How homebuyers can navigate a housing market where cash rules

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New research from real estate company Opendoor confirms what frustrated homebuyers already know: In the post-pandemic real estate market, cash is king.

Fully 72 percent of sellers prefer cash offers, according to research released this week by Opendoor. The iBuyer also found that three-quarters of sellers reported that an offer contingent on a mortgage would need to be 10 percent higher than a cash offer to merit equal consideration.

In other words, if you’re bidding on a $400,000 home and you need financing, you might need to offer $440,000 to capture the seller’s attention, according to Opendoor’s research.

“The certainty is so meaningful to sellers, especially in this market,” says Kerry Melcher, Opendoor’s head of real estate.

Sellers are concerned about moving on to the home they’re going to buy, and they need cash to compete in a hot market, Melcher says. Opendoor and other iBuyers pitch themselves as a workaround — the companies give buyers certainty about closing dates, although iBuying also can carry hefty fees.

The premium sellers assign to cash offers makes sense, real estate experts say. If a financed offer falls through, the seller might have to put the home back on the market and wait additional weeks for a deal to close.

Is the cash premium really worth 10%?

Not everyone believes financed buyers are at such a stark disadvantage. Adam Pollack, co-founder and chief executive of financial technology firm Accept.inc, a mortgage company that submits cash offers on behalf of borrowers, says the 10 percent premium sounds high. In his experience, sellers typically require homebuyers who need mortgages to outbid cash buyers by 3 percent to 5 percent.

“I would not say it’s 10 percent in our experience,” Pollack says. “But the concept Opendoor has demonstrated is certainly true, which is that sellers are more likely to accept a lower cash offer.”

Andy Sachs, a Keller Williams broker in Newtown, Connecticut, likewise says the premium sellers put on cash offers is about 3 percent.

“Cash is king, but 10 percent seems really steep to me,” Sachs says. “You’re telling me someone’s not going to roll the dice to take a $500,000 offer vs. a $450,000 cash offer?”

Sachs advises sellers to scrutinize the details of the financing. If a buyer needs a loan but is putting down a large amount, that offer can be as good as cash. On the other hand, a buyer who’s putting down just 3 percent or 3.5 percent is at more risk of losing financing should the appraisal or inspection deliver a surprise.

Why home sellers prefer cash offers

Lenders approve millions of purchase mortgages every year, but scoring a home loan is no sure thing. A job loss or other financial hiccup can kill a deal.

Even so, most homebuyers have solid credit scores, so loans typically sail through. “If someone is qualified for a mortgage in today’s market, there’s a good chance they’re going to close,” Sachs says.

In today’s fast-appreciating market, one characterized by a record-high pace of appreciation, a different threat is derailing deals — low appraisals. The value estimate has emerged as the biggest hurdle for many deals, Sachs says: “The appraisal is probably more fear-inducing right now than the inspection process.”

It’s not unusual for a buyer to bid aggressively, and competitive bidding can push the price past the value established by an appraiser. In that case, the buyer might have to bring more cash at the closing table.

“It’s just hard for appraisals to chase this market when it has been going up so much,” Melcher says.

To deal with the possibility of a low appraisal, eager buyers are including appraisal waivers — a promise to the seller that if the appraised value comes in low, the buyer will simply make up the difference with a bigger down payment.

Another workaround is to use one of the new breed of lenders — Accept, along with Homeward and Ribbon — that make cash offers on behalf of borrowers.

An additional option for buyers is the “decision-now approval,” also called an underwritten preapproval or upfront underwriting. Those terms mean the loan is funded, and that the buyer can finance contingencies from the offer without worrying about losing the deposit.

Tips for buying a house in a seller’s market

Here are a few other ways to make your bid stand out:

  • 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.
  • Promise to close the deal even if the appraisal comes in lower than you hoped.
  • Understand that making a low down payment might put you at a disadvantage.
  • Be prepared to bid on many houses. Some agents report that buyers might make 30 offers before one is accepted.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
Senior mortgage editor