Shrikant Murali spent a frustrating year trying to buy a home in Austin, Texas, a city with an intensely competitive real estate market. The software engineer made one bid after another that proved close but not quite good enough.
“There are a lot of investor buyers, and they are paying all cash,” Murali says. “It’s a very hot market.”
Murali finally landed a place by making an all-cash offer of his own. But the first-time buyer didn’t manage to save $360,000 for an Austin townhouse. Instead, he relied on a new cash-offer program from Better.com, a lender and real estate brokerage based in New York.
Better.com bought the townhouse for Murali, then resold it to him. It’s the sort of innovative offering that’s becoming more common in a U.S. housing market that’s increasingly stretching Americans’ finances.
Startups Accept.inc, Homeward and Ribbon have begun offering all-cash offers in recent years. Better.com unveiled its program in August.
In super-hot market, cash is king
As the coronavirus pandemic reshapes the American housing market, bidding wars are common in many corners of the country. When sellers weigh multiple bids, they often pick the certainty of a cash offer over one that needs financing.
As a result, cash buyers typically score a slight discount compared with buyers who rely on financing. And cash buyers might be able to drive a harder bargain around inspection contingencies.
“There are two trends we’re noticing in the industry,” says Paul Tyger, a general manager at Better.com. “The first is it’s hypercompetitive, and it’s extremely hard to stand out. The second is the rise of iBuyers. You can get your equity quickly, but it comes at a cost.”
He’s referring to companies such as Opendoor, Offerpad, Zillow Offers and Redfin Now. They promise to buy homes quickly and with little hassle, although for a fee. However, iBuyers have been reducing fees so that they’re more competitive with traditional transactions.
According to Zavvie, a real estate technology company, the average cost of selling to an iBuyer fell to 7 percent in mid-2021, down from nearly 11 percent in 2020. The lower fees bring iBuyers’ cut in line with traditional sales.
Better.com isn’t the only company that sees an opportunity to stand in as a cash buyer for creditworthy buyers. Ribbon likewise lets bidders make cash offers. It charges a fee of 2 percent to 2.4 percent. Ribbon’s service is available in North Carolina, South Carolina, Tennessee, Georgia and Texas, and the company plans to extend its reach. Ribbon has raised more than $650 million from investors.
Homeward also has been building a business around the concept of making cash offers on behalf of buyers who are creditworthy but don’t have $500,000 available to wire to sellers. Homeward, which has brought in more than $370 million from investors, charges buyers a fee of as much as 1.9 percent.
Another player, Accept.inc launched in 2019 and announced this year that it raised $90 million from investors. As of October 2021, the company did business only in Colorado, although it planned to expand to other states.
How it works
Better.com’s cash offers are available in about a dozen major metro areas, including Atlanta, Chicago, Dallas, Denver, Miami, New York and Washington, D.C. Buyers must use a Better.com real estate agent.
If a buyer also takes a mortgage through Better.com, they pay no fee for the service — and they collect a rebate on the real estate commission and a discount on closing costs. If a buyer makes a cash offer through Better.com but uses another mortgage company, the consumer pays a 2.5 percent fee and foregoes the discounts.
The buyer can move in as soon as Better.com buys the property — that’s what Murali did with his Austin townhouse. As of mid-October, he was renting the home from Better.com and expected to take ownership by Halloween.
Better.com says it plans to extend its geographic reach. Mike delPrete, a real estate analyst who studies iBuyers and cash offers, says the “power buyer” concept could spread beyond a few early innovators to become standard practice in home buying.
“I would not be at all surprised to see the number of Realtors, brokerages and big real estate brands offering power buyer products keep increasing,” delPrete says. “It’s just like iBuying — originally pioneered by a few, it quickly becomes another tool in an agent’s toolbox.”
Tips for buying a house in a seller’s market
If you’re not shopping in a market served by Better.com, Accept.inc, Homeward or Ribbon, you might not have an option for an all-cash offer. Here are a few other ways to make your bid stand out:
- Get preapproved for a mortgage and have the cash for the closing costs.
- Be ready to move fast when you find a house you love.
- Go through the full underwriting process before you make your offer.
- Make sure your offer is aggressive enough to stand out — but not too expensive for you to afford.