iBuyers gatecrash the all-cash offers party

Some home buyers are leaning on so-called iBuying firms to better compete by offering all-cash on the properties they target. iBuyers can help buyers by making cash-backed offers on their behalf or by providing financing to help draw attention to their offer in a bidding war, experts say.

The National Association of Realtors reported that iBuyers are the main reason why an increasing number of buyers are able to bring cash to closing. In July, cash sales made up 23% of all sales, compared to just 16% one year ago. It’s believed that much of that growth is due to suppor for iBuyers and other fintech firms, who’re helping buyers either through cash offers on their behalf or by providing cash financing, the NAR said.

Cash offers are seen as a key strategy in a bidding war, as most sellers don’t want to risk accepting an offer contingent on financing, which may be declined.

iBuyers including Opendoor, Redfin Now, Zillow Offers and Keller Offers started out by offering to buy people’s homes sight unseen. They provide sellers with an instant cash offer on request. But as that model declined during the COVID-19 pandemic, they’ve come up with an alternative model where they buy homes using all cash on behalf of an individual buyers instead of purchasing it for themselves.

Opendoor launched its cash-backed offer program in March and will back up their client’s offer with cash in the event that the buyer is unable to secure financing by the closing date. So if the buyer’s mortgage application is denied, Opendoor will buy the home instead and hold it for 120 days with a fee of 1% of the purchase price. If, after that time is up, the buyer still can’t get financing, then Opendoor will either sell the home, or hold it for longer at an increased fee if the buyer requests.

Startup Ribbon is pushing an alternative model that gives buyers similar advantages. It buys the home directly with cash on behalf of its clients, and then holds it while they try to secure financing. As with Opendoor, Ribbon charges the buyer a percentage of the purchase price.

“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.”

Cororaton said he believes the role of fintechs and iBuyers who provide cash-backed offer services like this will likely continue to increase while the housing market remains so competitive.