Instant cash buyer firms are helping home buyers better compete in the market with all-cash offers. The iBuyers are helping buyers make cash-backed offers or providing cash financing to help them catch a seller’s attention in a bidding war.
Their increasing presence is behind the increasing percentage of home buyers bringing cash to closing. In July, cash sales comprised 23% of existing-home sales, up from 16% a year earlier, the National Association of REALTORS® reported. Support from iBuyers and fin-tech companies is behind much of that growth, whether making cash offers on their own behalf or helping to provide cash financing to home buyers, NAR reported.
All-cash offers are typically a winning bidding war strategy. Sellers often prefer all-cash offers because they don’t have to worry about the financing falling through.
iBuyers—such as Opendoor, Redfin Now, Zillow Offers, Keller Offers, and others—have previously offered to buy homes in all-cash transactions. But a newer business model has emerged in which the institutional buyers are purchasing the property not for themselves but for a buyer, who can make a more competitive offer.
For example, Opendoor launched a cash-backed offer program in March. They will back up a buyer’s offer with a cash offer to the home seller if the buyer fails to secure financing by the closing date. If the buyer is unable to get financing, Opendoor purchases the home for the buyer, and holds it for 120 days with a fee of 1% of the purchase. If the buyer is still unable to get financing, Opendoor will continue to hold the property for another 120 days at an increasing fee structure.
Another company, Ribbon, purchases the home from the seller for cash on a buyer’s behalf and provides a home buyer more time to secure mortgage financing.
Many of these companies work on a structure where they will buy the property for the buyer with cash but charge the buyer a percentage of the purchase price as they hold it.
“The cost of obtaining a cash-backed offer or cash offers is not much higher than the 3.7% to 4.4% average percent above the list price that buyers have already been offering to sweeten their offer,” said Gay Cororaton, research economist for NAR, on the association’s Economists’ Outlook blog. “Moreover, cash-backed or cash offers give assurance to the seller that there is a ready institutional buyer who will purchase the home should the buyer not be able to secure mortgage financing.”
The role of fin-tech companies or iBuyers who provide cash-backed buyer offers or cash financing will likely increase in the future due to the competitive market, Cororaton said.