When John Wai decided it was time to pack up his five-bedroom Bay Area home in favor of a less expensive lifestyle on the outskirts of Sacramento, he knew that one of the hardest parts of making it all happen would be the challenge of having an offer accepted on a new home while at the same time attempting to sell his old one.
But in this highly competitive real estate market, he couldn’t make an enticing, all-cash offer on a home until he could first sell his $2 million home in Orinda, CA.
The idea of finding a buyer for the home, packing up his belongings, and then moving into a temporary rental while making offer after offer on a new house 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 lending company that fronted him the money to make an all-cash offer on a four-bedroom contemporary house in the Sacramento suburb of Woodland, using Flyhomes’ Buy Before You Sell program.
Wai credits the cash and the quick closing time it provided as among the reasons why he won his new home. The sale closed in October.
Flyhomes Inc., which was launched in 2016, is one of several startups offering 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 money handy in their bank accounts.
Though the mechanics of the arrangements they use differ, this new crop of lending companies all aim to provide an alternative to traditional mortgages, to make it easier for first-time homebuyers and homeowners aiming to trade up or downsize in a highly competitive real estate landscape.
Buyers who plan to enter into one of these deals, though, need to do so with their eyes wide open. Having all of that money at their disposal may not come cheap, and as a result, they may wind up paying more over the long term.
“Anytime you enter an intermediary in a consumer-to-consumer transaction, the challenge is: How is that better for a consumer?” says Barry Zigas, a senior fellow 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 bridge loan, a short-term loan used to bridge the gap between buying his new home and selling his old home, at a rate of 6%. (That’s a standard rate for a bridge loan, although getting a traditional mortgage would have been significantly cheaper. Rates were 3.45% on 30-year fixed-rate loans in the week ending Jan. 13, according to Freddie Mac.)
Wai doesn’t have to make any payments until the Orinda home closes. Then he will pay the whole loan back at once 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 for the new house than he is expecting to earn from the old one.
How companies that help homebuyers make all-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 the buyer’s agent and on the mortgage. (For Flyhomes, the cash offer comes with a short-term bridge loan to acquire the property. For both companies, if buyers want to stick with the company, it will also earn money on their long-term mortgage.)
These companies take their half share of the standard 5% to 6% real estate commission of the sale price, which is negotiated by a flesh-and-blood agent who walks buyers through the process. They say the loan rates they offer are competitive with the larger mortgage market—although they do not specify the exact rates. This type of product tends to completely forgo or limit other fees.
However, if for some reason the loan falls through because of an unforeseen credit issue or job loss, or if the buyer ultimately can’t or doesn’t want to make 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 buy back the home if all of the contingencies on the offer are met.)
Other companies that help buyers make cash offers, including Ribbon Home and HomeLight, charge a 1% to 3% convenience fee of the purchase price of the home, if the offer is accepted. In expensive markets like California, that could add up to a substantial amount.
Both first-time and existing homebuyers need to meet traditional underwriting standards for creditworthiness with a good credit score (in most cases, a minimum of 620) and healthy debt-to-income 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’re able to close so much faster.
As with any transaction, it’s extremely important to read the fine print of an all-cash deal, says Ed Magedson, founder of Rip-Off Report, a consumer reporting website.
“I’ve had consumers contact me because some companies quote them interest rates that change when they actually receive the paperwork with these cash offers,” he says. “Most of these companies are legitimate. But it’s best to deal with a business that’s been around for at least a few years, so a consumer can do a search to see if they are a good company without complaints, assuring them they are less likely to get ripped off.”
All-cash offers are becoming more important in today’s housing market
For Wai, the advantages of Flyhome’s cash-offer program outweighed any potential cons. The first offer he submitted was under contract within a matter of days.
“By the time we submitted the offer to the agent, the sellers had already received another,” says Wai. “But they accepted our offer because it was more compelling, due to the short closing time. Because I hadn’t sold my other house yet, we were able to give the seller[s] a free leaseback period. So they didn’t have to rush to get out of the home.”
All-cash purchases accounted for 23% of sales of existing homes in December, according to data from the National Association of Realtors®—a mind-boggling trend, given the spike in home prices. The figure did not include new home sales in that percentage, however.
Sellers like these offers because buyers appear more financially stable than those who offer a low down payment. Cash offers often close more quickly, and they may have fewer strings attached than when using a mortgage, depending on the type of loan.
In some states, like Florida, about half of the homes sold were paid for in cash, according to the National Association of Realtors. Nevada, Arizona and West Virginia also experienced staggeringly high levels of all-cash sales.
This influx of all-cash real estate transactions dates back to the mid-2000s housing bust, when a tsunami of foreclosures flooded the market.
A slew of corporations bought up single-family homes with the intention of converting them into rentals, amassing huge property portfolios bankrolled by and benefiting Wall Street investors. But home prices have since risen substantially—especially during the pandemic.
Zigas, of the Consumer Federation of America, worries about the impact on the housing market of empowering more buyers to make all-cash offers.
First-time buyers who’d prefer to use a more conventional loan may find it even harder to land a deal when sellers are being presented with all-cash offers and quick closes. The availability of such funds could also incentivize buyers to pay more to secure a home by using a service of this kind in certain instances.
Perks of using firms that help homebuyers make all-cash offers
Flyhomes, for example, which boasts cash offer programs for both existing and first-time homebuyers, claims that its Cash Offer program has enabled clients to purchase their home 4.5 times faster than buyers using traditional mortgages—saving them the agony of losing out on offers again and again.
According to the company’s data, their clients save money on the purchase price, too. It says more than half of the time, Flyhomes customers win bids even though their offer is not the highest presented, saving an average of nearly 3% on the home price compared to the highest competing offer.
“The power of cash has always existed with investors,” says Tushar Garg, Flyhomes’ CEO and co-founder. “We democratized it by making all of our buyers cash buyers.”
Sellers these days, of course, regularly receive multiple offers, giving them the ability to pick and choose from the most attractive terms. In 2021, homes have been receiving an average of at least four offers each, according to NAR. It was just 2.9 offers the previous year.
Startups offering cash-offer programs are growing fast. Ribbon, Orchard and HomeLight Inc. announced new funding rounds in recent months.
HomeLight, which is often used by agents as a listing management tool and source of referrals, launched its Cash Offer and Trade-In programs in select markets this summer. Buyers pay a fee of between 1% and 3% of the sale price of the home, depending on whether they opt to take out a long-term mortgage through the company or another lender.
According to HomeLight founder and CEO Drew Uher, the company also offers a free, 21-day closing option, where it does not take possession of the home, acting instead as both the mortgage lender and title and escrow company.
Bay Area-based Realtor Stephanie Nash suggests her clients shop around for the best mortgage products to suit their needs. After doing a bit of research, she says she would think about mentioning HomeLight Cash Offer as a potential option in certain scenarios.
“It would depend on the client. If they were losing [out on] a lot of properties, it might be something I would consider talking to them about,” she says. “But they would have to understand what they were getting into and if it was worth it to them. In California, especially the Bay Area, it’s a really expensive service, considering our home prices.”