Cash is king when it comes to buying real estate. In the competive market of the last two years, making a cash offer often has been the key to winning a bidding war.
In the January through May period, the percentage of all-cash purchases for single-family homes in the U.S. averaged 26%, compared with 23% for all of 2021 and 19% in 2020, according to data from the National Association of Realtors.
A cash offer can determine whether the home seller accepts a buyer’s bid. But with the median price of existing single-family homes at $423,300 in June, most buyers can’t buy houses with savings. To solve this problem, a new crop of businesses have sprung up to make cash-backed offers on behalf of buyers.
Here’s what you need to know about all-cash offer companies:
They Make Your Offer More Competitive
When a property has multiple bids, cash gives buyers an edge. Sellers sometimes accept a lower cash offer compared to a mortgage-backed offer to avoid the complications of a buyer's financing being derailed.
In a 2022 study by the University of California at San Diego, researchers found that buyers using mortgage loans paid an average 11% premium compared to all-cash offers. They also found sellers frequently turned away higher mortgage-based bids when buyers offered cash, even though only about 3% of mortgage loans fail to close.
They Aren’t Free
All-cash offer companies profit by charging the buyer a transaction fee collected at closing or through standard real estate commission fees.
Ribbon, a real estate startup based in New York, charges 1% to 3.5% of the purchase price, depending on how you use the service. If you use your own loan to close the sale, Ribbon charges 1% for making the cash offer. If your loan derails and you hire Ribbon to rescue your close, you pay up to 3.5%. Ribbon collects these fees at closing through an addendum written into the purchase contract.
Orchard, another New York-based real estate startup, is a full-time brokerage that makes cash-backed offers on buyers’ behalf. As a buyer’s agent, their fee comes from the real estate commission, usually 5% to 6% of the purchase price, split with the seller’s agent.
For Orchard customers, "who are typically first-time buyers, Orchard is the buying agent and is paid a commission by the seller,” Mandy Menaker, Director of Communications for Orchard, said in an email.
“Unlike other services that offer cash buying, there are no additional fees to use Orchard’s cash-backed offer as compared to buying with a traditional agent," she said.
You can use Orchard as your real estate agent, title company and loan officer, in addition to using them to make a cash-backed offer on a property without paying fees beyond the standard real estate commission.
Next Step:Fast Track Your Home Loan Preapproval
They Work With Government-Backed Mortgages
What about using all-cash offer companies when you plan to finance the purchase with government-backed mortgages?
In some instances, you can. According to its website, Ribbon works with mortgages backed by the Department of Veterans Affairs, known as VA loans.
For buyers considering mortgages backed by the Federal Housing Administration, or FHA loans, you can apply to Accept.inc for a cash-backed offer.
“Accept.inc is now the only cash offer company that can turn FHA borrowers into cash buyers, a group that often faces the largest disadvantage when trying to win a home,” Nick Friedman, the company's COO and co-founder, said in an emailed comment.
Using an all-cash offer company like Ribbon makes government-backed loans more attractive to sellers otherwise deterred by the multiple contingencies and red tape government-backed loans sometimes entail.
Ask any prospective all-cash offer company early in the process if they work with your preferred type of loan.
You May Have Limited Time to Secure Financing
Some companies require lender pre-approval to get cash-backed offers. However, you can still move in if your mortgage loan isn’t ready by closing.
If Ribbon closes without your funding in place, you pay them pro-rated rent to stay in your new home while you secure financing. You then pay Ribbon the original purchase price of your home, but your funding must come through within 180 days of close.
They Can Help You Buy a New Home Before Your Existing Property Sells
Traditionally, people might use a bridge loan to purchase a new home while waiting for their existing home to sell. Some all-cash offer companies offer similar functionality without the need to apply for a bridge loan or pay two mortgages.
You can use HomeLight to get a cash offer on your home before you shop for a new home. Once a seller accepts your offer, HomeLight will purchase your existing home, eliminating the need for a bridge loan.
“Cash offer programs, such as HomeLight Cash Offer, have proven to be a powerful tool for homebuyers in a variety of situations, whether it’s a buyer who wants to purchase their first home but is continuously getting beat out by the competition, a family looking to take a leap and transition out of their starter home, or a retiree looking to upsize in the highly competitive market,” said Vanessa Famulener, president of HomeLight Homes, in an emailed comment.
Orchard has a similar program with its Move First program. Instead of buying your home outright, they guarantee your home’s sale.
“Once you have moved out, Orchard handles all cosmetic repairs of your home through our Concierge service, gets your home listed on the open market, and organizes all home showings,” said Orchard's Menaker.
This feature of all-cash offer companies can save families considerable time and headaches.
“Homeowners never need to deal with storing pets in crates or keeping their home looking like a museum with three toddlers running around,” Menaker said.
They Operate in Particular Regions
Like other real estate and loan products, the availability of all-cash offer companies varies by region.
Orchard, for example, serves 13 metropolitan markets and is expanding. HomeLight offers services in all major U.S. cities, but HomeLight Trade-In is only available to Arizona, California, Colorado, Florida and Texas. Ribbon operates in some southeastern, midwestern and western states.