost 3% on the house price compared to the highest competitor bid.

“The power of money has always existed with investors,” he says Tushar Garg, CEO and co-founder of Flyhomes. “We’ve democratized it by making all of our buyers cash buyers.”

Nowadays, of course, sellers regularly receive several offers that give them the opportunity to choose from the most attractive conditions. In 2021 houses have received one an average of at least four offers each, according to NAR. Last year there were just 2.9 offers.

Startups that offer cash offer programs are growing fast. Ribbon, Orchard and HomeLight Inc. have announced new rounds of funding in recent months.

HomeLight, commonly used by agents as a listing management tool and referral source, launched its cash offer and trade-in Programs in select markets this summer. Buyers pay a fee ranging from 1% to 3% of the home’s selling price, depending on whether they choose to obtain a long-term mortgage through the company or another lender.

According to the founder and CEO of HomeLight Drew Uherthe company is also offering a 21-day no-cost closing option where it does not take ownership of the home, instead acting as both mortgage lender and title and trustee company.

Real Estate Agents in the Bay Area Stephanie Nash suggests its customers look for the best mortgage products for their needs. After doing a little research, she says she’d think about bringing it up Cash offer from HomeLight as a possible option in certain scenarios.

“It depends on the customer. If they would lose [out on] a lot of qualities, it might be something I would talk to them about,” she says. “But they would have to understand what they are getting themselves into and if it is worth it to them. In California, especially in the Bay Area, it’s a really expensive service considering our house prices.”

Virginia C. Taylor