If you’ve been trying to buy a home, you already know how competitive it is. And you’re probably especially aware of how challenging it is to compete with all-cash buyers. A quarter of all homes sold in February of this year were purchased with cash, up from 22% a year ago, according to the National Association of Realtors. In some states, like Florida, about half of the homes sold were paid for in cash.
Ribbon, Flyhomes, Orchard, Homeward, Better, and Accept.inc are some of the companies that have stepped in to offer a solution. Once one of these companies pre-approves you for a mortgage, they’ll work with you to find a home and purchase it with cash on your behalf. Then you’ll buy it back from them once your traditional mortgage closes.
This may sound similar to iBuyers, which took a lot of hot real estate markets by storm in 2021. iBuyers acted as both buyers and sellers of moderately priced, newer homes in places like Arizona, Atlanta, and Florida. While some iBuyers are still around, the practice has been sharply curtailed after the key players took huge losses. Zillow, for example, lost $881 million and stopped iBuying altogether in November of 2021.
They key distinction between iBuyers and these companies that are acting as financial intermediaries is that they aren’t trying to sell any properties. Instead, they’re approving home buyers and putting up the cash for the home, and then the home buyer pays them back.
There are some differences in how each company processes the purchase, and the price varies depending on whether you’re also using them as mortgage lender. Homeward charges 1.9 percent of the home’s value for this service, unless you also use Homeward as your mortgage lender, which brings the fee down to almost zero. Ribbon charges 1 percent to 3.25 percent of the home’s price.
People who seek out these services must meet the traditional standards of creditworthiness to be eligible. That usually means a credit score of at least 620 and a low debt-to-income ratio.
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. Customers can expect the due diligence and request for documents at the outset of the buying process, which enables the purchase to move much faster. According to Flyhomes, their cash offer program enables clients to buy their new home 4.5 times faster than they could with a traditional mortgage.
While there aren’t any independent statistics on how many homebuyers are utilizing this service, according to Homeward, they’ve seen the number of homes under contract increase by 375 percent in the past twelve months. If these startups are able to restore some balance to buying a property, this could be just the beginning of a brand new business model for buying houses.
